Trademark Law Developments in the Metaverse

The Metaverse (or “Web 3.0”) provides varying levels of access to three-dimensional environments for various decentralized activities such as gaming, commerce, social media, dissemination of authenticated digital assets such as non-fungible tokens (NFTs) and cryptocurrency, and others. Participants can engage in any number of virtual reality activities and transactions with others at any conceivable virtual location, whether based in reality or in fantasy. Not surprisingly, trademark law has now reached the Metaverse.

Background

Blockchain and NFTS

As background, NFTs are grounded in blockchain technology. Blockchain is a shared database or “ledger” that facilitates the process of recording transactions and tracking assets in a business network. Transactions are expedited by storing a set of rules (termed a smart contract) on the blockchain that is executed automatically. Blockchain is ideal for this functionality because, while all network participants have access to the shared ledger and its record of transactions, no participant can tamper with or alter a transaction after it is recorded to the shared ledger. As each transaction occurs, it is recorded as a “block” of data showing the movement of an asset, be it tangible (product) or intangible (intellectual property). The data block records any information desired regarding the transaction and any underlying tangible or intangible asset. Each block in the blockchain is connected to the blocks preceding and following it, forming a chain of data results recording information such as exact time and sequence of a transaction. The blocks are securely linked to prevent alteration of a block or insertion of a block between two existing blocks in the blockchain. Each subsequent block strengthens the verification of the prior block, rendering the blockchain tamper-evident. Data trustworthiness, security, and sharing efficiency are therefore in theory greatly improved compared to conventional record-keeping and validation methods.

NFTs are blocks of data composed of unique software code linked to an underlying asset. The NFT code smart contract gives specific details regarding the NFT, the asset, and any associated intellectual property rights. NFTs are unique in that they are not interchangeable or replaceable. While NFTs can be used to verify ownership and authenticity of “real-world” goods, a common use of NFTs is to verify ownership/authenticity of digital goods. In effect, NFTs can function as a digital “certificate of authenticity” for the asset and a record of ownership.

Often, the asset represented by the NFT is artwork. In the “real-world,” you can own a physical piece of artwork with or without also owning the right to copy (i.e., copyright) the artwork. Analogous to copyright, the NFT is indicative of ownership of a representation of a particular work of art that has been “tokenized,” but not of ownership of the actual artwork itself unless specifically granted by the seller. Thus, proving valid ownership of artwork that could otherwise be untraceably copied is established by the NFT time-stamping and tamper-evident functions. Ownership transfers are likewise easily traceable and verifiable, reducing the risk of fraud.

The enormous commercial market already realized for NFTs raises significant concerns relating to enforcement of intellectual property rights by rights holders, including trademark rights. Unlike copyright, which secures an owner’s right to reproduce, distribute, and display a work, trademarks are founded on the principle of providing to the public a trustworthy identification of the source of goods and/or services. Wise brand owners are turning their attention to policing infringement of their trademark rights not only in the real world but also in the digital world, particularly in view of the potential disconnect between application of trademark law to trademark rights in “real world” goods versus digital images bearing third-party trademarks in the digital world. The case law relating to enforcement of IP rights of rights-holders in the Metaverse is nascent and unfolding. However, certain recent cases pertaining to NFTs may provide some insight into the position the courts will take on trademark rights enforcement in the digital universe in the future. In that regard, as of the January 1, 2023, revisions to the Nice classification¹, International Class 9 expressly refers to NFTs.

Case Law

Juventus F.C. v. Blockeras s.r.l.

In Italy, the Rome Court of First Instance heard the first decision on trademark infringement involving NFTs in November of 2022. Blockeras operated a blockchain-based fan token called The Coin of Champions whose popularity and value was based in part on endorsement by popular footballers (styled “Ambassadors”), one of whom (Christian Vieri) was a former Juventus player. Along with the token, Blockeras issued an NFT collection of “Action Cards” intended for use in a fantasy “NFT Game.” One of the Action Cards depicted Christian Vieri in a Juventus uniform.

Juventus Football Club sued Blockeras S.R.S. for minting and selling NFT player cards bearing the club’s registered trademark, specifically a figurative trademark depicting the club’s black and white vertical striped shirt with two stars on the chest. In its defense Blockeras argued, among other things, that Juventus’ registrations did not extend to downloadable virtual products. The court was unconvinced, noting that, despite the fact that the Nice Classification system (an international trade mark classification of goods and services established by the Nice Agreement of 1957) did not at the time expressly cover NFTs, the registration of the Juventus mark in question expressly indicated that it also concerned products not included in the Nice Classification, as well as the fact that Juventus had entered the fan token market at least as early as 2018. The court further found that Juventus’ registration included downloadable publications in International Class 9, which would arguably be considered related to downloadable digital files authenticated by NFTs. The court granted Juventus’ request for an injunction against use of Juventus’ mark for commercial purposes.

At least here, the court was willing to expand traditional trademark protection to encompass related digital products not expressly recited in a registration.

Hermès v. Rothschild

In the first U.S. lawsuit to consider application of trademark rights associated with physical products to digital assets, Hermès International/Hermès of Paris, Inc. sued artist Mason Rothschild for trademark infringement, dilution, and cybersquatting in connection with a series of “MetaBirkins” NFTs linked to digital faux-fur versions of the well-known Hermès Birkin handbag and associated BIRKIN trademark registration. The NFTs were sold to individual buyers for up to thousands of dollars each.

In pre-trial pleadings, Rothschild argued that Hermès’ claims should be dismissed based on case law holding that art receives protection under the First Amendment to the U.S. Constitution. Hermès responded that the use of the trademark and sale of the NFTs was purely commercial and not entitled to First Amendment protection. In May of 2022, the U.S. District Court for the Southern District of New York held² that the METABIRKIN NFTs were digital images capable of constituting artistic expression and therefore entitled to First Amendment protection. However, the court allowed the case to go forward, holding that Hermès had sufficiently pled that Rothschild’s use of METABIRKIN either had no artistic relevance to the underlying work or alternatively explicitly misled the consumer as to the source or content of the work. The court subsequently denied both parties’ motions for summary judgment, reaffirming that the Rogers test for evaluating trademark infringement in artistic works is applicable to the digital images relevant to Hermès’ claims. The Rogers test asks:

(1) Does the work have some artistic relevance to the underlying work?

(2) Is the work explicitly misleading as to the source of the content of the work?

Based on this analysis, the court found that “MetaBirkins” should be understood to refer to both the NFTs and the associated digital images, and that genuine issues of fact precluded summary judgment.³

At trial, the jury found Rothschild liable for trademark infringement, dilution, and cybersquatting and awarded damages to Hermès in the amount of $133,000, $110,000 for trademark infringement, and $23,000 for cybersquatting⁴ (significantly less than the damages requested by Hermès). It is anticipated that Rothschild will appeal. Hermès has also filed a motion for a permanent injunction against Rothschild which has yet to be acted on. One takeaway here is that the court was willing to apply traditional trademark principals to digital images including third-party trademarks.

Nike v. StockX

In February of 2022, Nike sued StockX⁵ for trademark infringement relating to the resale of Nike sneakers. StockX is a streetwear reseller that also provides authentication services to customers including a collection of NFTs linked to allegedly authenticated physical goods. Many of the StockX minted NFTs include images of Nike sneakers, which Nike alleges are virtual products constituting trademark infringement, false designation of origin, and trademark dilution among other causes of action.

StockX responded that the NFTs are merely a method to track ownership and authenticity of physical Nike products sold on the StockX marketplace and not virtual “products” in themselves, noting that the NFTs may be redeemed by the owner at any time in exchange for delivery of the actual physical shoes. StockX further analogized its business to other e-commerce retailers and marketplaces who use images and descriptions of products to resell goods. StockX further asserted affirmative defenses of the first sale doctrine (generally limiting the right of an IP owner to assert claims of infringement in connection with products already sold to a consumer) and fair use (generally allowing third parties to use trademarks of others without liability in certain limited circumstances).

Nike disputed this argument, noting that while the shoes to which the NFTs were tied remained in StockX’s “Vault” until claimed, the NFTs could be resold at will. Nike further noted that the Vault NFT terms expressly stated that the NFT holders could be granted the right to “obtain certain additional products, or benefits to engage in certain experiences, such as unlocking a reward or access to exclusive sales.”

Nike has since amended its complaint to include counterfeiting and false advertising. Nike alleged that certain of the NFTs are or were tied to counterfeit shoes despite StockX’s guarantees of authenticity, thereby further undermining StockX’s argument that the NFTs are not virtual products but instead merely confirm authenticity/ownership of the underlying physical products.

The outcome remains to be determined, and barring a settlement may hinge on whether the court accepts Nike’s position that the StockX NFTs are virtual products or alternatively StockX’s position that the NFTs are merely digital “receipts” for physical products.

Yuga Labs, Inc. v. Ripps

This case involves issues of trademark rights associated with NFTs and digital images. Yuga Labs is the creator of the Bored Apes Yacht Club (BAYC) collection of NFTs. The Bored Ape NFT collection depicts comical images of anthropomorphic “bored” apes which have become status symbols, with many owned by well-known celebrities. The Bored Ape NFTs can sell for millions of dollars. Estimated sales of Bored Ape Yacht Club NFTs exceed one billion dollars. In July of 2022, Yuga Labs filed a lawsuit against Los Angeles-based artist Ryder Ripps and others,⁶ claiming false designation of origin, false advertising, cybersquatting, trademark infringement, trademark dilution, unfair competition, and others. Lacking any registrations for the trademarks in question at the time the lawsuit was filed, Yuga relied on common law trademark rights. Interestingly Yuga did not bring arguably the most logical cause of action, copyright infringement, potentially because those rights may have been licensed to the owners of the individual Bored Apes at the time of sale.

The trigger for the lawsuit was a web site created by Ripps and others allowing users to reserve an NFT to be minted by Ripps under the brand “Ryder Ripps Bored Ape Yacht Club” (RR/BAYC). The RR/BAYC NFTs point to the same digital artwork files as the BAYC NFTs, with the ownership of both collections recorded on the Ethereum blockchain. Yuga alleged that Ripps made more than $5 million in sales of the RR/BAYC.

Ripps responded that the case should be dismissed because his works were parodies and protests against the Bored Ape Yacht Club protectable under the First Amendment, alleging that the RR/BAYC project was created as a “protest against and parody of” the Bored Ape Yacht Club collection’s alleged use of “racist,” “neo-Nazi,” and “alt-right” imagery. Ripps further argued that his use of the BAYC marks was nominative fair use. Ripps also filed a motion under California’s anti-SLAPP (Strategic Lawsuits Against Public Participation) statute alleging that Yuga Labs’ lawsuit was intended to deter him from exercising legitimate political or legal rights or to punish him for having done so.

The court refused to grant summary judgment dismissing the case, holding that the Rogers test did not apply because the sale of RR/BAYC did not constitute an expressive artistic work protected by the First Amendment. According to the court the RR/BAYC NFTs did not express an idea or point of view but instead merely “point to the same online digital images…” The court further found that even if the Rogers test had applied, Ripps' use of the BAYC images was not artistically relevant to his art and that the usage of the BAYC images was misleading. In turn, the court found that Ripps' use of the BAYC marks was not nominative fair use because Ripps was not using the marks to sell Yuga Labs’ BAYC NFTs, but instead used them to sell his own competing RR/BAYC NFTs. Finally, the court denied the anti-SLAPP motion, holding that Ripps failed to demonstrate that Yuga’s claims arose from Ripps’ protected speech but instead that the only conduct at issue was the sale of RR/BAYC NFTs pointing to Yuga’s digital artwork, not any commentary by Ripps. Therefore, the anti-SLAPP statute did not apply.

In February of 2023, Yuga Labs settled a co-pending lawsuit against Thomas Lehmann,⁷ the creator of the website and smart contracts associated with the RR/BAYC NFTs. The suit against Ripps remains pending. A co-defendant in the case (Cahen) has filed an opposition⁸ to registration of a number of the BAYC marks on numerous grounds, which has been suspended pending resolution of the district court case. In addition to certain counts asserted in the district court case, Cahen alleges that the marks are deceptively misdescriptive for failure to provide yacht services.

Certain holdings of the court are notable. The court in Yuga followed the court’s lead in Hermès in holding that NFTs are goods for purposes of the Lanham Act rather than merely digital images. The court further found that Yuga had not transferred or abandoned its trademark rights in the BAYC marks by selling the BAYC NFTs despite the transfer of copyright as part of the sale. Thus, the NFT transfer of rights was not held to be an unrestricted license. Defendant’s use of the BAYC marks was not held to be nominative fair use because the Defendant’s marks were used to refer to and sell their own competing goods (RR BAYC NFTs) rather than to the BAYC marks.

Conclusion

To date, the specific details of enforcement of trademark rights in the Metaverse remain unsettled and there is little case law specific to the Metaverse to look to. The Hermès case suggests that courts may be willing to apply traditional trademark law and principles to enforcement of trademark rights in the digital world, at least in the context of well-known brands and trademarks. Indeed, the Hermès court expressly stated that even for allegedly artistic works incorporating third-party trademarks, the First Amendment protects the “right to speak out against a mark holder, but it does not permit [you] to suggest that the mark holder is the one speaking.”⁹ Artistic works are not entitled to First Amendment protection if the mark owner can show that use of its trademark in an expressive work is not “artistically relevant” to the work or if the use of the mark explicitly misleads the public as to the source or content of the underlying work.¹⁰ A work is “explicitly misleading” if it causes the public to believe that the trademark rights holder created or otherwise endorses the work.¹¹ The Hermès and Yuga courts further held that NFTs could be goods for purposes of the Lanham Act.

However, the Hermès court also expressly held that digital versions of physical products “could constitute a form of artistic expression” under the Rogers test, and it has been hypothesized that Hermès failure to register its trademark in digitally relevant international classes may have influenced the damages awarded by the jury. It will be interesting to see if the upcoming Supreme Court decision in the Jack Daniels case, which has the potential of modifying the Rogers test, will impact application of trademark law to NFTs in the future.

As ever, an ounce of prevention is worth a pound of cure and can potentially reduce legal expenses. Reliance on existing “real world” IP protection automatically translating into the digital world has been shown by the cases above to potentially be a viable option for protection, but is not without risk. Therefore, brand owners would be wise to adopt brand protection strategies that include registration applications for important marks that include descriptions for “virtual” classes of goods and services associating the marks with digital goods/services, or at least in international classes that encompass digital goods/services.

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¹https://www.wipo.int/classifications/nice/nclpub/en/fr/..

²Hermès Int’l v. Rothschild, 603 F. Supp. 3d 98 (S.D.N.Y. 2022), citing Rogers v. Grimaldi, 875 F.3d 994 (2d Cir. 1989) (Use of Ginger Rogers’ name in a film and film title did not violate the Lanham Act because the use was an exercise in artistic expression ant the title contained no explicit indication that Rogers endorsed the film).

³Hermès Int’l v. Rothschild, Case No.1:22-cv-00384 (S.D.N.Y. Feb. 2, 2023).

⁴Hermès Int’l v. Rothschild, Case No.1:22-cv-00384 (S.D.N.Y. Feb. 8, 2023).

⁵Nike, Inc. v. StockX LLC, 1:22-cv-00983 (S.D.N.Y. Feb. 3, 2022).

⁶Yuga Labs, Inc. v. Ryder Ripps et al., 2:22-cv-04355 (C.D. Cal. June 24, 2022).

⁷Yuga Labs, Inc. v. Thomas Lehman, 1:23-cv-0085(N.D.N.Y. Jan. 20, 2023).

⁸Cahen v. Yuga Labs, Inc., Opposition No. 91283323 (Trademark Trial and Appeal Board, 2023).

⁹Hermès Int’l v. Rothschild, Case No.1:22-cv-00384 (S.D.N.Y. Feb. 2, 2023).

¹⁰Id.

¹¹Id.