London Brands Seminar: NFTs and the Metaverse | Hogan Lovells

Commercial problems when structuring agreements in Metaverse

After a brief introduction to non-fungible tokens (NFTs) and the Metaverse, including an explanation of the various, multiple metaverses currently in existence (referred to collectively as the ‘Metaverse’), Joel Smith, along with colleague Andrea Constantine, discussed what to consider when structuring deals in Metaverse, for example selling an NFT. Joel said that managing and distributing risk in contracts is critical to setting up virtual stores, offering digital assets and opening new platforms in the Metaverse. Andrea stressed that in order to avoid disputes, it is important to be precise about what you are selling (or not) selling, setting up or offering access to, in terms of the digital resource, the virtual store or the metaverse platform (the “Virtual Offer” ). While many businesses, especially luxury brands, are keen to make inroads into the Metaverse, these are some of the questions brand owners should consider first:

• Do you have any contractual rights or restrictions, or do your historical contracts need to be updated to support the transition to a virtual offering?

• Do you have the right to make the virtual offer regarding the use of the brand, content or technology?

• What rights do you give the buyer/user of the virtual offering in terms of exclusivity, the underlying IP rights and the ability to trade unhindered (with or without a share of the resale proceeds)?

• Consider your legal exposure (and the extent of your own responsibility/liability) to the Virtual Offering and how you can reduce, limit or exclude such liability?

• How much control do you have to remove or disable access to the Virtual Offering (in the form of burning an NFT, making a digital asset unavailable or removing, suspending or terminating user access to the Virtual Offering, or monitoring, removing or editing non- -compatible content)?

• Consider the wider economic regulations, taxes, online torts, advertising regulations, data security and ESG implications of the virtual offering, including the jurisdictional impact of borderless access.

Protect your brand in the Metaverse

Emily Sharkey and Charmaine Kwong then moved on to how brand owners can protect their brand in the Metaverse. Emily noted that Metaverse-related trademarks have increased significantly over the past two years at both the UKIPO and EUIPO, indicating that brand owners are investing in the virtual world and are keen to protect their brands within it.

Emily and Charmaine recommended an archiving strategy for Metaverse. They said the main reasons for re-filing for virtual goods, rather than relying on existing registrations for real-world goods, are: a) the ability to use platform removal services; and b) the costs of enforcement will be lower and enforcement easier if your registration covers identical “virtual goods” to the infringing good, rather than relying on existing registrations and “likelihood of confusion” arguments or reputational claims (both of which are not guaranteed to succeed and will result in increased legal expenses).

While there is currently no official UKIPO guidance on how to specify Metaverse-related goods/services, Emily said the message coming from other offices (eg EUIPO) and UKIPO investigation reports is that broad terms such as “NFTs” or “virtual goods” ” are not acceptable. Therefore, the specification should specify the types of virtual goods provided (e.g. downloadable virtual goods, namely virtual clothing) and the goods to which an NFT applies (e.g. downloadable art authenticated with non-fungible tokens).

IP enforcement in Metaverse

Alastair Shaw, Grace Gladdle and Laura Alvarez Otero concluded the session with a case study on enforcing your trademark rights in Metaverse, looking at jurisdictional issues, injunctions, how to enforce court orders and methods of service. Joel observed that “the digital reality is stretching traditional concepts of trademark infringement, which courts have jurisdiction and the effectiveness of remedies. We are now beginning to see how courts are approaching these challenges in a number of ground-breaking cases around the world.”

The speakers highlighted that not all metaverses are built the same way: centralized and decentralized metaverse architectures require different enforcement strategies and mechanisms to achieve rapid results. Metaverse’s terms and conditions relevant to enforcement, such as jurisdiction, applicable law, and critical notice and takedown rules, also vary widely. It is important to become familiar with the most important contract terms for Metaverse and focus on Metaverses where the greatest opportunities and threats arise. The team also believed that cases of crypto fraud have been useful in driving new law. A wave of disputes surrounding the hacking of digital wallets has led to the rapid adaptation by the English courts of existing enforcement mechanisms, such as service by alternative means and third party information (Norwich Pharmacal) order, which provides templates for Metaverse enforcement mechanisms.

The main message was: it is business as usual for the courts. Preemptive rules and unjustified IP threat laws also still apply to an online virtual world, just as they do in the real world.