Digital decisions: brands in the metaverse

The concept of the metaverse has been explored in books, TV and film for decades. Think Ready Player One, The Matrix and Avatar.

But these fictions hint at a reality that is gathering pace, spurred by online gaming and the development of virtual and augmented reality technologies.

Meanwhile, blockchain technology—a decentralised digital ledger which enables cryptocurrencies such as Bitcoin—has facilitated the growth of non-fungible tokens (NFTs).

NFTs allow creators to tokenise unique digital assets such as artwork, music, and video games, and sell them as one-of-a-kind collectables, such as in the influential Hermès v Rothschild, aka ‘MetaBirkins’.

The rise of NFTs has attracted brands to the metaverse, especially since its value is estimated to grow to between $8 trillion and $13 trillion by 2030. And as of January this year, the US Patent and Trademark Office (USPTO) had received more than 10,000 trademark applications for NFT-related goods and services alone, in a roundtable on the subject.

This boom presents opportunities, but also challenges in terms of asset protection, exemplified in Herm è s v Rothschild and Nike v StockX; and in terms of monitoring third-party activities on NFT trading platforms, seen for instance in Juventus v Blockeras.

As we grapple with this brave new world, how should brands ready themselves for playing—or not, if they so choose—in this emerging market?

Scramble for meta

Many brands and creators are “in a rush” to file metaverse-related trademarks, according to Jonathan Hyman, a partner at Knobbe Martens, Los Angeles.

He has been advising clients on how to best protect themselves for either entering the metaverse or defending from others from potentially trading off their IP.

The problem, he says, is that nobody wants to be left behind.

“Everyone’s waiting to see what will materialise and I think there’s going to be a lot of trial and error,” says Hyman. “I’ve got clients that are pretty far in the advanced stages, where they’ve mocked out how their marks and brands will interplay in the metaverse, and I’ve got others that are just trying to figure out what it would entail.

“The reality is, not every brand dovetails into something that would be played with in the metaverse, but that’s not to say you wouldn’t want to file defensively.”

Classification conundrum

The International Trademark Association ( INTA) has tackled this knowledge gap recently in two extensive white papers,

Published in April 2023, INTA’s explore the challenges presented by new digital ‘ecosystems’ throughout the lifecycle of trademarks.

Michael Geller, a partner at DLA Piper in Chicago, was a contributor. He says the reports highlight the many questions surrounding these topics.

“As the technology grows, people start to explore and play with it,” he says, and see how digital goods fit into the global economy “from a technology perspective, from a consumer good perspective, and—probably most importantly—from a monetisation perspective.”

For trademarks, he says one of the overarching takeaways is the hope that NFTs do not change the overall landscape of IP protection, and that they fit within the trademark legal system in the same way, or at least a similar way, as physical goods do.

Kate Swain, partner at Gowling WLG in London, was also involved in the white papers. She adds that a key point also emerged from the research about how to harmonise classification.

“Obviously, you apply for your trademark in relation to certain goods and services. And where on earth does the metaverse fit into that?”

She says that presently, most applicants are opting for Class 9, in the Nice Classification, but that there are also arguments that Classes 35, 41, and 42 could be where these kinds of digital rights sit.

Or perhaps a new virtual goods classification is needed, she suggests. “At the moment, I don’t think there’s a collective view on this.”

Decentralisation and a borderless metaverse

Both Swain and Geller spotlight a key feature of the metaverse—that it is without borders or centralisation, allowing users to move freely and interact globally. Decentralisation, rather than having a single authority, enables greater autonomy and inclusivity for users, regardless of their physical location or political affiliations.

But how can a decentralised ‘world’ be reconciled with protecting the IP of owners’ virtual assets?

“It’s a great question!” says Lisa Ferrari, a partner at Cozen O’Connor in New York. Making the comparison with the challenges presented by the rise of the internet and e-commerce, she believes, like Geller, that the issue of jurisdiction in the virtual world could be addressed in a similar manner to that in the real world.

“In the US, courts have wrestled with the question in the real world and have come up with systems and processes for addressing it—for example, dealing with bad actors in China, who are selling counterfeits into the US.

“It’s not always the best outcome for the plaintiffs, because it can be difficult to get a jurisdictional hook into the defendants, but there has been some success in this way such as getting their financial faucets turned off.”

A virtual strategy

Infringement issues aside, many brands are excited by the metaverse, and are prepared to take full advantage of what it offers.

Steven James, a partner at Morrison Foerster in London, believes that the metaverse brings many positives.

“One of the big attractions, I think, for brand owners and clients is that it does open up all these opportunities,” he says, “and new ways of resurrecting perhaps dormant rights or rights that weren’t particularly doing much. And so there are huge opportunities there.”

But whether or not a brand is considering having a presence in the metaverse, how should it navigate this minefield to prevent infringement and misuse?

The first step, advises Hyman, is making sure that as a company you can show bona fide intent, and that you can actually implement the plan to go into that space.

Then some initial thought needs to be given as to what that looks like for the brand, he adds. For example, for food brands, will there be a virtual restaurant? Are there going to be unique spaces within that virtual restaurant?

“It really is forcing marketing teams to figure out how they’re going to interact with their customers in these virtual spaces,” he explains.

“Once they figure that out, the next question is, what are the appropriate marks to be filing? Are we just going to have a branded metaverse? Or are we going to be building things around our key menu items?”

Not all brands are Nike

One brand that has been proactive in the metaverse is Nike. The company launched Nike Virtual Studios in January 2022, an independent studio focused on virtual products and “blockchain-based experiences”.

This new division followed the firm’s acquisition of NFT studio RTFTK (operating under the Virtual Studios umbrella), plus trademark applications for the use of Nike branding on digital goods and a partnership with the gaming platform Roblox that resulted in the virtual Nikeland.

Ferrari of Cozen says Nike is “hedging its bets”.

“It’s very interesting how a company like Nike is not relying on its rights in the real world; they’re basically saying, we are going to file applications in the virtual world.”

But not every brand has the resources and reputation of Nike, so is it worth the investment for smaller brands?

Ferrari points to the advantage given by the timescales in the US for filing an intent-to-use application, which could provide between three and five years from the time of filing until the time you have to demonstrate use.

“For Nike, of course, if the metaverse isn’t up and running in that time for them to be selling virtual sneakers, it’s no skin off their back,” notes Ferrari.

“But for a lot of other brand owners, I think the question is, are we at the point where it’s worth the investment if you’re not going to be able to turn that application into actual use in the metaverse in the time you need to do that?”

Be prepared

It is precisely this strategising which is crucial, but brands may be left wondering how much work to actually do upfront.

Ferrari believes it’s worth doing the exercise of looking at existing registrations and considering filing applications in the metaverse, even if brands are not considering having a presence at this point.

“I think what all of us in this field are looking for is to see the extent to which our clients’ existing registrations for goods and services in the real world will carry over when there are infringement issues or other issues in the metaverse,” she says.

She uses the MetaBirkins example to illustrate her point. “Of course, it’s just one jury and one case, but it indicates that Hermès had rights.

“At that point, Hermès had existing registrations only in the real world. And yet it was able to assert those registrations against the defendant.

“That’s good for brand owners, who are not sure how much to dip their feet into the water.”

But even with the right strategy, licensing terms and legislative avenues in place, the fact remains that policing infringement will be difficult in a cross-border world and could resemble a game of ‘whack-a-mole’.

For example, one of the recommendations to INTA as a result of the NFTs white paper, explains Geller, is harmonisation internationally of mechanisms for NFTs and similar digital goods, to address infringing material.

In addition, he says there should be similar regulations as to how NFTs are looked at from a global perspective.

“NFTs are going to impose new, challenging policing issues,” he explains. “Brand owners are just going to have to figure out new ways to identify infringing material and take action.”

For Ferrari, the anonymity of NFT platforms is “frustrating”.

“You can do traditional DMCA [Digital Millennium Copyright Act] takedown notices, and NFT platforms typically comply with those,” she says. “But if you have someone who is opening and closing and reopening under different account names, it can be very difficult.

“My hope would be that as we’re moving into the metaverse, there would be some systems in place to take away this anonymity that has a lot of downsides to it for brand owners and IP owners.”

A common law system

One existing aspect of US law might help brand owners here, suggests Ferrari—the robust common law system of trademarks, in which rights in the US come from use of the trademark.

“Even if you don’t register it, if you are using it, you are accruing goodwill, and you are accruing rights in the trademark,” she explains.

“I’m really interested in seeing the extent to which the registrations that companies have in the US can be used against infringers in the metaverse—that’s the open question.”

Again, Ferrari cites MetaBirkins. “There are a lot of questions that come from that case, like, if your mark is famous in the real world, are you going to be able to assert its fame in the metaverse?

“In the US, the designation of a mark as famous is very hard to achieve and it gives you a lot of benefits—for example, in a claim for dilution, you wouldn’t have to demonstrate likelihood of confusion.”

She adds: “It’d be very interesting to see whether a mark which had achieved that level of fame in the real world could carry it over into the metaverse.”

Adapt or die?

In the meantime, should conventional trademark law apply to metaverse-related disputes—or will the law adapt?

“I think the courts are really good at applying current law to new technology—they can bridge the gap,” says Hyman. “And I don’t think that there’s anything unique, really, with the NFT/metaverse space. It all comes down to consumer confusion.”

Eventually, he says, there will be more cases like MetaBirkins that push and clarify the law, and “hopefully make it clearer for people who are going to try to free-ride off brands that this is not something to be done lightly.”

Ferrari adds that, for now, existing laws will suffice: “I think we have to expect that the traditional principles of intellectual property law are to a large extent going to apply.”

Hyman is cautiously optimistic. “I get the rush to file, but I don’t know if all these marks that are filed right now will ever have use,” he wonders.

And for James, whether more litigation will come with it will largely depend on economics, he says.

“At the moment, the whole world of NFTs, crypto and blockchain has had a bit of a kicking because of economic pressures.”

Now, though, there are maturer offerings, as James puts it, and where there’s value, there are likely to be disputes, he says.

“That’s when you’ll start seeing [trademark law] being tested—just as we’ve already seen with bigger brands where you have third parties trying to stretch the elasticity of intellectual property rights.”

But then he predicts that third parties will devise new business models, “and they’re going to push those brands and the intellectual property that subsists within them to the limit—and that’s where you’ll see the litigation.”