‘A remarkable decision’: Why did the MetaBirkins maker get to keep the infringing NFTs?

It seems as though we haven't heard the last of the so-called MetaBirkins.

In July, artist Mason Rothschild asked the US Court of Appeals for the Second Circuit to review a decision that he infringed Hermès’ marks by minting and selling non-fungible tokens (NFTs) inspired by the ‘Birkin’ bag.

Meanwhile, a New York federal court’s injunction in June that barred Rothschild from selling the NFTs also delivered an unexpected twist.

In a decision deemed “remarkable” by some lawyers and “unique and complicated” by another, the court refused to order the destruction of Rothschild’s NFTs or the transfer of his smart contracts to the French fashion house.

While the order imposed restrictions against Rothschild, it also prompted one unresolved question: what exactly should—and could—be done with infringing digital assets and smart contracts?

A first-of-its-kind trial

Things seemed more settled back in February after the Manhattan federal jury found that Rothschild’s NFTs had directly infringed the designer bag—named in honour of the late Anglo-French actor and singer Jane Birkin.

The closely watched trial was the first to question how NFTs should be treated according to existing legal doctrine, and for many, the verdict allayed fears that current laws may be insufficient to protect brands in the metaverse.

As Gina Bibby, partner and global fashion technology lead at Withers, points out, the ruling “showed that real-world IP rights are enforceable in the metaverse”.

She believes that it clarified that “constitutional rights related to ‘artistic’ endeavours are limited” and that a finding of infringement is likely when “such endeavours are intentionally commercial in nature and exploit the IP of third parties without their consent”.

That may be so, but not everything went in the fashion house’s favour: namely its failure to acquire the NFTs or the smart contracts associated with them.

So why did the fashion brand seek this remedy? One word: control.

Essentially, a smart contract is a computer program or a transaction protocol that can automatically execute, control or document events and actions according to the terms of a contract or an agreement.

Such contracts can be placed in a smart wallet—effectively a digital account—on the Blockchain that allows users to store and manage their digital assets including NFTs and smart contracts.

In its motion for an injunction, Hermès insisted that destroying the NFTs and transferring the contracts would prevent further infringing activity by Rothschild.

An ‘unwise’ remedy

But Judge Jed Rakoff took a different view, declaring that this solution would be “unwise”.

“It is true that, where there is a significant and ongoing risk of irreparable harm to the plaintiff, courts have sometimes exercised their powers to ‘order that all [materials] in the possession of the defendant [that] bear[] the registered mark’ to be “delivered up and destroyed,” he wrote.

He added, however, that “several factors make this remedy both unnecessary and potentially unwise”.

Rakoff opined that “because the MetaBirkins NFTs are at least in some respects works of art, the court, out of an abundance of caution”, would enter “a narrower injunction that would remedy continued consumer confusion while avoiding any potential constitutional problems”.

Conceding that Hermès had proven that Rothschild had continued to market, sell, and collect royalties from the MetaBirkins NFTs since the verdict, he reasoned that its fears relating to future infringements were unfounded.

“The fact that he has done so before an injunction has been entered does not necessarily suggest, as Hermès thinks it does, that he would violate the terms of an injunction once it has been entered,” he wrote.

A ‘remarkable decision’

However, for Kevin Pasquinelli, partner at Robins Kaplan, the decision is “remarkable”.

“The court gave wide protection to any First Amendment expression that might possibly exist in the MetaBirkins, implying that there could be possible expressive uses of the content that might not constitute a trademark infringement,” he explains.

“What’s most remarkable about the injunction is that the court declined to require transfer or destruction of any of the MetaBirkins NFTs to Hermès.”

The refusal was perhaps even more surprising given that Rakoff was initially so scathing in his assessment of Rothschild’s behaviour.

“The defendant's entire scheme here was to defraud consumers into believing, by his use of variations on Hermès’ trademarks, that Hermès was endorsing his lucrative MetaBirkins NFTs,” he opined in his February ruling.

George McCubbin, senior associate at Herbert Smith Freehills, agrees that Rakoff’s subsequent stance regarding the fate of the NFTs and smart contracts was somewhat unexpected.

“The 'remarkable' aspect here is that—despite characterising Rothschild as ‘simply a swindler’—the court then declined remedies that would most thoroughly protect the company that was the victim of his alleged swindling,” he said.

So in light of such trenchant criticism, why did Rothschild retain his NFTs and smart contracts?

After all, as McCubbin points out, the destruction or delivery of infringing goods “is the most absolute way that a rights holder can ensure that their IP is being preserved because it ultimately avoids the issue of those infringing goods ever resurfacing in the public domain”.

First Amendment reigns supreme

But in this case, it seems that constitutional concerns overrode such concerns.

Throughout the legal proceedings, Rothschild consistently, and unsuccessfully, argued that his creations were constitutionally protected because the digital images of the Birkin bags are tied to the NFTs he sells. Such artistic expression, he said, is protected by the First Amendment.

And while this argument failed to apply to his defence—largely because the jury concluded that he intentionally misled consumers into believing that Hermès was endorsing his products—this was not the case with his actual NFTs and contracts.

As McCubbin explains: “In declining to order the transfer or destruction of any of the MetaBirkins NFTs or smart contracts to Hermès, the court still expressed deference for the First Amendment protection over works of art.

Sharon Urias, partner and IP practice group leader at Greenspoon Marder agrees, emphasising that Hermès is still, to a certain extent, protected.

“The court made a point of noting that there were potential constitutional problems with a broader injunction in light of the fact that the NFTs are, at least in some respects, works of art. And the court noted that if Rothschild violated the injunction, eg, by selling more NFTs or collecting royalties, then it could hold him in contempt.

“So, ultimately, while not ideal in Hermès’ eyes because it likely doesn’t trust Rothschild, there is a measure of protection from further infringement.”

That may be somewhat reassuring for the luxury brand, but what does this narrower-than-expected injunction mean for future disputes involving digital assets and smart contracts?

According to Bibby, it could prefigure even more complex legal arguments regarding the future judicial treatment of infringing virtual products and contracts.

“Perhaps future court decisions will address the specific question of whether a forced transfer of infringing digital assets actually encroaches upon the asset owner’s constitutional rights,” she contends.

If it’s not art, is it always infringing?

For Dyan Finguerra-DuCharme, co-chair of Pryor Cashman's trademark practice, this “unique and complicated” injunction highlights how the frequently posed question: “Is the NFT art or not” is, in itself, “a false dichotomy”.

“It suggests that the work must not be art to be infringing, or that if it is art, then it’s automatically not infringing.

“That’s not the case. Being art and being infringing are not mutually exclusive,” she explains.

Consequently, she believes that the injunction offers balance. “On the one hand, it prohibits unlawful conduct, while on the other hand, it respects the creative expression of NFT artists,” she says.

“The decision not to transfer the smart contract recognises that even though the jury found that the NFT wasn’t immune from infringement on First Amendment grounds, the NFT is still art and its ownership should remain with the artist.”

There were, she adds, some pragmatic considerations as well.

“Judge Rakoff’s decision not to order the destruction of the NFT recognises the practical reality of how the blockchain works,” she says.

Unlike a traditional computer database, she adds, the blockchain is an immutable record that cannot be altered.

“Once the owner of an image is entered, it cannot be erased or changed and because it is decentralised, anyone can access the information and no one controls it.”

Jane Birkin has the last word

Undoubtedly, this particular order invites all sorts of questions concerning disputes over metaverse content, and who, ultimately, should gain control of infringing virtual products and smart contracts.

But this scenario, as Bibby reflects, was somewhat inevitable.

“Emerging technologies such as NFTs almost always raise novel legal issues. In the MetaBirkin case, the court had the difficult task of weighing any constitutional rights of Rothschild against the IP rights of Hermès without the benefit of prior legal precedent related to NFTs,” she explains.

“Ultimately, the court reached a decision that recognised that there may be some constitutionally-derived rights that transferring Rothschild’s NFTs and smart contracts to would encroach upon.”

In her assessment of the case, Bibby memorably concludes that “there would have been no MetaBirkin case without Jane”—the Birkin bag’s revered namesake who passed away suddenly on July 16.

Indeed, one of the fashion muse’s soundbites—recorded for posterity in 1969—could offer a degree of comfort to the brands and lawyers attempting to navigate, or even decipher, this most complex of cases: “But who wants an easy life? It’s boring.”