Lorraine Tay, Author at The Fashion Law

Looking Back at the Rise of NFTs & Lessons for Brands Going Forward

December 14, 2022 - By Lorraine Tay

Non-fungible tokens (“NFTs”) – along with “metaverse” – were among some of the buzziest words of the year. No shortage of brands looked to NFTs to provide new and interesting opportunities to promote their products and services, and an avenue to introduce new products; while the metaverse promises to one day be an entirely new playground and marketplace for consumers and companies, alike. However, a field of opportunity can also be a minefield for the unwary. As with many new technologies in the past, questions have arisen as to how traditional intellectual property laws should be applied to NFTs. While it is often copyright law that bears the brunt of such challenges, NFTs have turned the heat on trademark laws this year. Against this background, two cases that are currently ongoing before U.S. courts touch on brand-related issues and offer takeaways for brand owners.

Nike v. StockX and Hermès v. Rothschild

In Nike Inc. v StockX LLC, Nike is suing online marketplace StockX for trademark infringement, unfair competition, trademark dilution, counterfeiting, and false advertising for launching its Vault NFT collection tied to actual Nike sneakers. A key question that has arisen in the case is whether StockX’s NFTs are mere “claim tickets” to facilitate the trading of the physical sneakers to which they are tied (as StockX claims) or digital products in and of themselves. StockX is arguing that it is using NFTs as digital receipts and/or in the same way e-commerce retailers use images and descriptions of products online. Nike, on the other hand, contends that StockX’s NFTs are more than merely digital receipts because they are bundled with additional StockX services and benefits, can be redeemed by StockX for a fee thereby depriving the NFT owners of the physical goods, and are also at times sold for many times more than the price of the actual Nike sneakers at play.

The distinction between claim ticket and digital product is important because if the NFTs are simply claim tickets, as StockX says, Nike could be prevented from enforcing its rights by virtue of the U.S. “first-sale doctrine.” The doctrine prescribes that the enforceability of the trademark (or copyright) in a product is exhausted after the product is first sold by or put into the market under the authority of the trademark owner. If the doctrine applies, Nike may not be able to successfully prevent use of its marks by StockX in connection with the legitimate reselling of Nike sneakers.

In another case, Hermès International et al. v Mason Rothschild, Hermès is suing the creator of a collection of “MetaBirkins” NFTs for allegedly infringing its registered trademarks (for “BIRKIN” and the configuration of its iconic Birkin handbag), false designation of origin, and trademark dilution. The “MetaBirkins” NFTs are associated with digital images, created by Rothschild, of Hermès’ Birkin handbags covered in fur in furtherance of what he claims is “a commentary on fashion’s history of cruelty to animals, and its current embrace of alternative fur-free and textile initiatives.” To be clear, unlike in the StockX case, these NFTs are not tied to physical handbags.

Rothschild sought to get the lawsuit dismissed on the basis that he is shielded from Hermès’ claims by the First Amendment, arguing that he is using “MetaBirkins” as the title of his artworks rather than, as Hermès claims, to identify the source of the NFTs. Under U.S. law, in the context of titles of artistic works, the First Amendment would ordinarily defeat any trademark infringement claim unless the use of the mark has no artistic relevance to the work and/or the use is explicitly misleading as to the source of the works.

However, a New York federal court refused to dismiss the suit on the basis that both of these issues – that is, whether the use of Hermès’ trademarks had artistic relevance or was explicitly misleading – were issues that had to be fully considered by the court. The lawsuit will therefore proceed to trial (unless the parties settle).

Lessons for Brand Owners

There are no clear answers – yet – to many of the issues that are before the U.S. courts when it comes to the realm of NFTs and the metaverse more broadly. However, we can decipher some lessons for brand owners from these enduring legal fights …

1. Consider trademark protection in the metaverse

To succeed in a trademark infringement claim, a brand owner has to show that the alleged infringing goods or services are identical, or at least similar, to the goods and services covered by the brand owner’s trademark registrations. Both Nike and Hermès have a string of registrations for physical goods – footwear or handbags, but neither has protection for virtual versions of these goods. Beginning in October 2021, Nike filed applications to register its marks in connection with “downloadable virtual goods, namely computer programs featuring footwear” (i.e., digital sneaker NFTs) and “retail store services featuring virtual goods, namely footwear” (i.e., a digital sneaker NFT trading platform). However, these applications are still pending as of the time of writing.

As much as brand owners would certainly argue that NFT or other digital versions of their products are extensions of their product lines, albeit in the metaverse, so that a license or authorization is required to trade in such products, it remains to be seen if a court will agree that a virtual version of a good is identical or similar to its physical cousin. The analysis of similarity of goods generally takes into account factors, such as the nature of the goods and their respective uses, users and trade channels. A number of these factors would appear to weigh against a finding of similarity between physical and virtual products.

Notably, under trademark law, a mark can be accorded extended protection – for dissimilar goods and services as well – if the brand owner can show that the mark is “well-known” in the jurisdiction in question. However, most brands will find it difficult to surmount the high threshold of proof required. Additionally, while a brand owner could rely on alternative causes of action that are not reliant on a showing of goods similarity, these are subject to their own unique requirements and challenges.

Therefore, brand owners may wish to consider extending the protection for their marks to the digital realm and obtain registrations not just for physical goods and services but also virtual versions of the same. (It is worth noting that in the U.S., actual use of a mark gives rise to rights, making it so that Nike, for instance, which has been using its marks way of partnerships with video game companies, such as Xbox, for years, and more recently, with Roblox, has rights in its well-known marks for use on virtual goods and services even if it does not yet have NFT or metaverse-specific registrations.)

Thinking even further ahead, given the explosion in digital activity in recent years and the potential to exploit their brand assets even more, brand owners may wish to explore the range of practical use cases for NFTs (for instance, e-gaming) and seek protection in the relevant classes to facilitate exploitation and enforcement.

2. Potential challenges with establishing confusion

A key element of claims based on trademark infringement and passing-off (which is a common law tort premised on misrepresentation) is the requirement to establish a likelihood of confusion (that is, that consumers may be confused as to the source of the alleged infringer’s goods or services). In other words, in order to succeed in an infringement claim, a trademark holder would need to show that consumers would be misled into believing that the alleged infringing NFT originates from or is somehow related to the trademark owner.

However, there could be a plethora of factors that impact the issue of “confusion” that should form part of a brand owner’s considerations when evaluating the merits of any enforcement action – for instance:

Disclaimers – The presence of a disclaimer on the NFT platform could serve to dispel possible confusion. For instance, StockX is arguing that its users are not confused about the nature of the Vault NFTs because its website makes it clear that its NFTs are “not affiliated or associated with, sponsored, by, or officially connected to Nike…” and that Nike’s marks are used “solely to refer to the physical product to which [its NFT] corresponds.” Nike, however, contends that this disclaimer is not noticeable to potential buyers of the StockX NFTs, and therefore, ineffective.

(In the MetaBirkins case, Hermès goes so far as to argue that the disclaimer on the MetaBirkins website is not only ineffective because it is “absent from all other channels upon which the NFTs are promoted and/or sold,” but actually makes matters worse, as it “excessively uses the HERMÈS mark three times,” and also “unnecessarily links to Hermès’ website and capitalizes the HERMÈS mark,” thereby, creating “a confusing impression among consumers as to Hermès’ sponsorship of the MetaBirkins NFTs and the MetaBirkins website.”)

Identity of the creator – Another consideration is the identity of the creator and whether the offending NFTs are offered as part of a line. In particular, the offer by a platform or business of a branded NFT that is part of a line would seem to be more suggestive of some form of collaboration with or endorsement by the brand owner, than an offer by an individual end-user of a standalone NFT.

Physical NFTs – Physical NFTs are NFTs (i.e., digital code) that are tied to physical goods, such as StockX’s Vault NFTs. This type of NFT has been touted as being useful in tracking the provenance of and title to goods, such as fine art, wine, and other collectibles. The more widely physical NFTs are used for such purposes, the more likely that consumers will view them as being mere digital tools to facilitate trading, rather than products in and of themselves, and the less likely that they will be misled into thinking that a NFT linked to a particular branded good must originate from the brand owner.

3. Copyright infringement as a possible back-up claim

Another avenue for brand owners to consider when dealing in the virtual realm is copyright. Copyright infringement is not reliant on considerations of the similarity of the goods/services or consumer perceptions, but instead, is premised on the unauthorized reproduction and dissemination of the copyrighted work. As such, if there is a challenge with establishing the elements of the trademark-related causes of action, copyright infringement potentially could serve as an alternative ground of complaint. The main challenges on this front lie in tackling possible “fair use” defenses, and in some cases, with establishing copyright ownership.

The Singapore Copyright Act 2021 provides for a U.S.-style general fair use defense, which is not purpose-specific, but instead, looks to a list of non-exhaustive factors, including the purpose and character of the alleged infringing use, and its effect on the potential market for or value of the original work in determining whether a particular use is “fair.” Additionally, while there is no equivalent of the U.S. First Amendment (i.e., free speech) rights in Singapore, there is a specific defense of fair use for the purpose of criticism or commentary.

First use defenses are likely to be raised in the NFT scenario. For the general fair use defense, a key question would be whether use of works in connection with NFTs can be said to be “transformative” in the sense that an NFT adds something new and is used for a further purpose. The specific defense for criticism or commentary, on the other hand, could potentially apply in a scenario akin to that in the “MetaBirkins” case, at least in theory, given Rothschild’s argument that he is using the underlying artworks as a commentary on luxury goods and the practices of the industry.

It is also important to note the potential challenges in establishing copyright ownership, which could derail enforcement efforts. While Singapore provides a statutory presumption of ownership, this can be challenged by the defendant in good faith, upon which the claimant will have to prove ownership. For many rights holders, this could pose a challenge where there is no clear chain of title or records are patchy, or where the infringing NFTs are based on a fictional character that has been widely depicted or represented, making it difficult to trace the lineage of the particular work or works that have been misused.

Going Forward

With the foregoing in mind, there is increasing speculation that many NFTs lost their luster given the plethora of legal issues, commercial risks, market fluctuations, and other uncertainties. Even so, given the relatively low gas fees (to mint an NFT) and the potential promise of high returns, there remains a draw – even if it involves companies revisiting how, exactly, they will utilize and present this technology to consumers going forward. In light of such potentially enduring relevance for NFTs, brand owners will likely face this phenomenon for some time to come.

The outcomes of the Nike v. StockX and MetaBirkins cases will undoubtedly have a significant impact on how brand owners and IP users alike navigate the NFT minefield in the future. Until then and given the highly uncertain landscape, brand owners will be well advised to ensure that they have a good grasp of their rights, along with the relevant facts before charging forwards with all guns blazing. Fundamentally, it is also timely for brand owners to conduct an audit of their existing intellectual property portfolios to identify any gaps in chain of title or protection, and to plug these gaps, if necessary, to ensure that they are well placed to tackle the challenges to come as companies exploit what the digital realm has to offer.

Lorraine Tay is the joint managing partner of Bird & Bird ATMD and head of the firm’s Intellectual Property Group in Singapore.

Pin-Ping Oh is a partner in Bird & Bird’s Intellectual Property Group in Singapore and part of the Media, Entertainment & Sports team.

Business

The New Age Brand Strategy: Trends, Opportunities and Challenges

April 7, 2021 - By Lorraine Tay

What is in a brand? Once a literal reference to the “badge of origin” that distinguishes one market entity from another, brands have evolved to represent the fundamental values and beliefs of a business. For consumers, brands have taken on additional significance – with there being an element that is equivalent to a lifestyle choice, with big names like Apple and Nike even rising to the level of cult status as a result.

With this in mind, it comes as no surprise that the brand has become such a critical and commercially viable asset. Forward-thinking leaders see brand investment as an opportunity to enhance the value proposition of the business in the eyes of investors and partners, bringing greater opportunities for collaboration and diversification into alternative revenue streams. In fact, solutions that look beyond the traditional business model are especially important in times of economic downturn, to enhance business resilience by mitigating the losses from fledging investments.

As the nature of branding changes, so, too, must the efforts used to maintain it. To fully capitalize on the value of a brand, it is no longer sufficient to rely simply on the patchwork of legal protections obtained through sporadic registration. Instead, a holistic and dynamic approach is necessary to arm a business with the arsenal it needs to innovate and create as its build on the goodwill generated by these increasingly valuable – albeit intangible – assets. In today’s world, for instance, where the landscape is constantly changing, it has become even more important that a brand speak with one voice. The ripple effect of social media has the potential to amplify every single communication made by the brand, thereby, creating a long-lasting, broad-ranging impact on consumer perception.

Being accountable for the brand message

In spite of pandemic-related travel restrictions, which have inhibited our ability to physically cross borders, the ubiquitous use of the internet has kept the world more connected than ever. Happenings from halfway across the globe are known to us within minutes. We receive updates not only from mainstream media outlets, but also via first-hand commentaries disseminated on social media. This unprecedented level of information exchange has inadvertently created a more culturally and socially attuned community, with movements such as MeToo and Black Lives Matter emerging in the process.

For brands, what this translates to is increased accountability. To be held responsible to the global community at large for the social, cultural and environmental impact of each business or marketing decision. As many brands have learned first-hand, instances of non-compliance with existing norms may lead to an immediate boycott or a call for a brand to be “cancelled” by the masses, causing potentially lasting damage.

The global interconnectedness also means that political and diplomatic sensitivities are no longer confined within the four corners of the negotiation table – often, the debate spills over into the virtual arena. Netizens wield a significant influence because they have the numbers to drive the social narrative, and to demonstrate how a foreign political stance can translate into real-life social and economic impact. The recent Xinjiang cotton trade controversy is a perfect example of how brands may be affected in this era of social media diplomacy. Many well-known fashion labels have come under siege by Chinese consumers after speaking out about and/or suspending their supply of cotton from Xinjiang due to alleged human rights abuses against the Uyghur minority. These examples illustrate that it is crucial for brands to keep their ears on the ground. Any new marketing decision or campaign must be closely scrutinized to ensure that the messaging is consistent with prevailing consumer sentiment, not only in markets where they have a physical presence but also abroad. The internet knows no borders.

Managing content on diverse marketing channels

Print ads, television broadcasts, billboards – these traditional marketing avenues have almost become a thing of the past. Instead of receiving information unilaterally, consumers today crave a social experience. Social media platforms, such as Instagram, TikTok, Weibo, and YouTube, have, thus, emerged as the new face of marketing, by providing avenue for consumers to initiate conversations with and about any given brand.

And it is not only the tools that are changing. In recent years, we have seen high-value corporate sponsorships and celebrity endorsements being overtaken by influencer marketing. In many cases, rather than relying on a single personality, brands are now keen to capitalize on the word-of-mouth effect by building an army of micro-influencers to spread their content. Not only does it save time and costs for a business, but influencer marketing can also create an organic narrative that is more relatable to the ordinary consumer. In fact, research has shown that about 60 percent of YouTube subscribers would trust product recommendations from their favorite content creators, rather than those endorsed by traditional celebrities. The message hits home because influencers are perceived as part of the masses.

While the use of such relatively new marketing channels can be a potential gamechanger, brands should be cognizant that social media can be a double-edged sword. With the number of people associated with and interacting with a brand, it is impossible to have complete control over the brand image in the same way that brands had before the rise of the various social media platforms. To manage the inherent risks of adverse publicity and ambush marketing, businesses must remain connected with their audiences and “police” the online narrative as it unravels in the appropriate instances. (And given the nature of social media and the nuances of consumer reactions, brands must carefully determine when and when not to take action over products and/or narratives that they do not approve of).

In an age where social media has an even higher transmission rate than the COVID-19 virus, it is important that brands stand ready to mitigate any reputational fallouts – should they opt to take action – in a prompt and effective manner.

Digitalizing with a plan

The pandemic did not create a world of unprecedented change – it merely accelerated it. Innovations such as artificial intelligence, the Internet of Things, and data technology have been around since before the crisis struck. But a year of intermittent lockdowns and social distancing has underscored how reliant we have become on these technologies, and how they can bring us forward in this new era.

Digitalization has proven to be a particularly effective tool in consumer engagement, especially for brands that used to rely on a brick-and-mortar presence to promote their offerings. For instance, the Virtual Assistant launched by beauty retail chain Sephora was an immediate hit amongst consumers when it was first rolled-out in 2018. Conveniently located on Sephora’s mobile app, this feature combines augmented reality with AI and RFID technology to allow potential customers to try on new shades of makeup within the comfort of their home. Since many stores temporarily shuttered as a result of the pandemic, digital initiatives like these have acted as a saving grace for forward-thinking businesses.

Nevertheless, it would be unwise to pursue digital transformation without a plan. The ability to collect and process consumer data often lies at the core of any successful digitalization initiative, yet recent data breach incidents involving high profile companies may cause consumers to think twice before ticking “I consent.”

In spite of the risks, data remains a critical force in shaping the future of the retail landscape, and in fact, a 2018 study indicated that 79 percent of customers are still willing to share relevant information about themselves in exchange for more contextualized experiences. The key for companies lies in managing the data-value exchange, such that the benefits for consumers outweigh the risks of potential issues involving data protection. Apart from improving product offerings and customer experiences, consumers need to be assured that adequate data protection policies and cybersecurity infrastructure are in place well before any product launch. After all, it is always prudent to pre-empt rather than react, especially when it comes to the management of consumers’ personal data.

Securing protection for your intangible assets

Developments in technology and enhanced adoption of new media as part of the current business model have made it easier than ever to reach a wider audience. Thanks to the connectivity brought about by the internet, a third-party in another part of the world could come to know of your well-established brand, and masquerade their products and services under your flagship label. Innovation and the rapid use of technology has also meant that it is now much easier to replicate the look and feel of another’s brand in the digital realm to lure unsuspecting consumers.

The consequences of going in cold could, therefore, be disastrous – apart from a failed business venture, a company could also face enforcement actions and lose the ability to use and exploit its brand in key territories of interest. Even for brands with some existing protection, conventional risks – such as infringement, passing off, and brand dilution – are all exacerbated in the online environment, coupled with relatively new challenges posed by cyber-squatting and developments to the counterfeiting model that exist exclusively online.

As brands take advantage of current market trends and opportunities in the virtual space, it is equally as important, if not more so, for brands to arm themselves with a holistic intellectual property strategy that fits today’s demands and challenges. To mitigate these risks, an effective brand strategy should be a multi-pronged approach:

Adequate protection: Brands should proactively identify and seek protection for their intellectual property in terms of geography and business verticals. Coverage could extend to any creative material – from your brand’s trade name and logo, to the design and get-up of your products, your mobile application interface, and any content published on your webpages. A sound intellectual property strategy would necessarily require businesses to map out jurisdictions where the brand has a physical presence or a virtual footprint. Since intellectual property rights are territorial, protection for these assets must be sought in each individual country of operation.

While it may be ideal to achieve 100 percent coverage, a brand protection strategy should be balanced against costs and the need to preserve financial headroom in these uncertain times. Apart from registration and portfolio management, licensing and franchising arrangements should also be reviewed to ensure that adequate contractual safeguards are in place to protect the brand, even while allowing for commercialization and exploitation.

Monitoring and enforcement: The success of a brand strategy also hinges on the ability to enforce the rights obtained through legal protection. From the enforcement angle, “new age” internet identifiers like domain names, AdWords, hashtags, and social media handles are set to become centerpiece in the fight against online piracy and cybersquatting. Despite the potential administrative hurdles, it is essential to have a proper monitoring system in place to detect counterfeit sites, unauthorized product sales on online marketplaces, diverted site traffic and the like.

Once the illegitimate third parties are identified, the take-down approach also needs to be carefully calibrated from a reputational angle, to ensure that the brand will not be accused of abusing its dominant position.

Management buy-in: Fundamentally, at the heart of every successful brand protection strategy is support at the various levels from boardrooms, through to operations, marketing, and day to day functions on the ground. Companies and brand owners should maintain effective and robust internal policies to educate and create awareness across the various functions. Ultimately, it is important that the business as a whole adheres to and helps to develop a synchronized IP strategy, to maximize the value of these intangible assets for revenue generation.

Overall, a multi-faceted, practical and robust approach is necessary to safeguard the value of the brand and uphold its integrity in this new age.

The brands that can truly weather the storm are not those who fear and resist change, but those who embrace and capture new growth opportunities in a crisis. Instead of reminiscing about the safe harbor that we once took for granted, it is time for businesses to pivot themselves to ensure that their brands are ready to dive into today’s new gameplay.

Lorraine Tay is the joint managing partner of Bird & Bird ATMD and head of the firm’s Intellectual Property Group in Singapore.

Tze She Teo is an associate in Bird & Bird’s Intellectual Property Group in Singapore.