How the metaverse and NFTs might impact IP protection in 2023

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

Hermès v Rothschild

Hermès filed a lawsuit against 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 protection under the First Amendment. However, Hermès contended that the sale of NFTs was purely commercial and Rogers was consequently 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 applied. However, the court denied Rothschild’s motion to dismiss because Hermès sufficiently alleged that his use of MetaBirkins either has no artistic relevance to the underlying work whatsoever or, even if it has some, it explicitly misleads as to the source or the content of the work.

The case proceeded to trial and the jury found that Rothschild was liable for trademark infringement, trademark dilution and cybersquatting, awarding Hermès damages. Since the verdict, Hermès has requested the court mandate that Rothschild stop using the Birkin trademark, and transfer to Hermès the MetaBirkins domain name, as well as his income from sales of the tokens.

Current takeaways

The verdict in the case exhibits the ability for brand owners to potentially protect against the unauthorized issuing and sale of NFTs using their marks or designs, even when faced with a First Amendment defence.

Nike v StockX

In February 2022 Nike filed a trademark suit after StockX, a company that resells sneakers, announced that it would use NFTs to allow buyers to track ownership of physical products resold on the StockX platform and to confirm authenticity. StockX argued that its use of third-party brands 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 issues 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 more precautions when launching NFTs of 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 provide some guidance on:

• how the office may classify these products and services;
• how likelihood of confusion refusals might be issued with respect to digital versus terrestrial products and services; and
• what makes a mark merely descriptive of metaverse-related goods and services

Current takeaways

Generally, virtual goods appear to be proper to Class 9, but further clarity regarding the nature of the goods may be required (ie, ‘virtual goods’ alone is too vague). For NFTs, it is also essential that the applicant specify the type of digital item authenticated.

The USPTO’s likelihood of confusion assessments include:

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

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

Challenges and opportunities

The issues involved in enforcing trademark rights with respect to blockchain domain names are essential watching for parties in this space. 

Blockchain domain names link 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 the ICANN domain name systems and are not subject to many of the rules and requirements of traditional domain names.

The use of brand names in or as blockchain domains can create consumer confusion and may result in the loss of crypto assets due to such confusion. Based on the current system, brands likely will need to choose between attempting to work with certain marketplaces to stop infringing domain use and registration and securing blockchain domain names quickly ahead of potential bad-faith users.

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

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

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