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7 June 2022CopyrightMuireann Bolger

Litigation in the metaverse: is IP fit for purpose?

If interest from the world’s largest tech companies is a measure of potential, then the dawn of the metaverse is not far away.

Facebook rebranded as Meta at the tail end of last year and shortly after its company accounts showed just how much it is pinning on the virtual ecosystem, revealing a $10 billion spend on its metaverse division in 2021.

Apple is expected to unveil its own virtual reality headset this autumn after a long period of research and development. Experts predict that it could be the tech giant’s most significant new product since the iPhone.

But this new era also presents a maze of potential problems for IP owners.

Lawyers anticipate hybrid lawsuits across trademarks and copyright to become the norm, while territorial and jurisdictional issues loom large.

Can the current legal frameworks handle these questions, or will new laws be necessary? And what is the present litigation in this area likely to tell us?

One thing is almost certain: we can expect a long period of legal uncertainty, says Deborah Greaves, partner at Withers.

“Litigation emerging from new technologies and developments always tells businesses and legal practitioners one thing: technology is always ahead of legislation. Waiting for legislative solutions to these disputes will not only take a long time, but will perpetuate inconsistent decisions,” she explained.

And two US cases are arguably keeping IP lawyers on tenterhooks, inviting different predictions of how they may pan out.

In January, French luxury brand Hermès sued a digital artist, Mason Rothschild for ripping off its Birkin handbag through the issuance of MetaBirkin non-fungible tokens (NFT), after he created fuzzy images of the Hermes Birkin handbag and minted them as NFTs.

A month later, Nike sued StockX in February for selling NFTs of images of Nike sneakers without the company's permission, arguing they infringed its trademarks by causing consumer confusion. The complaint held StockX's NFTs interfered with Nike's own NFT plans.

The cases query to what extent this new tech requires new enforcement strategies and whether existing trademark laws and other laws and regulations are fit for purpose in this space.

When is ‘art’ an infringement?

“Hermès’ efforts to reign in ‘Metabirkins’, and Nike’s challenge to StockX, both raise significant trademark and copyright issues for IP lawyers, noted Ron Dreben, a partner at Morgan Lewis.

“The age-old challenges of fair use in art and unauthorised use of trademarks and copyrights to promote goods available for sale or exchange will need to be revisited for this new space. The big questions are: is it a digital bag art or an infringement? Is an NFT a new product or a promotion?” Dreben says.

But according to William Stroever, member and co-chair of the IP department at Cole Schotz, while hybrid lawsuits will be an area to watch over the next few years, the existing legal frameworks and case law are mighty enough to survive this challenge.

“Our IP framework has withstood the onslaught of technology so far and will continue to do that. As courts apply the existing framework to these new fact patterns, new cases will be drafted with that case law in mind and will fill out that framework in these new areas,” he predicts.

This view is supported by a May decision delivered by a New York federal court holding that Hermès’ lawsuit should be tested against a precedent set by a landmark ruling handed down more than three decades ago.

In 1989, Rogers v Grimaldi, established the "Rogers test" for protecting uses of trademarks that involve intellectual freedom issues.

According to the ruling, artists can use a trademark if it meets certain artistic criteria and doesn’t mislead consumers.

The Second Circuit affirmed that “suppressing an artistically relevant though ambiguous[ly] title[d] film” on trademark grounds would “unduly restrict expression”.

Old principles still apply

Rothschild had argued that, because the digital images of the Birkin bags are tied to the NFTs he sells, the Second Circuit’s test in Rogers could apply and that the lawsuit should be dismissed on First Amendment grounds.

The First Amendment provides that Congress make no law respecting an establishment of religion or prohibiting its free exercise. It protects freedom of speech, the press, assembly, and the right to petition the government for a redress of grievances.

Last month, the court concluded that the Rogers test applies, at least in part, to the trademark infringement analysis of Rothschild’s activities. But it also held that the fashion designer's complaint included sufficient allegations of misleading consumers and confusion, rejecting Rothschild’s motion to dismiss.

As David Sunshine, a member of Cozen O’Connor’s IP Practice Group, notes: “Hermès’ survival of the motion suggests, at least to some extent and in the near term, that the current legal landscape can handle IP claims in the metaverse.”

After all, in terms of territoriality, he argues, the metaverse is not a whole lot different from earlier “virtual” environments such as online gaming and the internet itself.  “While the metaverse is a new frontier, existing IP laws can still be applied to it, albeit imperfectly.”

Margaret Esquenet, partner at Finnegan, agreed that the legal principles behind trademark law and copyright law can be applied to the metaverse in the same way they have been applied to other emerging technologies.

“Courts and juries assessing disputes should be able to decide how to balance the parties’ rights by keeping those fundamentals at the forefront of their considerations,” she advised.

Others take a different view, predicting that such “narrow views” adopted by the courts could soon be challenged.

“We can’t put a lot of precedential weight on these early decisions because subsequent decisions from other circuits are likely (hopefully) to go in the opposite direction and realise this isn’t a first amendment issue,” argues Julia Anne Matheson, partner at Potomac Law.

“We afford protection for brands that are shown in the ‘virtual worlds’ of advertisements and film and television. It is no stretch to recognise that protections that exist in the ‘real world’ should extend to the ‘virtual world’ as consumer perception, confusion, and the resulting damage are the same,” she says.

In her view, the May ruling illustrates a “fundamental misunderstanding” of the proper application of concepts of parody and the appropriate confines of free speech together with “a startling lack of appreciation for trademark rights”.

She warns that intervention may be necessary to address timely pivotal weak points in case law. “Expecting our fraught and dysfunctional Congress to weigh in on this issue in a timely manner is likely unrealistic. But I am afraid that without that guidance, we will continue to see an incredibly damaging erosion of trademark rights,” she says, ruefully.

This view is shared by Mike McArthur, associate at Haynes and Boone, who cautions that: “Failure to adapt and protect IP here would stifle innovation in this new world and would bring harm to rights owners and consumers.”

But he predicts a growing volume of case-law will eventually help clear a path for all stakeholders. “The number of these cases with unique fact patterns and new legal claims should only increase in the coming months and years, providing some clarity about protecting IP in the metaverse in their wake,” adds McArthur.

For example, he predicts that the MetaBirkin case could eventually challenge the precedent set by Rogers. “We should learn whether NFTs depicting famous products will be treated as an infringing offering or as transformative art protected by the First Amendment. My initial sense is that it will be the former.”

And in the Nike v StockX case, he mulls that as Nike plans to sell its own sneaker NFTs, StockX’s NFT receipts will be viewed as “a separate competitive and infringing offering” rather than “a permissible form of digital authentication for the owner of a physical product”.

However, these remain “very much up in the air” and it is likely that more unexpected twists and turns could emerge.

Jurisdiction: global

Even if the US courts provide more clarity, other tricky questions are likely to dominate when the same metaverse IP issues are mulled in foreign jurisdictions.

As Greaves noted: “The issues that these cases will face are jurisdictional, including service of process, and cross-border enforceability of judgments. It is this grey area in the application of the trademark and copyright laws in various jurisdictions that is likely to result in inconsistent outcomes.”

At present, she noted that trademark and copyright owners have little recourse but to rely on existing laws and tools—despite their deficiencies.

“With respect to enforcing rights in IP arising out of the metaverse that are strictly related to infringement of trademarks and copyrights, plaintiffs will need to resort to the tools that have been used for enforcement of infringement outside of the metaverse,” she explains.

She does however point to a recent decision by the Singapore High Court to grant a worldwide proprietary injunction to freeze a Bored Ape Yacht Club (BAYC) NFT on the Ethereum blockchain against a Singapore-based individual.

The BAYC NFT series is a collection of 10,000 avatars which achieved a floor price of 108 Ethereum, equating to more than $260,000.

The Singapore High Court’s injunction to protect the NFT marked the first in Asia and the first globally in a commercial dispute. Additionally, the court decided to freeze trading of the NFT on the basis that it was a digital asset, and also permitted the injunction to be issued via social media platforms including Twitter and instant messaging social platform, Discord.

“Hopefully the Singapore ruling is indicative of how other courts will interpret jurisdiction, which helps to address one of these initial hurdles,” says Greaves.

According to Morgan Lewis’ Dreben, the limits of copyright harmonisation internationally under the Berne Convention of 1886 may also be tested as different countries take different views of fair use in a virtual world and even copyrightability itself.

Plaintiffs, he explains, may argue that the presence of nodes in most if not all states should provide blockchain transactions and parties to metaverse disputes with “a sufficient nexus”, while defendants may argue that the distributed nature of digital assets precludes a finding that a transaction is directed toward any particular location.

“Even the fundamental concept of whether minting creates an indefensible infringing copy may be viewed differently by country and by courts within countries. On the trademark side, the scope of coverage for registrations that do not expressly identify virtual goods may be treated differently by country and by courts,” says Dreben.

Leave no stone unturned

So what is the advice to trademark owners? “The majority of the online companies are going to have to add NFTs to their policies. Because courts are taking such a narrow perspective, I think it will be important for brand owners to update their portfolios to seek protection for their most important marks and trade dress/designs in the ‘virtual world’,” urges Matheson.

“And our branding organisations need to be working on white papers to help guide the courts on frameworks to apply existing protections to this new world,” she adds.

But she does, however, envision that these metaverse IP clashes would harbinger large-scale and necessary change in the long-term.

“Just as our US constitution was written to evolve with the times, the fundamental principles that underpin trademark laws need to be applied in a way so as to ensure legal protection for recognised brands in the digital world,” Matheson says.

“The courts in the US have shown themselves unable or unwilling to extend protections of the real world into this new virtual world even though US courts are often the ones that are further ahead than their foreign counterparts. Unfortunately, the legal system is always many steps behind.”

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17 February 2022   The luxury brand’s lawsuit over non-fungible tokens heralds important questions for brand owners and artists over their IP rights in the metaverse, Joseph Barber of Howard & Howard Attorneys explains.
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