NFTs

Navigating Intellectual Property Rights Of NFTs And The Metaverse – Trademark

As adoption around blockchain, non fungible tokens (NFTs) and
the metaverse grows, there’s an increasing focus on the legal
challenges these emerging technologies present. Not having an
understanding of intellectual property rights in a virtual
environment can increase risk for sellers, buyers and trademark
holders alike.

NFTs and the Metaverse Defined

NFTs are crypto assets used to validate ownership in goods and
assets sold online or in electronic marketplaces. Currently, NFTs
are used to sell interests in a multitude of disparate items
including digital representations of music, artwork, photographs,
videos, gaming features, concert tickets, domain names, digital
real estate, precious stones such as diamonds, and many other types
of goods. The real-world value of an NFT is driven, in part, by the
uniqueness and/or the rarity of the associated good or asset. An NFT is a container that stores digital
information that uniquely identifies the asset and the network
location where the NFT can be found. The NFT can also include
program code for a smart contract so that fees and/or royalties can
be transferred to a creator based on the asset’s use, sale, or
transfer in ownership. NFTs are based on blockchain technology
which makes them indestructible and easily verifiable.

The “metaverse” is a term that broadly describes an
implementation of technology under the web3 concept. The metaverse combines virtual reality, augmented
reality, and artificial intelligence for an immersive and
interactive user experience. Web3 is the evolution of the Internet or the
World Wide Web to its third generation which involves a wholly
decentralized platform where each user owns his/her data as opposed
to the current construct where the platform owns any user-created
data.

Trademark Cases Involving NFTs

In the real world, the uniqueness in creative works such as
music, art, photographs, and videos is protected through copyright
or trademark registration. However, there is much uncertainty as to
how IP protection translates to the digital world. If recent U.S.
courts opinions are any indication, brand owners and creators are
becoming more diligent in preventing and stopping the unauthorized
use and sale of their creative works by participants in a virtual
or metaverse-type digital environment. The way courts apply and
interpret IP law in the digital domain is especially important as
the scope of ownership rights transferred to NFT purchasers, and
protections enjoyed by NFT creators can be unique in each
transaction.

Hermes Int’l v. Rothschild

In Hermes Int’l v. Rothschild, 2022 U.S.P.Q.2d 476
(S.D.N.Y. 2022), the court denied the Defendant’s Motion to
Dismiss based on a finding that Defendant’s use of the mark
“MetaBirkins” was misleading as a function of likelihood
of confusion and actionable for trademark infringement under the
Lanham Act. Rothschild used the mark “MetaBirkins” in
association with a collection of digital images he created. Each
image depicted an image of a faux-fur covered Birkin handbag, which
is sold by Hermes. The images were sold using NFTs, where each
image had an assigned number, and were sold at prices on the scale
of the real world Birkin handbags. By Rothchild’s own
admission, the NFTs containing the “MetaBirkins” digital
images were sold as “a tribute to Herm[e]s’ most famous
handbag, the Birkin, one of the most exclusive, well-made luxury
accessories. Its mysterious waitlist, intimidating price tags, and
extreme scarcity have made it a highly covetable ‘holy
grail’ handbag that doubles as an investment or store of
value.”1 Consumers posted messages on social media
platforms, which showed that they believed the NFTs were affiliated
with Hermes. Even major magazines publication such as Elle
and L’Officiel mistakenly reported that the
“MetaBirkins” NFTs were unveiled by Hermes in partnership
with Rothschild.”2

Rothschild argued that the digital images constituted artwork
and that the mark “MetaBirkins” was used as the title of
the artwork and not as a source identifier of his products. For
this reason, he asserted that the use of “MetaBirkins”
was entitled to First Amendment protection. The court agreed and
stated that because the digital images being sold could constitute
a form of artistic expression the First Amendment concerns must be
balanced with Lanham Act protection under the Rogers
test.3 Under the Rogers test, the use of
another’s mark in an expressive work will not be actionable
under the Lanham Act unless it “has no artistic relevance to
the underlying work whatsoever, or if it has some artistic
relevance, unless [it] explicitly misleads as to the source or
content of the work.”4 In its analysis, the court
determined that the weight of the factual allegations supporting
the Defendant’s trademark use as not being artistically
relevant and the use being explicitly misleading is too great to be
resolved at the early stage of the case. As a result, the motion to
dismiss was denied.

The Hermes case will be closely followed because it will likely
provide clarity on the extension of IP rights in works contained in
NFTs, and particularly, when First Amendment protections can be
extended to the use and/or sale of NFTs in the digital domain.

Notorious B.I.G. LLC v.
Yes.Snowboards

In a case from the Central District of California, Notorious
B.I.G. LLC (NBLLC) filed a complaint against professional
photographer Chi Modu (Defendant) alleging the unauthorized sale of
merchandise and NFTs containing images of the late rapper
Christopher Wallace.5 NBLLC owns and controls the IP
rights of Wallace’s estate and licenses the IP rights to others
in connection with various products in return of royalties. This
case is in its early stages and NBLLC filed several motions
including a Motion for Preliminary Injunction, alleging that the
unauthorized sales “jeopardized and diminished the value of
the exclusive license” granted to a non-party to the suit
“which has caused a decrease in the value of Plaintiff’s
property rights” and “the Defendant’s continued
conduct would cause substantial irreparable injury to Wallace’s
reputation and harm to the value of future endorsement and
partnership opportunities available to
Plaintiff.”6

The court reviewed whether the preliminary injunction should be
issued using the four-part balancing test from the Supreme
Court’s decision in Winter7 in combination
with the “serious questions” test set forth by the Ninth
Circuit court in the Cottrell decision8. The
Winter test looks at the likelihood of success on the
merits, the likelihood of irreparable harm, the balance of equities
and hardships, and whether the preliminary injunction would be in
the public interest. Under the Cottrell test,
“‘serious questions going to the merits’ and a
hardship balance that tips sharply toward the plaintiff can support
issuance of an injunction, assuming the other two elements of the
Winter test are also met.”9 Because the sole basis
for the relief sought in the Preliminary Injunction Motion was a
cause of action for an alleged violation of the common law right of
publicity under New Jersey law, the court was first required to
determine whether the state law claim is preempted by the Copyright
Act.10

In its analysis, the court determined that the Defendant’s
publicity right claim regarding the Plaintiff’s posters,
prints, and NFTs is preempted because the infringing acts
“relate to the display and distribution of the copyrighted
works themselves, without a connection to other merchandise or
advertising” where the “purpose of the sale is to display
and distribute the photographs.”11 The court found
differently for other infringing products (e.g., shower curtains,
skateboards, etc.) that included copyrighted photos of Wallace
because the use of the images was for the purpose of promoting and
selling the product. Further, preemption of publicity right was
also supported in that the court deemed the Defendant’s
infringement to likely cause damage to the commercial value of
Wallace’s persona. This factor weighed in NBLLC’s favor
because of Plaintiff’s asserting lost revenue from customers
who bought the infringing products from Defendant and not because
of NBLLC’s authorized products or the authorized products of
NBLLC’s licensee. The Defendant argued that his sales increased
the commercial value of NBLLC’s right to publicity. However,
the court disagreed as it found no evidence was provided to support
the Defendant’s contention. The court determined that these
factors supported the Plaintiff’s establishment of a likelihood
of success on the merits on the right of publicity claim.

The court next looked to the affirmative defenses of
acquiescence or laches available to the Defendant, and whether
these defenses had a likelihood of success based on the evidence.
Based on the analysis, the court found that the evidence presented
was not sufficient to establish that NBLLC knew of the
Defendant’s user of Wallace’s image on merchandise nor
whether Plaintiff acquiesced to that use. Defendant relied on the
evidence of sales and licensing activity of Wallace’s images
dating back to 2004 and knowledge of Defendant’s skateboard
design in 2015. However, the fact that there was no testimony of
non-parties corroborating Plaintiff’s alleged knowledge, the
court found the evidence insufficient for success on the
defenses.

Plaintiff further proved that it would suffer irreparable
reputational harm to Wallace’s public persona due to
Defendant’s activities, in presenting evidence of
“substantial time and resources over many years in
establishing Wallace’s public persona” and “how its
ability to benefit from these efforts will be harmed if
Wallace’s image and likeness is exploited by
Defendant.”12 The court found that the balance of
equities favors granting the Preliminary Injunction Motion because
the motion would only apply to a portion of Defendant’s
products which is outweighed by the reputational harm to NBLLC. In
addition, the court determined that the public interest would be
better served if the Motion were granted.

This ruling shows that infringing activities involving the sale
of NFTs in a digital marketplace could trigger an award of
injunctive relief if the goods associated with the NFTs are used
for a commercial purpose, such as the endorsement or sale of an
unrelated product or service. It should be noted that an
infringement claim under Copyright Law would be preempted if the
NFT associated with an IP-protected work were employed in a
“non-commercial art use.”

Key Takeaways

As the use of virtual reality and augmented reality in online
gaming and markets continues to expand, the incorporation of
real-world goods and products into digital environment increases
the sense of realism and the interactive user experience. For this
reason, the owners of goods or products, which may be artistic
works or have artistic and/or ornamental features, should
diligently monitor the gaming and online marketplace for
unauthorized use. As early court rulings show, the mere appearance
or placement of a protected work in the digital environment may not
amount to a violation of IP rights. However, sales of digital
versions of a protected work could in some instances rise to a
violation of IP rights, if those sales are made for the purpose of
making a profit and/or confuse the purchaser as to the source or
endorsement of the goods being sold.

Sellers and purchasers of artistic works should also take care
when engaging in NFT transactions. NFT issuers should consider and
determine how much control over the digital work they choose to
relinquish to an NFT purchaser. Further, the purchase contract
should explicitly define the rights maintained by the issuer and
those transferred to the purchaser in a sale. In most cases, the
NFT issuer maintains control over the work and governs how the NFT
holders can use the content within the license. Only one of the top 25 NFT sellers passes some
semblance of true ownership in the underlying digital work to token
holders
. On the other side of the transaction, the NFT
purchaser should carefully review the terms of purchase for the
license terms which include the rights and/or restrictions on use
of goods associated with the NFT. In addition, purchasers should be
aware of whether the terms of the license can be changed, revoked,
or amended at any time by the issuer or licensee.

The emerging technology surrounding blockchain and NFTs present
challenges and questions concerning the enforcement of IP rights in
a virtual environment. These challenges and questions are further
heightened when considering the use of NFTs in a web3 environment.
The web3 concepts of data decentralization and user-ownership in
data are in conflict with some uses of goods when associated with
NFTs. NFT issuers and purchasers should understand the full scope
of ownership rights that are transferred and/or acquired in an
online transaction. Not having this knowledge or understanding can
increase the risk of loss for one or both parties involved in an
NFT transaction.

Footnotes

1. Hermes at *2.

2. Id. at *3.

3. Rogers v. Grimaldi, 875 F.2d 994 (2d Cir.
1989).

4. Id. at 999

5. Notorious B.I.G. LLC v. Yes.Snowboards, 2022
U.S.P.Q.2d 526 (C.D. Cal. 2022).

6. Id. at *2

7. Winter v. NRDC, Inc., 555 U.S. 7, 129 S. Ct.
365, 172 L. Ed. 2d 249 (2008)

8. All. for the Wild Rockies v. Cottrell, 632
F.3d 1127 , 1135 (9th Cir. 2011).

9. Id. at 1132

10. Notorious at *4.

11. Id. at *6.

12. Id. at *11.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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