Despite the downturn and increased volatility in the NFT market, NFTs and the metaverse have taken the fashion industry by storm. Gucci has become the first luxury brand to build its own store in the metaverse and the possibilities for other luxury brands are limitless. However, the legal framework around NFTs can be vague and confusing, so what should luxury brands look out for?
What is an NFT and who owns the copyright?
An NFT is a 'non-fungible token'. This is a unique and tradeable token which belongs to its holder and cannot be replicated like for like. Ownership and authenticity of the token is verifiable as its transaction history is recorded on a ledger. The token that is 'owned' is the metadata, rather than the physical work itself.
NFTs are not yet specifically addressed in UK legislation so the normal principles of copyright ownership apply. The purchaser of an NFT does not automatically own or have a licence to use the copyright to the physical works they have purchased, unless the owner of the copyright has granted a licence or provided an assignment to the works.
Surveys of some NFT projects and their licences reveal that few take the necessary steps needed to ensure purchasers have full transparency as to the IP rights of the NFTs. Thinking through the legal issues should be an integral part of the NFT design process, not an afterthought.
The opportunity
The increased popularity of NFTs has fuelled customer interest in luxury goods, whether real, digital or both. According to Statista, the global metaverse market will be worth $47.48 billion in 2022, and is expected to surge to $678.8 billion by 2030. From creating exclusive, personalised experiences, tailoring unique loyalty programs, selling digital assets and building excitement for a new product launch, the opportunities in the metaverse for forward-thinking luxury brands are extensive and have a real possibility of setting the foundation for the future of the fashion industry.
Earlier this year, Gucci became the first luxury brand to build its own store, 'Gucci Vault Land' within the digital platform, The Sandbox. The experimental concept store showcases a careful curation of rare vintage Gucci pieces with the ultimate goal of educating the web3 community on the brand's heritage via gamification. Luxury brands are especially prone to counterfeit risk, a risk which can be mitigated through blockchain technology. The collaboration between Azuki, the self-proclaimed "brand for the metaverse", and Ambush, the Tokyo-based street fashion brand, utilised a physical backed token ("PBT") to create a collection of "phygital" goods. A chip on the physical item linked to the PBT in the holder's wallet can be scanned to verify authenticity and transaction history. Luxury brands can operate similarly to this model and fight the counterfeit industry by adding a blockchain-backed layer of authentication.
Blockchain technology also offers opportunity for luxury brands to connect with their customers. A key principle of web3 is community, and luxury brands can capitalise on this principle by offering customers access to their IP for a mutually beneficial relationship. For example, Andy Nguyen created the 'Bored & Hungry' restaurant using the IP from his Bored Ape Yacht Club NFT. A luxury brand, with the assistance of a commercially sound licensing agreement and marketing strategy can adopt this community-first approach by allowing holders of their NFTs to showcase their creativity.
Despite an increased volatility in the NFTs market due to over-speculation and reports of infringement, the opportunity for brands to build long-term NFT Communities remains. Popular NFTs such as Okay Bears and Degods have continued to show a significant increase in volume. Furthermore, a strong community within the market will generate buzz, attract buy-ins and increase profile traffic for luxury brands.
The legal challenges
As expansive as the opportunities are, with the increased popularity of digital fashion comes potential exposure to infringement. Digital fashion pieces can be reproduced and shared online at speed and without technical limitation, for example by screenshotting and redistributing the digital work. Controlling third party copying of the original digital content may present a challenge for luxury brands using NFTs, given that copies can be produced even more rapidly than in the 'physical' fashion market. It is not entirely clear for brand owners at this stage how certain goods and services related to the metaverse and NFTs are best protected.
Brands are strategically using trademark filings to extend the brand use in the digital space and copyright to protect the digital representation of their marks. Regular reviews of trade mark and design portfolios can help brand owners ensure that the protections they have in place are fit for purpose. A brand audit, with a view of identifying any gaps in protection within an IP portfolio, focusing on whether the scope of the protection is wide enough.
The lack of regulation relating to infringement remains a key obstacle for brands and users alike. There is, however, increased clarity on the horizon. Earlier this year, Withers KhattarWong successfully obtained a worldwide proprietary injunction on behalf of a Singaporean NFT investor to freeze the sale and ownership transfer of a rare Bored Ape Yacht Club NFT on the Ethereum blockchain against a Metaverse personality A landmark ruling, the court recognised NFTs as an asset and asserted jurisdiction over assets in the decentralised blockchain which invariably results in added protection for both brands and holders of NFTs from hackers and counterfeiters.
The marketing strategy of luxury brands requires nuance, and the introduction of complex technology to address these nuances alongside the introduction of a community-first approach is difficult and requires careful planning. A well-drafted licensing agreement is needed; one that addresses the balance that has to be struck between the commercial goals and protection required by luxury brands and the need for appropriate levels of freedom for creativity for holders of the NFTs.
Take-away points
The use of NFTs and the expansion into the metaverse by luxury brands is here to stay. Given the lack of legislation and court guidance, a strong and comprehensive trademark registration strategy for virtual goods will act as a powerful tool for luxury brands.
Brand owners must focus on preparing and revamping their intellectual property portfolios through increased monitoring of unlawful uses to ensure that their rights are adequately protected in all forms and spaces. Similarly, a cohesive licensing agreement and marketing strategy combined with the issuance of NFTs can allow luxury brands to have a mutually beneficial relationship with their customers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
