Arbitration in the Metaverse: How to Anticipate and Resolve Web3 Disputes

Image: Decentraland


Arbitration in the Metaverse: How to Anticipate and Resolve Web3 Disputes

As Meta Platforms CEO Mark Zuckerberg ha said, the metaverse is “the next generation of the internet,” a virtual environment you can enter – instead of just observing on a screen – where you can (or soon will be able to) work, play, socialize, shop designer brands, buy ...

May 23, 2022 - By Juliette Asso, Laura Azaria

Arbitration in the Metaverse: How to Anticipate and Resolve Web3 Disputes

Image : Decentraland

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Arbitration in the Metaverse: How to Anticipate and Resolve Web3 Disputes

As Meta Platforms CEO Mark Zuckerberg ha said, the metaverse is “the next generation of the internet,” a virtual environment you can enter – instead of just observing on a screen – where you can (or soon will be able to) work, play, socialize, shop designer brands, buy virtual land, and a lot more. Part of what makes the metaverse special now – as compared to existing videogame universes or social media platforms – is the ability to buy, own, and resell digital assets, a feature that has been enabled by the development of the blockchain technology. More than that, the metaverse allows people to escape the individual, geographic and social limitations that bind them. 

Although it still is at an early developmental stage, the global metaverse market is expected to reach $758 billion by 2026, and as with any groundbreaking technological development, the metaverse will give rise to complex legal issues. In fact, legal disputes are already surfacing in the courts, particularly when it comes to the right to create and sell non-fungible tokens (“NFTs”), i.e., digital assets stored on a blockchain that represent digital – or real-world – objects like art, music, or videos. In January 2022, Hermès filed a trademark lawsuit against digital artist Mason Rothschild for creating and selling 100 MetaBirkins NFTs that depict the company’s iconic Birkin bag. 

In response to Hermès’ trademark infringement and dilution complaint, counsel for Rothschild has comparing his use of the Birkin trademark to Andy Warhol’s famed use of the Campbell’s soup cans in the early 1960s, arguing that he is selling art that is shielded from trademark liability by the First Amendment. 

Another one of the high-profile intellectual property battles related to the metaverse involves Nike, which filed a trademark infringement lawsuit against StockX in early February 2022, claiming that the reseller was offering up NFTs that display Nike’s trademarks without authorization.

Several lawsuits will also arise in relation to contracts entered into before the metaverse era. For all intellectual property contracts drafted before the metaverse was even contemplated, a major source of contention will be to determine who owns the said rights in the metaverse and whether they include the right to mint a corresponding NFT. This issue was at the core of the lawsuit that production company Miramax filed against director Quentin Tarantino following the announcement of his plans to auction off NFTs of seven exclusive scenes from his handwritten Pulp Fiction script. Miramax argues that Tarantino’s NFT project violates their contract – although the contract was entered into long before the invention of NFTs. 

The Hermès, Nike and Miramax-Tarantino lawsuits are far from being the only type of Web 3.0 disputes. There will inevitably be numerous claims lodged by users against metaverse platforms or among metaverse users, themselves. Although there will certainly be new types of disputes, the rise of metaverse will also give rise to disputes of the same nature we encounter today in the “real” world. 

Disputes Against Metaverse Platforms

One of the most obvious and predictable types of disputes that will arise between users and metaverse platforms will concern the use of personal data, as it is virtually impossible for metaverse platforms to guarantee the absence of hacking attacks indefinitely. A growing number of disputes relating to virtual real estate in the metaverse is also likely given that the virtual real estate market is booming. Prices have recently reached unprecedented levels, with a total volume of $500 million last year (including a single transaction of $2.43 million in Decentraland) and are expected to double in 2022. What increases the value of a specific plot of land is not only its location but also its scarcity, since most metaverses guarantee a limited number of available plots. But what if the value of your waterfront parcel in a very trendy Saint-Tropez-like village suddenly falls, as the metaverse platform decides to build an airport instead of the virtual sea in front of your house, or to remove the sea altogether? Would you have a legal claim? Should you (and can you) ask for more guarantees than those provided by default, when buying your plot of land? 

And what if, despite its current commitment, a metaverse platform unilaterally decides one day to increase the number of plots? The value of your real estate investment would undoubtedly decrease, but would you have a claim against the platform for breach of its commitment to limit virtual land? Lastly, what if a metaverse platform goes bankrupt altogether or shuts down its servers? What claim would you have against it? Which bankruptcy law would be applicable?

There may also be disputes concerning the interference of metaverse platforms in users’ personal investments in the metaverse, where they are allowed to offer services to users or to create digital assets and sell them to other users. But what if, after having invested a fortune in building a state-of-the-art virtual flagship store, exhibition center, concert hall or gaming experience, the metaverse platform unilaterally decides to shut it down, or even delete your account altogether, because it finds your activity to be against its policy (which always contains a degree of subjectivity)?

With the foregoing in mind, companies that are eyeing ventures in the metaverse should assess the guarantees offered by the metaverse platforms – and their rights in case of violation, which vary from platform to platform. This includes carefully considering the terms of use, with a particular focus on: (1) the type of activities that are prohibited; (2) the scope of the metaverse platform’s limitation of liability: some platforms (The Sandbox and Decentraland) limit their liability for example in case of a bug or virus in the metaverse software, which may impact the services a user is offering or its digital assets; (3) the existence of an overall limitation of liability cap (e.g. $100 for The Sandbox and Decentraland); (4) the governing law and its impact on the users’ rights and obligations. Currently, Decentraland provides for the laws of Panama, The Sandbox for the laws of Hong Kong, and Cryptovexel for the laws of New Zealand; and (5) the dispute resolution method: currently, arbitration under the ICC rules for Decentraland and jurisdiction of the courts of Hong Kong for The Sandbox.

Disputes Among Users

As for disputes among metaverse users, in addition to the trademark disputes already underway, and any potential criminal and tort disputes that inevitably carry over to the metaverse from the physical world (such as theft of digital assets, sexual harassment practiced by one avatar against another, housing disputes between neighbors, etc.), a large part of disputes will arise from transactions between users.

In the metaverse, users can: offer services to other users (e.g. gaming experience, concert, real estate agency services, coaching); create digital assets (e.g. wearable, accessories, art) and sell them to other users; and rent or resell parcels of virtual land to other users. Against this background, there are questions over what terms and conditions apply to these transactions? 

When it comes to NFTs, for instance, transactions are completed through smart contracts, which automatically transfer (permanently or temporarily) the ownership of the digital asset (i.e.  virtual land, virtual objects, or virtual vouchers giving access to a virtual service) from one user to another upon reception of crypto payment. However, these smart contracts are currently limited to monetary obligations and term limitations; they do not allow users to provide for more complex rights and obligations to govern these transactions. In some specific circumstances, it might therefore be advisable to also enter into a “classic” contract specifying in particular the real identity of the avatars and the applicable law and dispute resolution mechanism chosen by them. The applicable law would address all the issues that could not be anticipated upon coding of the smart contract or drafting the “classic” contract.

Alternatively, NFT and/or metaverse platforms could also start providing fair, transparent, and impartial dispute resolution mechanisms for disputes between users. They could, for example, allow disputes between users to be decided by a third party through a decentralized justice system, similar to the one used by eBay in the early 2000s. They could also provide for automatic enforcement of these decisions, which would be particularly important given the avatars’ anonymity. The success of metaverse platforms will undoubtedly depend on their ability to address these dispute resolution issues.

The dispute resolution framework will likely have to be reinvented to account for the technological settings of the new environment we are moving into. Our legal system is based on geography because it is the world we currently live in, but in the metaverse – where anonymous avatars from all around the world are interacting and transacting with each other – time, location and identity are fluid perceptions. The legal concepts of habitual residence, place of business of the parties or real estate property location, which are traditionally at the core of private international law rules, become meaningless. Therefore, before investing on NFT ventures or the metaverse market, more generally, companies and investors, alike, would be well advised to carefully check the applicable terms of use, if any, and in certain circumstances, enter into a contract better suited to the particular needs of the transaction.

In case of disputes, contracts should allow for arbitration (after a potential mandatory mediation) rather than court litigation. These alternative dispute resolution mechanisms offer valuable advantages for digital transactions, provided they adapt to meet the challenges of technology and time-sensitivity: ability to agree in advance on the applicable law or the language of the proceedings, flexibility of the process, arbitrators’ expertise in the technologies at hand, ease of enforcement of arbitral awards under the New York Convention, etc.

Juliette Asso is counsel at LALIVE, where she specializes in international arbitration, including both commercial and investment treaty arbitration.

Laura Azaria is counsel at LALIVE, where she specializes in international arbitration and litigation.

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