Trying to understand the buzz around the “metaverse”? The trick is conceptualizing something that’s in the process of becoming that has no one single meaning. There are as many different definitions of “the metaverse” as there are applications in the metaverse. The term itself is trendy and sexy—but to an extent, it is everything we have already been doing in online digital environments. There’s a collective reflex to reference online video games that emerged in the early 2000s to help frame the current thinking about the metaverse. Consider The Sims, World of Warcraft, Pokemon Go, Second Life, and Minecraft—all part of a multi-billion-dollar industry that existed before the recent surge of interest in the metaverse. Game developers and brands are familiar with branding, partnerships, product placement, licensing, and trademark infringement within this context. But what has changed in the digital landscape? Why are companies like Nike, Gucci, Louis Vuitton, Balenciaga, Dolce & Gabbana, Converse, Coca-Cola, Lamborghini, Hyundai, and Wendy’s taking steps to try and position themselves at the forefront of branding and trademark protection in the metaverse?
The metaverse is being shaped from the primordial soup of the existing internet. No VR headset can show you the final product. The path forward might be clearer for digitally native brands, such as Facebook, which rebranded as Meta and made significant acquisitions in order to position itself at the forefront of this new industry. But it’s just as important for trademark owners in traditional industries to consider cementing their position within the metaverse—the potential opportunities along with the related risks associated with “sitting back” or getting in early. Like every emerging industry, the first movers have the advantage of shaping mass thinking. We have already seen brands across industries keeping pace, with these companies expanding their brand portfolios, developing new monetization strategies, and thinking proactively about trademark protection.
Companies are starting to recognize that the metaverse represents a new frontier for commerce, as with the internet in the early 2000s. Fast food chains, luxury brands, real estate corporations, and auction houses are all eager to either partner with metaverse platforms or create their own. Nike is currently building the metaverse Nikeland, through a partnership with the online gaming platform Roblox, which has over 50 million daily users and generated more than $1.3 billion in revenue in the last four quarters. Brands are also taking steps that will help them expand their trademark portfolios and capture various metaverse-related goods and services. For example, McDonald’s has recently filed a series of trademarks for a virtual restaurant that would deliver food in-person and online.
What steps should brand owners and creators take to protect their valuable intellectual property in the metaverse? Regardless of whether you are a ready player, one reality that cannot be denied is that we live in a world where the right to claim a JPG of an ape as your own can sell for more than a million dollars. With the metaverse market projected to hit double-digit growth within the coming years, reaching $800 billion by 2024, it’s not surprising that there’s a growing list of Fortune 500 companies taking real steps to protect their intellectual property in the metaverse-intangible rights in this intangible world.
For consumer-facing brands and content creators, trademarks and copyright are proving to be two of the most important areas of development within this emerging area. This explorable digital universe opens new opportunities to create branded spaces and experiences. Digital technologies facilitate infinite reproduction with minimal degradation—the millionth image of a digital butterfly will appear the same as the first. So how does one assess if a digital visual work (whether an avatar’s clothing, a virtual restaurant, or a piece of art) is “authorized” or “unauthorized” by the rights holder? What if the work is branded? And what if it has a “real world” counterpart? How can rights holders balance the need to control the character and quality of digital goods with the reality of user interactivity? Is there even such a thing as a “doctrine of exhaustion” in the metaverse? These are all questions that must be answered.
Ownership Of Assets
So, how do we buy and sell in the metaverse? Let’s start by going back to the example of online games of the early 2000s—the players in those virtual worlds could buy or earn various items for their characters (or “avatar”), like a sword, a car, or an outfit. Twenty years ago, the value of those goods only existed within the game. Players traditionally “purchased” items within a game via points they earned through play or with real funds to convert into usable tokens within the game—like with “Linden Dollars” in Second Life, for instance. With the web3 technology used in the metaverse, we can now remove the “middle person” from this scenario. Players can purchase items directly either with state-backed fiat currencies or blockchain-based cryptocurrencies/tokens such as Bitcoin and Ethereum. Ownership of these assets is recorded on the blockchain irrefutably and often comes in the form of a non-fungible token (NFT).
Disputes In The Metaverse
We have already seen high-profile brand owners take enforcement action against “metaverse” infringers. For instance, the French luxury brand Hermès has brought an action for trademark dilution and trademark infringement against Mason Rothschild, the California-based digital artist that created and sold the “MetaBirkin”, which is a collection of 100 NFTs depicting faux-fur iterations of the iconic Birkin bag. The physical Birkin bags can easily retail for six figures, whereas Rothchild’s NFTs were sold on digital marketplaces for anything between $13,000–$65,000. In their claim, Hermès asserted that the sale of the “MetaBirkins” constituted unauthorized use of the Hermès federally registered trademarks.
Nike recently launched its own metaverse-related lawsuit against the online resale marketplace StockX for trademark infringement and dilution. Nike claims that StockX created (or “minted”) NTFs of different shoes that prominently display the Nike trademark without Nike’s authorization. These NFTs were then sold at “heavily inflated prices to unsuspecting consumers who believed or were likely to believe that those ‘investible digital assets’ (as StockX calls them) are actually authorized by Nike when they aren’t.” Nike alleges that while StockX’s business caters to buyers and sellers of physical goods originating from various companies, almost all of the NFTs minted to date are Nike-branded.
The Hermès and Nike cases raise novel questions about trademark law in virtual environments. For example, how might the purely virtual nature of goods affect the “likelihood of confusion” test that is used to assess trademark infringement? How should one assess “the hurried consumer” in a strictly digital realm? Who’s the “average consumer” of these digital assets? Are brand owners able to rely on trademark registrations that do not strictly cover digital assets, NFTs, or blockchain, to enforce their rights in the metaverse? Will courts treat an NFT as inseparable from the “thing” to which it is tied, or will they be treated as mere “titles”, with intellectual property rights remaining separate, subject to the traditional consideration of chain of title/licensing from the owner? Adding to the complexity is that non-fungible tokens are sold on the open market, through specialty websites/platforms and auction houses. The value of a specific NFT is readily realizable for sellers. In early 2022, an NFT of a digital artwork by Beeple, entitled “Everyday: The First 5,000 Days”, sold at auction for $69 million, the highest price paid to date for an NFT.
Royalty Calculations & Counterfeiting
Traditionally, it has been difficult to trace the ownership of certain goods to their source. But NFTs hosted on the blockchain make a chain of title traceable. These tokens function as an ownership ledger and can never be destroyed (although they can be sent to a “burn” address to remove them from circulation). Records of NFT sale transactions are thus easily accessible and make it easier to calculate the total transaction value associated with these assets over the course of their existence. The traceability of NFT ownership opens potential new revenue streams for creators and artists and simplifies royalty calculations when works are used. For example, an NFT can be programmed so that the creator will receive royalties every time it is resold.
What remedies will be available to the rights holders and brand owners dealing with counterfeit digital goods is still an emerging area. Injunctions may well play a part in the prevention of unauthorized NFT sales on marketplace platforms. There is also a possibility that the parties subject to liability liability—and thus who would pay damages, might be expanded.
Various other questions still remain to be answered. Should damages be based on the total resale value of unauthorized NFTs? Should subsequent owners be subject to liability? How will the courts apportion liability between creators/minters, sale platforms, and purchasers? One thing is for sure; a strict set of rules and regulations must be put in place so that everyone knows where they stand as we venture into this new world.