Among the digital items and crypto collectibles that users can bid for and/or buy outright on non-fungible token (“NFT”) marketplaces like Opensea and Rarible are a sweeping array of crypto domain names. If you search for “Chanel” or “Hermès” on OpenSea, for instance, you will find NFTs tied to domains bearing the brands’ famous names up for offer. Chanel.eth currently boasts a price tag of 300 ETH ($924,794), while hermes.eth can be bought for 250 ETH ($788,435.00). The same goes for domains bearing the trademarks of Gucci, Prada, Dior, Balenciaga, Rolex, and other similarly situated brands, along with companies ranging from sportswear titan Nike to Italian automaker Ferrari.  

Ethereum Name Service (“ENS”) domains (i.e., those that end in .eth) represent unique addresses on the Ethereum blockchain, which can be used to easily receive any type of cryptocurrency and/or token, including NFTs, to a crypto wallet. These ENS domains and others decentralized domains do not function entirely differently than their .com counterparts in that, like the traditional DNS system, they act as human-readable names for less straightforward addresses. 

There are, however, some distinctions between DNS and crypto domains – from where the addresses point (typically to crypto wallets for crypto domains, but also websites that reside on a decentralized internet) to how governance is handled. Unlike DNS domains, for instance, blockchain-based web domains are not governed by the Internet Corporation for Assigned Names and Numbers (“ICANN”) and thus, are not subject to its procedures, such as the Uniform Domain-Name Dispute-Resolution Policy and the Uniform Rapid Suspension System. 

This means that while blockchain-based domains provide users with benefits, such as an easy-to-use alternative to a long, alphanumeric crypto wallet address (think: 0xb15166d10aebc6bb4868668eff1b3acd95da920c) and heightened security since they are created with blockchain-hosted smart contracts, there are some potential drawbacks. For one thing, trademark holders are not able to utilize ICANN proceedings when it comes to the bad-faith registrations or otherwise infringing uses of these domain names. At the same time, “Blockchain-based naming systems often have no central authority that can provide a remedy to aggrieved brand owners,” according to Sterne Kessler’s Dan Bernard and Monica Riva Talley, and “the anonymity that blockchains provide typically means that squatters cannot be identified in order to take legal action in any forum.”

A Gold Rush & The Potential Harm

The very decentralized nature of blockchain-based domains “makes them attractive to a new breed of squatters and digital land grabbers – not least because they can be nearly impossible to police for infringement of trademark rights,” Bernard and Talley have noted. Unsurprisingly, “One of the purported ‘next big things’” in this space “harkens back to one of the ‘old big things’ in the gold rush of the dot-com boom two decades ago,” per Bloomberg’s senior markets editor Michael Regan. In other words, domain-name squatting … albeit not in Web2 for .com domains but in Web3 for those bearing suffixes like .eth, .crypto, .coin, .dao, .nft, .sol, etc.

The rush to claim blockchain domains – which saw 85,000 new .eth domains registered in March bringing the total number of .eth domains, alone, to 825,000 – is raising questions and posing risks for well-known brands and other trademark holders, whose names are being brought into the fold. 

The potential for harm is worthy of attention, as if a trademark is being used in a crypto domain name without the trademark owner’s authorization, “there is a significant risk that the owner of the domain name can purport to offer the brand’s crypto wallet and/or enter into financial transactions or smart contracts, allegedly on behalf of the brand,” according to MMX general counsel Sheri Falcon. This is particularly noteworthy in light of the growing number of brands that are beginning to embrace crypto as a form of payment for their goods/services (Off-White is the latest), with many others expected to follow suit. (Think “apple.eth” for the purchase of an iPhone with cryptocurrency in the future – or perhaps, the future online store for Apple products, Harness IP’s Matthew Cutler hypothesizes.)   

Such harm is heightened by the fact that while certain blockchain domain naming companies, such as Unstoppable Domains, have implemented sunrise periods for domains associated with “well-known entities, products, or individuals” in an attempt to avoid squatting, there does not appear to be a mechanism for challenging unauthorized use of a trademark-bearing domain with such blockchain-domain registrars. (Unstoppable Domains, for one, states in its terms that users must “not to violate or infringe the rights of UD, our users, or others, including privacy, publicity, intellectual property, or other proprietary rights,” but lacks terms about trademark infringement recourse.)

Against this background, trademark holders looking to take action over blockchain-based domains will have to look elsewhere. 

Obstacles & Opportunities

In addition to obstacles to bringing litigation to prevent unauthorized use of blockchain domain names when it is impossible to ascertain the identity of the owner, which “presents challenges in determining the proper party, jurisdiction, and venue” in an action, Kelley Drye’s Andrea Calvaruso, Matthew Luzadder, Constantine Koutsoubas, and Kerianne Losier stated in a recent note that the Lanham Act’s Anti-Cybersquatting Consumer Protection Act, which “provides in rem jurisdiction over domain names themselves in certain circumstances where there is no personal jurisdiction over the defendant who owns the domain name,” may not prove to be useful. Such jurisdiction “is only possible in judicial districts where the registrar or other domain name registry or authority that issued the domain name is located,” and often, this is not in the U.S.

With all of this in mind, the most viable approach as of now is one that targets the sale of the domains as NFTs on marketplace sites. Takedown actions are offered by sites like OpenSea and are already being used by a number of luxury brands to put a stop to the sale of allegedly infringing crypto domains. At the same time, it is generally recommended that trademark holders consider acquiring blockchain domains of their own – from .eth to .nft – as a way to not only potentially prevent squatting but also reserve them for possible future use, which seems increasingly likely for brands across the board. (Just this week, Axel Dumas, the Executive Chairman of Hermès, told shareholders that management for the stalwart luxury brand is “curious about and interested in” the metaverse as a potential communication tool.)

THE BOTTOM LINE: Blockchain-based domains “present both opportunities and risks” for brands, according to Bernard and Talley, and so, companies should be treating these “new unregulated spaces as free markets that need to be monitored for opportunities and addressed proactively.” 

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A growing number of lawsuits over non-fungible tokens (“NFTs”), including the case that Nike filed against StockX over its use of Nike trademarks on NFTs tied to hot-selling sneakers, are beginning to test the nature of these novel digital assets. In the Nike case, which was filed in a New York federal court in February, the distinction between virtual products and otherwise value-less digital receipts is the critical one when it comes to identifying what StockX’s Vault NFTs are. Nike has argued that the NFTs are “virtual products, i.e., digital collectibles, created and first offered for sale by StockX, and available direct to consumers for purchase and trade on the StockX website and StockX app.” Meanwhile, StockX has argued that its Vault NFTs “are absolutely not ‘virtual products’ or digital sneakers,” and rather, serve as a “claim ticket, or a ‘key’ to access ownership of the underlying stored item.” 

While the lawsuit raises some novel questions that should shed light – and provide guidance – as an increasing number of brands look for ways to adapt their existing models for a Web3-focused world, Nike’s trademark infringement and dilution, and unfair competition lawsuit over StockX’s NFTs is also striking because it carries with it into the virtual world many of the same concerns that brands routinely argue in lawsuits over tangible goods in the “real” world, including issues of control, competition, and authentication, among others. 

One of the most immediate qualms that Nike has with the Vault NFTs that are being offered by StockX – which has allegedly used Nike’s famous marks to “garner attention, drive sales, and confuse consumers into believing that Nike collaborated with [it]” for the NFT venture – appears to be one of control. Specifically, StockX is offering up the Nike trademark-bearing NFTs, while simultaneously robbing Nike of the ability to exert control over the sale and conditions of those NFTs.

Nike’s problem is reflected in no shortage of language in its complaint, including its claim that “despite StockX’s prominent use of Nike’s trademarks and products in connection with the Vault NFTs, Nike has no control over the quality of the Vault NFTs whatsoever.” The Beaverton, Oregon-based titan also asserts that it “has no say in how many Vault NFTs bearing its trademarks are released, where the Vault NFTs are released and traded, when the Vault NFTs are released, how the Vault NFTs are released, traded, or redeemed, and at what price the Vault NFTs are sold and traded.” Clearly, these are pain points for Nike – and (maybe) rightfully so. 

(While brands are generally forced to give up the right the control if/how their products are resold once they release them into the market (this is the tenet at the heart of the first sale doctrine), there are limits in instances where the products being resold – or the conditions in which the products are being resold – are “materially different” than they initially were. Nike has already suggested that is the case here given that StockX is bundling the sneakers (the original products that Nike released into the market) with NFTs, the latter of which “may take a variety of forms, and the holders of NFTs may be entitled to obtain certain products, benefits or engage in certain experiences, such as unlocking a prize or entry into an exclusive sale,” according to StockX’s terms.)

The idea that brands want to carefully control the conditions in which their products are sold is a well-established one. A brand’s ability to control how/where its products are sold is “critical to its ability to preserve brand equity, maximize profitable e-commerce channel growth, and prevent damaging e-commerce conflicts with its brick-and-mortar business,” among other things, according to Vorys partner Daren Garcia. As such, this is an issue that has come up in a variety of cases in recent years, in particular, as brands look to regain some of the control they that have ceded as a result of the rise of various sales/distribution channels, including the burgeoning resale market

One need not look further than some of the lawsuits that Chanel has waged against resale entities for an indication that the ability to control how and where their products are sold is something that is important to luxury brands – and even more mass market brands like Nike, which is in the midst of prioritizing its direct-to-consumer distribution following decades of relying heavily on a robust wholesale network. 

Chanel demonstrated the concerns of many similarly-situated brands on this front in a since-settled case that it waged against Crepslocker, in which it argued that the British reseller was running afoul of the law by offering up Chanel goods in conditions that were damaging to its wildly valuable brand image. This included shipping Chanel products in packaging that diverged from Chanel’s standards; offering up products in accordance with terms that differ from those observed by Chanel (Crepslocker’s no-return policy and its requirement that consumers pay via PayPal (and not credit card) were cited by Chanel as examples of this); and using Chanel’s trademarks alongside “sportswear and other brands, which do not have similar associations of luxury, prestige, exclusivity, and longevity to those enjoyed by [Chanel].” 

Such quests for control – and the arguments that come along with them – do not appear to be a million miles away from Nike’s claims in the StockX case, which seem to stem largely from its inability to control the nature of the Vault NFTs, including the “murky terms of purchase and ownership,” which have allegedly “already led to public criticism of StockX and allegations that [its] Vault NFTs are a scam.” (StockX has, of course, disputed this, pointing to the successful completion of 2,853 Vault NFT transactions since the launch of the NFT venture in mid-January.)

At the same time, the critical element of authentication – and the advertising of “authenticated” products – often comes hand-in-hand with brands’ pushes for control, and it has come up in Nike v. StockX, with the sportswear behemoth taking issue with the fact that that StockX “touts each Vault NFTs as ‘100% Authentic.’” According to Nike, StockX is making use of such declarations in order to “explicitly mislead consumers that Nike has authorized, approved, sponsored, and/or endorsed StockX’s Vault NFTs,” when no such affiliation or authorization is at play. 

Again, this is not a novel issue. In its case against The RealReal, for instance, Chanel has pushed back against the reseller’s widespread promises of authenticity. Chanel has argued that The RealReal’s alleged authentication experts are “not properly qualified or trained in authentication of Chanel products to support [TRR’s] claims as to the genuineness of the products it resells.” And beyond that, Chanel has claimed that The RealReal has no business guaranteeing authenticity of Chanel goods, as “only products purchased directly from Chanel and its authorized retailers can be certain to be” – and thus, be advertised as – “genuine and authentic.”

In one more thing worth flagging, the recurring “real” world issue of marketplace operator liability is likely to come up as Nike’s lawsuit over the Vault NFTs proceeds (and potentially future cases against NFT marketplaces like OpenSea), with the Swoosh already contending that “unlike the eBay model, StockX is an active intermediary for each transaction—the seller ships the item to StockX, StockX receives and purportedly verifies the item’s authenticity, StockX then ships the item to the buyer with a StockX-branded verification badge, and StockX pays the seller (less its transaction fees).” As such, Nike may be setting the stage for an argument, should StockX seek to shield itself from liability on the basis that it is merely a marketplace operator and not a seller, which has been the go-to defense for the likes of Amazon

THE BOTTOM LINE: The growing number of trademark lawsuits that center on NFTs is giving rise to an array of novel questions, including ones that might require courts to make precedent-setting determinations about the very nature and purpose of NFTs (digital receipts versus virtual products) and that could have a significant effect on things like the likelihood of confusion analysis. All the while, we should not overlook the fact that these cases still largely revolve around well-established “real” world, brand-centric issues, which these cases are bringing into the virtual realm. 

TFL EXCLUSIVE – The metaverse may have a striking new occupant if a handful of recently-filed trademark applications are any indication. A number of new filings with the U.S. Patent and Trademark Office seem to indicate that Privé Porter is quietly preparing to enter into the metaverse and might be bringing its collection of hard-to-get handbags and luxury watches with it in what could prove to be a controversial effort to meet deep-pocketed – and crypto-happy – luxury consumers where they are, and beat brands, other resellers, and even some of the biggest players in the auction world into the virtual goods space in the process. 

Having made its name by connecting luxury collectors with Hermès’ wildly coveted handbags (i.e., $12,000-plus Birkin and Kelly bags) and difficult to acquire timepieces, such as Rolex Daytonas, which Privé Porter’s clients gladly pay a mark up for in order to avoid the hoops that these brands make consumers jump through in order to get their most longed-for offerings, Privé Porter seems to have set its sights on being an early-mover when it comes to offering up luxury goods in the burgeoning virtual world. 

Two trademark applications for registration, which were filed by counsel for Miami-based Privé Porter on March 11, cite uses of the Privé Porter name and its stylized key logo, respectively, on “downloadable image files containing and serving as title to designer handbags and designer watches authenticated by non-fungible tokens” (Class 9); and “online retail store services featuring virtual goods, namely designer handbags and designer watches for use in online virtual worlds,” as well as the “provision of an online marketplace for buyers, sellers and auctioning of downloadable digital designer handbags and designer watches authenticated by non-fungible tokens” (Class 35).

The language of the intent-to-use applications indicates that Privé Porter is looking to offer up non-fungible tokens (“NFTs”) that are tied to – and serve as title for – tangible luxury goods, namely, “designer handbags and watches,” and that also come with images of those tangible luxury goods. Beyond these uses, the applications suggest Privé Porter is also planning to offer up “downloadable digital designer handbags and designer watches” by way of an online marketplace (as is the customary method for acquiring NFTs), as well as via auction. 

Should Privé Porter introduce an experience in which it auctions off its coveted assets in the metaverse (i.e., on a metaverse platform), it would be an ambitious move that could potentially pit it against auction titans like Christie’s and Sotheby’s , which have readily embraced the market for digital assets, but have not actually brought a like-for-like equivalent of their “real” world auction activities to the metaverse. (It is worth noting that while Sotheby’s launched a replica of its London headquarters on the Ethereum-hosted virtual reality platform Decentraland last year, the virtual outpost acts exclusively as a gallery and not an auction house. If Privé Porter were to spearhead a metaverse-specific auction experience, it would also not be the first time it got a leg up in the luxury space thanks to a nascent platform; Privé Porter built its business by using Instagram as a retail platform back in 2013 and has since done roughly $120 million in business without an e-commerce site.)

Two additional intent-to-use applications that were filed on March 14 provide greater insight into Privé Porter’s endeavors, stating that the company plans to use the designs of a handbag and a watch in connection with “downloadable virtual goods, namely, computer programs featuring watches for use in online virtual worlds” in Class 9. 

Drawings from Privé Porter’s trademark applications

Interestingly, the two virtual goods marks do not consist of the design of a Birkin bag, Daytona watch, or any other famed handbag or timepiece. Instead, they come in the form of a pared-back purse and watch, both of which are branded with a single logo: the Privé Porter key. The handbag mark consists of “a three-dimensional trapezoid with two half oval lines with a partially complete rectangle in the center and mirrored vertical bars below the rectangle,” whereas the watch mark is described as a “three-dimensional tridecagon bracelet with a smaller tridecagon on top and a partially complete rectangle in the center and mirrored vertical bars below the rectangle.” 

A read between the lines suggests that this could be an attempt by Privé Porter to close the loop and offer up digital assets that the buyers of its physical goods, including real Birkin bags and Rolex watches, can flaunt in the metaverse without landing Privé Porter on the receiving end of trademark infringement from these brands. After all, the potential for real world litigation centering on virtual goods is hardly a mere hypothetical. Control-happy brands have proven to be litigious when it comes to unauthorized distribution of their offerings – both in the “real” world (the enduring Chanel v. The RealReal case comes to mind) and in the virtual one. While Hermès has not made any moves of its own in the metaverse (yet), it is in the midst of a trademark infringement and dilution case, which it filed against the creator of Birkin-resembling NFTs called MetaBirkins. 

Meanwhile, Nike sued StockX on February 3 for trademark infringement and dilution, as well as unfair competition, in connection with the reseller’s offering up of NFTs tied to images and physical versions of Nike footwear, complete with “inflated prices” and “murky terms of purchase and ownership.” 

On the other hand, the move by Privé Porter to file applications for registration for a virtual bag and watch branded with its own logo very well could mean that it is looking to move beyond – or to supplement – others’ offerings with its own collection of PrivéPorter luxury goods and virtual lookalikes or “digital twins” of these tangible goods for consumers to show off in the virtual world, such as in Decentraland or on other metaverse platforms. This would, of course, be noteworthy because as of now, while handbags from brands like Gucci have infiltrated Roblox, for instance, purses and watches are not available on Decentraland.

It is too soon to tell what the specific outcome will be, but regardless, a move by Privé Porter to bring ultra-luxury offerings into the metaverse makes sense, as it would not be surprising if a fair share of its existing customers fall within the camp of individuals amassing fortunes in the crypto space and looking to snap up virtual assets to offload some of their Ether-based earnings. 

Nike is serving as a leader when it comes to trademark filings related to metaverse, having filed a handful of trademark applications last fall for its famous word mark and Swoosh logo, among others, for use on  “downloadable virtual goods;” “retail store services featuring virtual goods;” and “entertainment services, namely, providing on-line, non-downloadable virtual footwear, clothing, headwear, eyewear, [and] bags,” among other things, “for use in virtual environments.” Part of its influence on the filing front – as indicated by the sheer uptick in applications filed by other brands in the immediate wake of its October 2021 filings – is almost certainly derived from the large scale lack of filings and registrations for virtual goods for companies to reference in their own quests to navigate trademark practices in the metaverse. 

While Nike is undoubtedly an early – and influential – mover in terms of the recent emphasis on non-fungible tokens (“NFTs”) and the virtual world more broadly, it is not the first brand to seek out trademark registrations for its marks in the metaverse. As such, here is a dive in a couple of notable early examples, and a few more recent ones, which could provide some insight into what we can expect from the U.S. Patent and Trademark Office (“USPTO”) and other trademark bodies in this realm. 

In much the same way as Second Life has provided (some) insight into what trademark infringement litigation looks like in the virtual world, it also spurred the registration of two trademarks worth considering. Back in 2008, the USPTO issued a registration to Alyssa LaRoche, the woman behind the Aimee Weber avatar on the Second Life platform and a design studio aimed at helping companies operate on the virtual platform that Linden Lab launched in 2003.

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The striking rise in demand for non-fungible tokens (“NFTs”) has captivated a growing pool of creators, consumers, and brands, and one of the immediate ramifications of that – aside from eye-watering sales, such as the millions of dollars that Beeple works and CryptoPunks have commanded – is the reality that NFT marketplaces are facing off against a perfect storm of fakes. One need not look further than the OpenSea and similar marketplaces to see how a sizable number of NFT creators are minting unique digital tokens tied to others’ art works and trademarks, and offering them up for sale, resulting in allegations of trademark and/or copyright infringement and in some cases, counterfeiting, from parties ranging from artists to famed luxury goods brands. 

Shedding light on the issue of infringement when it comes to the explosive rise of NFTs, OpenSea stated in a string of tweets in January that it has experienced a “exponential” increase in “misuse” of its free minting tool, and that “more than 80 percent of the items created with this tool were plagiarized works, fake collections, and spam.” Reports from the likes of the Verge further expose the issue, recently revealing, for example, that artist Aja Trier’s viral Vincent Van Gogh-style paintings have been turned into nearly 86,000 NFTs – all without her involvement or authorization. And as TFL reported last year, platforms were being inundated with NFTs bearing the branding of others (from Chanel to Supreme), without the companies’ involvement or authorization. 

Speaking about the surge in problematic offerings on Cent, the platform that he co-founded in 2017 and that played host to the sale of an NFT of Jack Dorsey’s first tweet for $2.9 million back in March 2021, Cameron Hejazi told Reuters that the sale of certain NFTs – namely, ones that consist of “unauthorized copies of other NFTs,” “content that does not belong to them,” and “sets of NFTs which resemble a security” – is a “fundamental problem” in the fast-growing digital assets market.

Shortcomings in the Law?

Interestingly, a fair share of the media narrative surrounding the increasingly rampant infringement within the so-called metaverse has suggested that some of the surge may be due to shortcomings in the law. The Wall Street Journal, for instance, recently stated that “government policies haven’t caught up to this technology, so it isn’t entirely clear what legal consequences there might be for someone who creates an NFT of someone else’s art.” While there is undoubtedly plenty of gray area at play when it comes to the law and the metaverse, a lack of applicability of existing intellectual property laws and policy does not appear (to me, at least) to be at the heart of what is going on here.

As the WSJ correctly notes, and as no small number of listings on NFT platforms indicate, “It is possible for anyone to make an NFT of any image or video, even if he or she doesn’t own the copyright for the image.” The same is true for the unauthorized use of another party’s trademark-protected name, logo, or other source-identifying symbol, by way of an NFT, as well as the unapproved use of another’s likeness, which is generally protected via states’ right of publicity laws.

However, the fact that NFTs can be minted and tied to others’ intellectual property does not necessarily mean that existing law does not apply and that the resulting product falls within the bounds of the law. (This is where there is room for discussion about what the product at issue actually is and what role the NFT plays.)

Despite the narrative that the metaverse is a “Wild West” in which anyone can co-opt another’s copyright-protected works or trademark-protected branding and link them to an NFT, the reality can be quite different. “If the NFT-linked work is an exact copy of a copyrighted work or it constitutes an unauthorized derivative work,” for example, Morgan, Lewis & Bockius LLP attorneys Anastasia Dergacheva and Christopher Archer assert that “the copyright owner may assert infringement on the basis that a copy was made to generate, display, or promote the NFT, or some other exclusive right of the copyright owner was violated.” As such, they state that “the person or entity minting the NFT must either own the underlying asset or have the necessary rights to mint and sell the NFT.”

On the trademark front, use of another party’s trademark in connection with an NFT could give rise to infringement claims in the event that consumers are likely to be confused about the source or sponsorship of the NFT, and assuming that the trademark asserting party has rights in the mark when it comes to virtual goods/NFTs. 

Or a Problem with NFT Marketplaces?

More than signifying critical issues with existing trademark or copyright laws (which apply to uses in the digital realm and likely are not fundamentally unable to provide protection for and enforcement against assets tied to NFTs, as well as other virtual goods/services), the proliferation of NFTs tied to allegedly infringing works seems to more clearly indicate NFT marketplaces’ inability to prepare for and subsequently address the sheer spike in minting and sales transactions – including for allegedly infringing works – that have taken place over the past year.

(To put growth in the NFT space – which is on track to blossom into a $80 billion market by 2025, according to projections from Jefferies – into perspective, OpenSea, which nabbed a $13.3 billion valuation in January after closing a $300 million Series C round, boasted a transaction volume that surpassed $14 billion for 2021, up from $27.1 million in 2020. After doing more volume in sales during two days in August 2021 (a total of $95 million) than it did in all of 2020, OpenSea co-founder and CEO Devin Finzer stated on Twitter this past summer what has become perfectly clear over the past year: “The growth curve for NFTs is insane.”)

Primarily, the issue appears to be that platforms that enable individuals to list – and oftentimes, mint – NFTs generally enable those individuals to list NFTs without employing meaningful screens for potential infringements. Second, there seems to be a lack of effective enforcement of the platforms by the platform operators. In actuality, most of these NFT marketplaces have relied almost exclusively on reactive measures when dealing with allegedly infringing works. In other words, the marketplaces are largely policed by rights-holders, themselves, who file notice and takedown requests in order to have (allegedly) infringing materials removed.

Notice and takedown procedures are not in any way unique or limited to NFT marketplaces; the existence of a robust takedown system helped eBay to sidestep liability in the trademark case filed against it by Tiffany & Co. more than a decade ago. Not a perfect solution, rights-holders have accused platforms like OpenSea of failing to act on takedown requests in a timely manner (or to act at all in some cases). In other instances, creators have complained that even when allegedly infringing listings are removed, new ones pop up in their place, mirroring the game of whack-a-mole that rights-holders are forced to play when it comes to listings of tangible counterfeit or otherwise infringing goods offered up on established marketplaces and/or by way of third-party domains. 

OpenSea revealed recently that it is “working through a number of solutions to ensure we support our creators while deterring bad actors,” and at the same time, a rep for the company told the WSJ that will be “hiring dozens of employees to deal with infringement and security problems in the coming months.” Meanwhile, in an even more aggressive move to put a stop to the sale of infringing NFTs, Cent has “halted most [NFT-related] transactions because people were selling tokens of content that did not belong to them.”

Consumers & Contributory Liability

As for what is prompting marketplaces to take increased action, chances are, it is due, at least in part, to their desire to hold on to existing users and attract news ones, something that would likely be difficult to do if a lack of enforcement against copycat NFTs starts to chip away at trust in such platforms in a meaningful way. (The stakes are of, course, higher given the decentralized nature and irreversibility of the transactions – even if the goods at issue are not above-board in a legal sense. 

There is also the potential for liability for platform operators in light of the influx of allegedly infringing listings on their sites. While Hermès, for instance, did not name OpenSea, Rarible, or LooksRare – the platforms upon which the allegedly infringing and diluting MetaBirkins NFTs have been made available – as defendants in its lawsuit against MetaBirkins creator Mason Rothschild, the potential for contributory liability for platforms is not impossible to imagine. 

“In some cases, a rights-holder may have a claim against the marketplace operators for contributory liability of it can show that she marketplace was aware of the infringing activity, and induced, cause, or materially contributed to the activity,” according to Skadden attorneys Stuart Levi, Eytan Fisch, and Alex Drylewski. Given the active role that many marketplaces play in enabling individuals to create and offer up of NFTs (OpenSea’s since-discontinued free minting tool comes to mind), they assert that “the second prong could be easy to establish.”

On the contributory liability front, the Skadden lawyers suggest that a plaintiff could “analogize today’s NFT marketplaces to those of a swap meet operator” like the defendant in the Fonovisa v. Cherry Auction case, in which the U.S. Court of Appeals for the Ninth Circuit held that a party that has “knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another, may be held liable as a ‘contributory’ infringer.” However, it is worth noting that in order to successfully establish knowledge (and secondary liability more broadly), a plaintiff would need to demonstrate that the defendant marketplace has knowledge of “specific infringing material,” which can vary depending on “the type of infringing activity, the nature of the services used by the direct infringer and provided by the online provider, and the online provider’s control over those services.” 

THE BOTTOM LINE: Lawsuits will continue to be filed by brands and other rights-holders, as the NFT market shows no signs of subsiding. Given that the identity of NFT-makers may be difficult to discern in no small number of instances (thereby, potentially taking some remedies off the table for rights-holders) , increasingly-valuable and easily-identifiable marketplaces are likely to be an attractive target, which is almost certainly part of why they are increasingly taking action to address allegations of infringement and limiting their involvement beyond acting as pure marketplaces.