The metaverse market encounters a knowledgeable success among investors, because of the new commercial opportunities it offers, especially in e-commerce and gaming[1]. In 2023, revenue in the metaverse market is projected to reach USD 54.95billion[2]. By the end of the decade, the metaverse is forecasted to reach about 700 million people worldwide.[3]
This economic phenomenon raises a number of legal questions and distorts existing legal paradigms: while some fear that the metaverse could become a "legal far west", at the mercy of private self-regulation[4], the authorities and courts are facing their first cases relating to acts occurring in the metaverse.
In this context, trademark law is obviously far from immune to the emergence of the metaverse. Being on the premises of trademark infringement litigation on the metaverse, the ruling of the New York District Court on the MetaBirkins case[5] is a precedent of international relevance. Indeed, this is a rare case of litigation over the creation and commercialization of non-fungible tokens ("NFTs").
This newsletter will give an outlook of the MetaBirkins case and will present general considerations to be aware of when planning to implement (or to infringe) a trademark in the metaverse. The specific aspects of registration of a trademark in the metaverse and the potential pitfalls will be briefly discussed.
I. Background
The development of the metaverse is a new Eldorado for the luxury sector[6]. As "rarity" is the main added value of a luxury good, NFTs allow luxury brands to provide an exclusive good to their customers[7]. This phenomenon is explained by the intrinsic uniqueness and unforgeable quality of NFTs[8].
Thus, luxury brands increasingly tend to develop both aggressive (e.g. massive virtual goods protection) and defensive (e.g. litigation of trademark infringements) strategies to protect their brands.
II. Key definitions
Before getting to the heart of the matter, it is worth clarifying three (3) notions that are central to the understanding of this newsletter: the terms "metaverse", "NFT" and "virtual good or service".
The metaverse is commonly defined as a persistent universe, supported by a computer system, designed to connect users who are immersed through an avatar and who interact in virtual worlds[9]. Part of these immersive platforms are built on distributed blockchain-based protocols that are decentralised (e.g. Sandbox, Decentraland, OpenSea), as opposed to interactive centralised systems (e.g. Minecraft, Roblox, Grand Theft Auto V online)[10].
For instance, there is no legal definition of a NFT in Switzerland[11]. However, two components can be identified: a token and its non-fungibility (i.e. non-exchangeability)[12]. A token can be (strictly) defined as "every entry or “block” on the blockchain, which represents an asset"[13]. Since an NFT is non-fungible, the "block" in question should "correspond to or represent (parts of) goods that are unique due to their characteristics, such as digital or physical works of art"[14].
In this context, a virtual good or service is intended to be used in a metaverse. It is therefore persistent; in other words, the user does not lose possession of it when he or she disconnects from the metaverse.
III. Summary of the case
American artist Mason Rothschild has created and commercialized in the OpenSea Metaverse a hundred NFTs that closely resemble the famous Hermès Birkin bag. Mason Rothschild's NFTs, called "MetaBirkins", have been very successful; each NFT has been sold for thousands of dollars and the artist earned over USD 1.1 million[15].
The Hermès brand sued the artist for trademark infringement, cybersquatting and unfair competition in front of the District Court of New York. Hermès presented the following claims[16]:
- By creating, marketing and selling NFTs of Birkin bags named "MetaBirkins", Hermès trademark rights were being diluted and consumers might be misled into buying the unaffiliated virtual goods.
- Mason Rothschild had registered and used the domain name "MetaBirkins.com" for economic gain and to take unfair advantage of the luxury brand's reputation.
Hermès has claimed damages in relation to trademark infringement and requested an injunction to destroy all the NFTs related to "MetaBirkins".
The artist, on the other hand, argued that his work could not be considered a trademark infringement because the NFTs underlying works were artistic representations of his imaginary (i.e. artworks)[17]. Since the "Metabirkins" were (allegedly) not “real” Hermès Birkin bags (i.e. commodities), they should not be considered as subject to trademark laws – that prevent counterfeiting, but as subject to copyright laws that can allow appropriation in certain circumstances[18].
The jury ruled in favour of Hermès, in the sense that Mason Rothschild’s NFT project infringed Hermès’ trademark rights. Hermès was awarded USD 133'000 in damages.
However, Mason Rothschild and his team are preparing an appeal against the verdict.
IV. Commentary of the case
As this dispute was seen as a battle between "the artists" and "the big brands", the New York District Court ruling created mixed reactions[19]. Some fear that this case law will have a chilling effect on NFT artists[20].
It is true that certain artistic movements, such as the "Ready-made" or "Pop Art," may involve trademarked goods without constituting a trademark infringement. It may therefore be argued that virtual goods are more likely to be perceived as products, and not as artworks due to a different (or biased) perception of new technologies[21].
From a theoretical point of view, the standard principles and trademark laws have been applied in order to resolve this case. Thus, the metaverse and related technologies do not appear a priori to be disruptive in terms of trademark law – either in content or application.
Getting to the practical considerations, the questions regarding the registration of virtual goods under a trademark remain open. In the MetaBirkins case, Hermès was able to benefit from its renown to extend its protection in the metaverse[22], even without having registered virtual goods under its trademark.
As such, the following issues are still the subject of legal controversy:
- How to classify and describe precisely virtual goods or products?
- What review criteria apply to absolute grounds for exclusion?
- How to analyse the similarity of products: between virtual goods and their "real" equivalents, or between different virtual goods?
- What are the criteria for determining trademark use for virtual goods?
Given the lack of legal certainty surrounding trademark protection for virtual products (or services), the actualisation and the harmonisation of practices between the various intellectual property organisations will therefore be crucial for the harmonious development of the metaverse market.
More generally speaking, the NFTs can be an interesting tool in the fight against counterfeiting and trademark infringement. When a metaverse runs on the blockchain, NFTs can not only help to track and validate ownership of virtual assets, but also verifying their authenticity[23].
However, detection of trademark infringement and enforcement of trademark laws will be highly sensitive to self-regulation, especially in the case where it is legally required that NFTs are destroyed from the blockchain or recovered from an owner[24]. For technical reasons (i.e. immutability of the blockchain), a minted NFT may not be destroyed or “burnt” by the marketplace; the marketplace may not be able to destroy or “burn” the NFT itself or recover it from the purchaser or its current owner[25]. In most cases, it will also be difficult to identify the owners of the NFTs[26].
There are already existing methods to technically address the immutability of the blockchain, in particular by adapting the smart contract related to the virtual good in question (e.g. provide the issuer an access to the NFT in any wallet of any subsequent buyer)[27].
V. Outlook
At this stage of developments in the field of trademark protection in the metaverse, and in particular following the MetaBirkins case law, various observations can already be expressed.
As the practice regarding virtual goods or services is not yet harmonised, it is also advisable to pay attention to potential divergent practices depending on the country or region where the registration or extension of the trademark is desired.
It is therefore advised that companies wishing to protect their trademarks in the metaverse register or extend their trademark to virtual goods (or services) in the relevant class of protection, following a thorough a strategic analysis of the business plan and legal requirements. This is particularly important when the brand is not a renowned one.
It is also advised to carefully code the smart contract, so that trademark laws enforcement is no timpeded by technical contingencies. The smart contract can also be supplemented by a “real” contract[28].
Our Experience
lecocqassociate provides a full range of financial regulatory, corporate and commercial advice in relation to the structuring and incorporation of entities.
This newsletter is for information purposes only. It does not constitute professional advice or an opinion. Please contact Ms. Lucile Cesareo-Hostettler on info@lecocqassocate.com for any questions.
Footnotes
[1] World Economic Forum, This chart shows how big the metaverse market could become [online], 7 February 2023; Statista, Metaverse – Worldwide [online] : According a recent analysis of Statista, the largest segments in terms of revenue in 2030 will be gaming (USD 163 billion)and e-commerce (USD 201 billion).
[2] Ibid.
[3] Statista, Metaverse – Worldwide [online].
[4] About some already existing challenges related to online regulation, see Jacques De Werra, Alternative Dispute Resolution in Cyberspace: The Need to Adopt Global ADR Mechanisms for Addressing the Challenges of Massive Online Micro-Justice, in Schweizerische Zeitschrift für internationales und europäisches Recht 2016, p. 289.
[5] Hermès International et al. v. MasonRothschild, case number 1:22-cv-00384, in the U.S. District Court for theSouthern District of New York.
[6] See Mark Ellwood, Luxury Brands AreAlready Making Millions in the Metaverse, in Bloomberg Businessweek, 9 December 2021.
[7] Anne-Sophie Contival, Deuxième acte dans l’affaire des NFT "MetaBirkin" [online], in Dalloz Actualité, 25 November 2022.
[8] Ibid.
[9] Amélie Favreau, Métavers et propriété intellectuelle, in Lexisnexis, no.6, 2022, p. 9.
[10] Ibid.
[11] Enzo Bastian, Le NFT : de l'œuvre d'art à l'instrument financier, in suigeneris, 2023.
[12] Katharina Garbers-von Boehm, Intellectual Property Rights and Distributed Ledger Technology with a focus on art NFTs and tokenized art, 2022, p. 12ff.
[13] Ibid.
[14] Ibid. ; Amélie Favreau, op.cit., p. 17 : Broadly speaking, the NFT includes, in addition to the token, the smart contract that deploys it and the metadata associated with it. However, this issue will not be discussed further in this newsletter.
[15] Hermès International and al. v. Mason Rothschild, case number 1:22-cv-00384, in the U.S. District Court for the Southern Districtof New York.
[16] This newsletter will focus solely onthe trademark infringement claim.
[17] As an artist, Mason Rothschild also claimed his right of free speech (in the Metaverse). While the existence of freedom of expression in the Metaverse was not denied, the District Court of New York did not allow Mason Rothschild to create, on the count of freedom of expression, an impression that the NFTs underlying works were coming from Hermès.
[18] According to Rogers v. Grimaldi case law, the freedom of artistic expression allows anyone to exploit a protected trademark as long as the exploitation constitutes artistic expression and does not explicitly mislead consumers. For more details, see Anne-Sophie Contival, Deuxième acte dans l’affaire des NFT "MetaBirkin" [online], in Dalloz Actualité, 25 November2022.
[19] "The artist’s lead counsel Rhett Millsaps declared in a statement “Great day for big brands. Terrible day for artists and the First Amendment”. […] Attorneys and a representative for Hermès did not comment following the verdict". See Eileen Kinsella, Hermès Wins Its Lawsuit Against the Digital Artist Who Made “MetaBirkins”, Setting a Precedent for NFT Copyright Cases [online], in Artnet, 8 February 2023.
[20] Ibid.
[21] Raphaële Karayan, Ces NFT ne sont pas de l'art, tranche le jury dans l'affaireopposant Hermès au créateur des MetaBirkin [online], in Usine Digitale, 9 February 2023.
[22] See key relevant considerations in Hermès International v. Rothschild (1:22-cv-00384), Order of 2 February 2023,p. 23.
[23] Katharina Garbers-von Boehm, op. cit., p. 45.
[24] Ibid., p. 8.
[25] Ibid., p. 43.
[26] Ibid., p. 43.
[27] Ibid., p. 43.
[28] Supplementing the on-chain smart contract with an off-chain smart contract is also possible. The issue of off-chain smart contracts is not analysed in this newsletter and will therefore not be discussed further.
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