News Update: In May 2022, the court denied MetaBirkins motion to dismiss.

The luxury and fashion industries have already embraced non-fungible tokens (NFTs)—unique digital assets (often a photo or video file), whose authenticity and ownership are immutably recorded on a blockchain — as forward-looking marketing, consumer engagement and brand-building tools. Global NFT sales have already reached the cryptocurrency equivalent of billions of dollars. Because NFTs can serve to authenticate identity as well as ownership of digital possessions and “unreal” property in virtual realms, the prevalence of NFTs is likely to grow as engagement with and in the metaverse expands.

Confusion and conflict have arisen over what rights NFT creators and metaverse builders have to incorporate the trademarks, artwork, writings and other intellectual property owned by others in the physical world, and what bundle of rights purchasers of NFTs and other digital assets actually acquire. 

Lawsuits recently filed in US federal courts by Hermès and Nike challenge whether the creation, marketing and sale of NFTs incorporating third-party trademarks and trade dress without authorization violate US intellectual property laws. These first cases have the potential to establish precedent for whether and how these laws will govern the use and enforcement of branding assets in the metaverse.

MetaBirkins: Counterfeit Products or Transformative Art?

Los Angeles designer Mason Rothschild designs and sells a line of collectible, standalone NFTs called “MetaBirkins,” which he claims  depict his commentary on the iconic Hermès Birkin bag. Rothschild has also adopted “MetaBirkins” more broadly in connection with his commercial activities relating to these NFTs, including use as the name of his e-commerce store, his domain name, his social media handles, as the name for his planned NFT exchange and through widespread use as a hashtag across social channels.

Hermès filed suit claiming that Rothschild’s use of “MetaBirkins” is a calculated attempt to mislead consumers constituting infringement and dilution of the famous BIRKIN trademark and trade dress. Although Hermès had not yet launched its own NFTs or other commercial metaverse activities, the luxury brand argued that it suffered harm from Rothschild’s actions nonetheless, as “consumers would expect that NFTs featuring famous brands are affiliated with those brands.”

In a motion to dismiss, the designer did not dispute Hermès’ trademark rights in both the Hermès and Birkin marks, or in its trade dress rights in the Birkin handbag design.  Rothschild admitted that the MetaBirkin NFTs he sells signify ownership of a digital image of a handbag but countered the contentions of infringement by relying upon the same US constitutional First Amendment protections for artistic expression that gave Andy Warhol the right to create and sell his renowned paintings of Campbell’s soup cans. 

Applying the test first enunciated in Rogers v. Grimaldi, Rothschild claimed that his use of “MetaBirkin” as the “name of his art project” is artistically relevant to his works that elicit contemplation of the meaning of the Birkin, and, therefore, protected expression under the First Amendment. Rothschild’s argument relies upon the assumption that owning a MetaBirkin is comparable to hanging a Warhol painting on the wall, an analogy that does not consider the broader context of a consumer’s experience and existence in the metaverse. Does a consumer who buys a MetaBirkin to own within the digital realm perceive that as equivalent to purchasing a physical handbag to own IRL?  If so, then Rothschild’s NFTs are not solely artistic works commenting on Hermès’ products, but rather commercial products substituting for Hermès’ products in the competitive metaverse marketplace.

Vault NFTs - Digital Receipts or Infringing Products?

In its lawsuit against online resale platform StockX, Nike cries foul for the same reason as Hermès, accusing the defendant of creating and selling “new virtual products that StockX has bundled with additional StockX services and unspecified benefits” such as “exclusive access to StockX releases, promotions, events”. Unlike Hermès, Nike has already used its famous brand in the metaverse, from Nikeland on Roblox to its acquisition in December of sneaker NFT design studio RTFKT; and Nike’s complaint supplies evidence of actual consumer confusion as to the source of the StockX NFTs. 

In contrast to Rothschild’s defense, StockX claims that each NFT functions not as digital art (that is, not a “MetaNike”), but rather as a traceable digital receipt authenticating the purchaser’s ownership of the corresponding IRL product secured in a StockX vault.  StockX expressly disclaims any authentication of the product itself. If the Vault NFT owner redeems the NFT for the IRL Nike product (an option promised to be available in the future), StockX will remove the NFT both from the buyer’s portfolio and from circulation. Under the Vault NFT license terms, StockX also retains the unilateral right to redeem a Vault NFT for an undisclosed “Experiential Component,” which similarly results in removal of the NFT from the buyer’s portfolio (and, thus a cessation of the NFT buyer’s ownership interest in the IRL product).This raises questions about whether the physical product is actually in custody in the StockX vault as well as whether StockX plans to resell the same product multiple times by using this unilateral right of redemption. Either way, StockX’s characterization of the NFT as a digital receipt for IRL product and not as a virtual product is unconvincing.

What Do Trademarks Communicate In The Metaverse?

Fundamentally, trademarks are property rights, and the concept of a property ownership system thus far remains central to virtual worlds. A plot in the fashion district in Decentraland recently sold for over $2 million in cryptocurrency equivalency, and companies are competing to buy space on Sandbox Hill Road in The Sandbox. If virtual worlds continue to evolve as marketplaces that depend upon commercial transactions to thrive, then brands need to have mechanisms to communicate value and exercise quality control over the virtual goods and services that fuel the meta-economy.

Melanie Howard is a partner at Loeb & Loeb in Los Angeles where she chairs the  Luxury Brands Group and Intellectual Property Protection practice. She can be reached at [email protected].