A New Frontier: Brand Protection And Elevation In The Metaverse – Trademark

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