Navigating Intellectual Property Rights of NFTs and the Metaverse

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.