Branding the Future: Advertising Law, the Metaverse, and NFTs – Part 2 | Venable LLP

In Part 1 of our two-part series on advertising in the metaverse, we summarized the story, discussed its broad implications, and analyzed the attention regulators are paying to false advertising in this space. In part 2, we look at some of the legal issues that can arise for companies working with competitions, endorsements and intellectual property in the metaverse.

Sweepstakes in Metaverse

Given the popularity of the metaverse, companies have already started running contests and competitions using NFTs as a marketing tool. Probably the biggest stumbling block for advertisers with these types of contests is offering an alternative method of entry (AMOE), where entry is contingent upon the purchase of an NFT.

Whenever an NFT bounty campaign solicits participation through the purchase of an NFT (or other consideration), a free AMOE must be offered. This AMOE must give the entrant using the free entry method the same opportunity to enter and win the same prize as the entrant using the purchase entry. Furthermore, clear and concise disclosures must be included in the competition rules and marketing materials. These rules should make it clear that no purchase is required to enter the competition and that such purchase will not increase the odds of winning.

An additional consideration for a metaverse lottery may be whether it requires entrants to have an existing account with the contest sponsor, or, if the prize is an NFT, whether the entrant (or winner) will be required to obtain a wallet capable of accepting NFT . . The sponsor must provide clear guidelines in the Official Rules on how to obtain such an account, whether it is on a social media platform or a blockchain-related account. In addition, if there is any cost associated with obtaining the account or wallet, this cost may be considered a consideration, which may make the promotion an illegal lottery. This applies even if the cost applies only to the winner, in that it is required to redeem the prize, in which case it will be a form of “reassessment”.

Endorsements in the Metaverse

Endorsements from celebrities and social media influencers are often used by brands to promote products, in the “real world” and the metaverse. Likewise, the need for adequate disclosure of material connections with endorsers and influencers has not changed, nor has the requirement that anything said by such endorsers and influencers remain true and not misleading.

On May 19, 2022, the FTC proposed changes to its “Guides Concerning the Use of Endorsement and Testimonial in Advertising” to expand the definition of “endorsers” to specifically include computer-generated advertisers. Such a move appears to be aimed at preventing fake computer-generated influencers from deceiving consumers in virtual spaces.

A recent iteration of this issue involves the SEC’s settlement with professional boxer Floyd Mayweather Jr. and music producer DJ Khaled, for failing to disclose payments they received to promote investments in initial coin offerings (ICOs). The SEC accused Mayweather of failing to disclose promotional payments of $300,000 to approve an ICO for the company Centra Tech Inc. and two other companies. Khaled faced the same charges for accepting $50,000 for his endorsements. Mayweather was later sued, along with two other celebrity influencers, in an investor class action lawsuit alleging a “pump-and-dump” scam in which they inflated the value of EthereumMax tokens and then sold them, leading to an immediate crash.

Intellectual property in the metaverse

A basic rule of thumb for any advertiser putting together a campaign, in the metaverse or otherwise, is to make sure they have the IP rights to everything that will be featured in that campaign. Some of the most heated legal issues that have arisen in the “law of the metaverse” to date have involved intellectual property rights and NFTs, and it is important to be clear in NFT agreements as to what rights will be created by the minting of NFT, or which of these rights are transferred when an NFT is sold.

For example, NFT owners almost certainly have the right to display any digital art and resell this right to display through other blockchain transactions, but not necessarily obtain the copyright associated with the work. The same problems can arise with trademarks. Purchasing an NFT of a cup of Dunkin Donuts coffee does not necessarily allow the purchaser to freely use the Dunkin Donuts logo in that NFT for any purpose.

An example of how such issues play out can be seen in the very public dispute between Nike and StockX over StockX’s use of Nike’s trademarks in the NFT program. In this dispute, as one of the largest retailers of Nike products, StockX used representations of Nike’s shoes in the creation of NFTs that were sold to StockX customers. Apparently, the NFTs were simply representations of the actual Nike product for which the NFTs could be traded. But Nike claims that such use of its trademarks is trademark infringement, as it leads customers to believe that StockX’s NFT program is somehow endorsed by Nike.

Takeaways

The introduction of new and exciting technologies such as metaverse, Web3, NFTs and blockchain does not necessarily mean that the basic rules of the road have changed, but companies wishing to adopt these technologies must carefully consider how the existing rules apply. Until the regulatory agencies, Congress, and/or the courts begin to establish metaverse-specific laws, we will continue to face problems and ambiguities when applying familiar rules in unfamiliar contexts.