A tectonic shift is underway in the area of brand protection and brand elevation. Technologies such as blockchain, non-fungible tokens (NFTs) and the like are creating new opportunities for brands in the metaverse—while, at the same time, raising challenging legal questions related to brand protection.
The Metaverse, NFTs and Blockchain
A metaverse generally refers to the translation of physical world human experience to an online virtual world. For example, digital platforms currently exist that allow users to immerse themselves in digital worlds where they can socialize; attend concerts and other events; purchase and own virtual goods; and even purchase, own and develop virtual real estate. These virtual activities are mostly facilitated by NFTs and blockchain technology.
An NFT is a digital asset (or unit of digital data), stored on the blockchain that often represents ownership of physical-world objects like art, music, apparel, photos and videos. NFTs are bought and sold online, frequently with cryptocurrency. NFTs can only have one owner at a time, and they are impossible to equally exchange (i.e., they are non-fungible).
NFTs use blockchain technology to provide verifiable proof of ownership of the item associated with the NFT. In other words, an NFT is a digital certificate of authenticity and blockchain technology secures and verifies this ownership. As a result, NFTs create "digital scarcity," but often these scarce digital creations already exist in some form in the physical world. Problems arise when the physical form of a digital creation is protected by copyright, trademark and other physical world laws.
Problems arise when the physical form of a digital creation is protected by copyright, trademark and other physical world laws.
Brand protection in the metaverse
Until recently, much of the application of existing laws in the metaverse, particularly intellectual property laws that are vital to brand protection, remained unknown. Recent litigation involving the Hermès and Nike brands, however, is likely to answer at least some unanswered questions.
In January 2022, Hermès filed a lawsuit against an artist, Mason Rothschild, over "MetaBirkin" NFTs, which are digital versions of bags that look like Hermès "Birkin" bags. Hermès argues that the selling of MetaBirkins is likely to confuse consumers, and that the digital bags infringe upon and dilute Hermès's federally registered BIRKIN trademarks.
On February 9, 2022, Rothschild moved to dismiss Hermès's claims arguing that because the digital images of the Birkin bags that are tied to the NFTs he sells are 'art,' the Second Circuit's test in Rogers v. Grimaldi (a case that protects the use of trademarks in "expressive works") applies and applying the Rogers test requires dismissing Hermès's claims on First Amendment grounds. In response, Hermès argued that the Rogers test did not apply but rather likelihood of confusion must be assessed under the two-prong test in Gruner + Jahr v. Meredith Corp. In its order denying Rothchild's motion to dismiss, the court confirmed that the Rogers test does apply, but because Hermès's amended complaint "contains sufficient factual allegations that the use of the trademark is not artistically relevant and that the use of the trademark is explicitly misleading as to the source or content of the work," dismissal was not appropriate.
Here, the court will almost certainly address, among other things, whether the BIRKIN trademarks—which are registered for physical goods and services are sufficient in a virtual context—and whether Rothschild's MetaBirkin NFTs are protected as artistic works under the First Amendment of the U.S. Constitution.
In February 2022, Nike sued an online reseller, StockX LLC, for selling images of Nike sneakers as NFTs. Nike argues, among other things, that the sale violates Nike's existing trademarks rights by causing consumer confusion as to the source of the NFTs. StockX LLC, on the other hand, effectively argues that its use of Nike's trademarks in its NFTs constitutes a "fair use," which exempts it from trademark infringement liability. There are generally two types of "fair use": descriptive and nominative. Descriptive fair use permits use of another's trademark to describe one's own goods or services, rather than to indicate the source of the goods or services. Nominative fair use permits use of another's trademark to refer to or describe something rather than to identify the source of that something.
On May 10, 2022, Nike asked the court to allow it to add claims of counterfeiting and false advertising in its lawsuit against StockX. Allegedly, Nike purchased four (4) confirmed pairs of counterfeit Nike shoes from the StockX platform despite StockX's guarantee that all sales are one hundred percent (100%) verified authentic. As a result, Nike argues that StockX makes false and misleading statements about authenticity to induce consumers to purchase infringing product.
In the Nike case, the court will likely address at least two issues grounded in intellectual property rights. Whether, as in the Hermès case, Nike's existing trademarks, which were registered to cover physical goods and services, are sufficient to cover virtual goods and services—i.e., NFTs. And whether StockX's use of Nike's trademarks in its NFTs constitutes a fair use. (See Professional Pointer: Brand Management in the Metaverse – A Roadmap for Retailers). Finally, if Nike's request to add claims is granted, the court will likely address whether StockX is liable for deceiving consumers by selling counterfeit goods and falsely advertising authenticity.
Brand elevation in the metaverse
Notwithstanding the open legal issues mentioned above, which may make brand protection more difficult in the metaverse, the metaverse presents unique opportunities for brands. For example, brands have the opportunity to engage new and existing customers by creating experiences that are more immersive and interactive. Brands may also generate additional revenue by marketing and selling their own virtual goods and services rather than waiting for others to do it.
Practical considerations moving forward
As the metaverse becomes increasingly more relevant, there are some practical steps that brands can consider moving forward. For example, while it is likely the case that trademark rights for physical goods or services are sufficient for protection in the metaverse, brands should register virtual trademarks. You will not be alone. In 2021, the United States Patent and Trademark Office (USPTO) saw a 400-times increase in virtual trademark registrations.
Also, consider creating specific agreements, like licenses, service and non-disclosure agreements, that protect your intellectual property and ownership rights before, during and after an NFT sale—ownership in the metaverse is not straightforward.
Consult relevant regulatory and tax laws related to virtual good and services, NFTs, cryptocurrency and the like. And finally, do your homework before filing suit against alleged infringers to avoid unnecessary and costly litigation.
Originally Published by The Brand Protection Professional (BPP), 20 June 2022
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.