How metaverse and NFTs may affect IP protection in 2023

IP issues related to the metaverse, blockchain technologies and cryptoassets will continue to be an important focus for licensees and businesses entering or expanding into this evolving space in 2023. Two metaverse and NFT lawsuits took center stage last year, with the outcome now eagerly awaited: Hermès’ suit over MetaBirkin’s NFTs and Nike’s suit against StockX.

Hermès against Rothschild

Hermès sued artist Mason Rothschild for his use of the BIRKIN trademarks in connection with his MetaBirkins NFTs, alleging trademark infringement and dilution. Rothschild argued that the claims should be dismissed based on Rogers v. Grimaldi and subsequent case law indicating that digital images of the bags are art and receive First Amendment protection. However, Hermès argued that the sale of NFTs was purely commercial and Rogers was therefore inapplicable.

In May 2022, the US District Court for the Southern District of New York found that Rothschild’s MetaBirkins NFTs were digital images capable of constituting a form of artistic expression, meaning that they were entitled to First Amendment protection and that Rogers used. However, the court denied Rothschild’s motion to dismiss because Hermès sufficiently argued that his use of the MetaBirkins either has no artistic relevance to the underlying work whatsoever or, even if it does, would be explicitly misleading as to the source or content of the work .

The case proceeded to trial and the jury found Rothschild liable for trademark infringement, trademark dilution and cybersquatting, and awarded Hermès damages. Since the ruling, Hermès has sought a court mandate that Rothschild cease using the Birkin trademark, and transfer the MetaBirkins domain name to Hermès, as well as his proceeds from the sale of tokens.

Current takeaways

The ruling in the case demonstrates the ability of brand owners to potentially protect against the unauthorized issuance and sale of NFTs using their marks or designs, even when faced with a First Amendment defense.

Nike v StockX

In February 2022, Nike filed a trademark case after StockX, a company that sells sneakers, announced that it would use NFTs to allow buyers to track ownership of physical products resold on the StockX platform and to verify authenticity. StockX argued that the use of third-party marks featured in the NFTs was protected under the first sale doctrine. Nike countered that the NFTs were distinct digital products with independent value and that StockX was profiting from Nike’s intellectual property.

Current takeaways

The problems involved in Nike v StockX could shape the IP landscape around NFTs, the legal distinction between NFTs and physical assets and the use of trademarks in connection with creative works.

Specifically, creators may need to take additional precautions when launching NFTs for other products.

USPTO’s Handling of Metaverse and NFT-Related Trademark Applications

Brands have rushed to the USPTO to file trademark applications in relation to metaverse environments and digital assets, including NFTs. The USPTO’s review of these applications and approved descriptions to date provides some guidance on:

• how the Office may classify these products and services;
• how the likelihood of confusion rejection can be provided with respect to digital versus terrestrial products and services; and
• what makes a brand merely descriptive of metaverse-related goods and services

Current takeaways

Generally, virtual goods appear to be appropriate for Class 9, but further clarity regarding the nature of the goods may be needed (ie “virtual goods” alone is too vague). For NFTs, it is also important that the applicant specifies the type of digital object being authenticated.

The USPTO’s likelihood of confusion assessments include:

• digital trading cards (Class 9) relating to physical card games (Class 28);
• traditional event services in class 41, presumably including virtual-related events; and
• retail services for virtual clothing in virtual worlds (Class 35) relating to traditional clothing (Class 25).

On the question of descriptiveness, the USPTO registered METAJACKET in Class 9 for “downloadable virtual goods, namely, clothing, with jackets,” but accepted the mark CYBERSNEAKER as descriptive of “downloadable virtual goods” in Class 9.

Challenges and opportunities

The issues involved in enforcing trademark rights with respect to blockchain domain names are critical to the parties in this area.

Blockchain domain names connect to an address on a blockchain and are often used as short-form addresses for sending and receiving crypto assets. Currently, these domains operate outside of ICANN’s domain name systems and are not subject to many of the rules and requirements of traditional domain names.

Use of brand names in or as blockchain domains may create consumer confusion and may result in the loss of crypto assets due to such confusion. Based on the current system, brands will likely have to choose between trying to work with certain marketplaces to stop infringing domain usage and registration and securing blockchain domain names quickly in front of potential bad faith users.

It is also important that brands and business owners account for considerations relating to the publication right for virtual avatars. The right of publicity refers to a person’s right to control the commercial use of their name, image and image. But how does a famous person stop others from usurping their likeness in virtual environments? And conversely, if a virtual persona becomes meta-famous, does a person have the right to protect their avatar?

Finally, it is critical to keep an eye on the US Copyright Office and USPTO joint study regarding issues of trademark, patent, and copyright law and policy arising from the use of NFTs. While the study is ongoing, the results are likely to provide some guidance on the direction of IP laws and protections for NFTs and the metaverse more broadly.

See here for a video accompanying this article on the McDermott Will & Emery website.