NFTs

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

In Part 1 of our two-part series about advertising in the metaverse, we summarized its history, discussed its broad implications, and analyzed the attention regulators are giving to false advertising in this area. In Part 2, we look at some of the legal issues that may come up for companies working on sweepstakes, endorsements, and intellectual property in the metaverse.

Sweepstakes in the Metaverse

Given the popularity of the metaverse, companies have already begun to run contests and sweepstakes using NFTs as a marketing tool. Probably the biggest stumbling block for advertisers with this type of sweepstakes is providing an alternative means of entry (AMOE), where entry is contingent on purchase of an NFT.

Anytime an NFT prize promotion solicits entries through purchase of an NFT (or other consideration), a free AMOE must be provided. This AMOE must allow the entrant using the free method of entry the same opportunity to enter and to win the same prize as the entrant using the purchase entry. Furthermore, clear and concise disclosures must be included in the contest rules and the marketing materials. These rules should make clear that no purchase is required to enter the sweepstakes and that such purchase would not increase the odds of winning.

An additional consideration for a metaverse sweepstakes may be whether it requires entrants to have an existing account with the sweepstakes sponsor or, if the prize is an NFT, whether the entrant (or winner) will be required to obtain a wallet capable of accepting the NFT. The sponsor must provide clear direction in the official rules on how to obtain such an account, whether it is on a social media platform or blockchain-related account. Additionally, if there is any cost associated with obtaining the account or wallet, then that cost may be deemed to be consideration, which may render the promotion an illegal lottery. This is true even if the cost is applicable only to the winner, in that it is required to redeem the prize, and in that case it would be a form of “post-consideration.”

Endorsements in the Metaverse

Endorsements from celebrities and social media influencers are commonly used by brands to promote products, in the “real world” and the metaverse. Similarly, the need for adequate disclosures of material connections with endorsers and influencers has not changed, and neither has the requirement that anything said by such endorsers and influences must still be true and not misleading.

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

One 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 for promoting investments in initial coin offerings (ICOs). The SEC accused Mayweather of failing to disclose promotional payments of $300,000 to endorse an ICO for the company Centra Tech Inc. and two other companies. Khaled faced the same allegations for accepting $50,000 for his endorsements. Mayweather was later sued, along with two other celebrity influencers, in an investor class action alleging a “pump-and-dump” scam where they talked up the value of EthereumMax tokens and then sold them, causing an immediate drop.

Intellectual Property in the Metaverse

A basic rule for any advertiser putting together a campaign, in the metaverse or otherwise, is ensuring that they possess the IP rights for everything that will be featured in that campaign. Some of the most hotly litigated issues to arise in “metaverse law” to date have involved intellectual property and NFTs, and it is important to be clear in NFT agreements regarding what rights will be created by the minting of the NFT, or which of those rights are being transferred when an NFT is sold.

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

An example of how such issues are playing out can be seen in the very public dispute between Nike and StockX over StockX’s use of Nike’s trademarks in its NFT program. In that dispute, as one of the largest resellers of Nike products, StockX used representations of Nike’s shoes in the creation of NFTs that were sold to StockX customers. Ostensibly, the NFTs were simply representations of the actual Nike product for which the NFTs could be traded. But Nike argues that such use of their 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 like the metaverse, Web3, NFTs, and blockchain doesn’t necessarily mean that the basic rules of the road have changed, but companies that wish 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 encounter issues and ambiguities when applying familiar rules in unfamiliar contexts.

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