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.

Funding is flowing into the metaverse and broader web3 endeavors. Since March 2021, sales of non-fungible tokens (“NFTs”) have made headlines – both for the eye-watering prices that some were commanding at auction and for the potential for NFTs to become a robust market, as brands appeared to be eager to market themselves and connect with consumers by way of these relatively novel pieces of technology. For Q3 in 2021, Forbes reported that the sale of NFTs had amounted to $10.7 billion in Q3 2021, a more than 8-fold increase from the previous quarter. As of January 2022, the monthly volume of NFT sales on the OpenSea marketplace hit an all-time high of $5 billion. 

Fast forward to October 2021 and Facebook, Inc.’s announcement that it would rebrand to Meta, Inc. in furtherance of a shift away from being a social media company to becoming “a metaverse company,” seemingly solidified a larger shift among companies that a blend of “real” and virtual worlds is the future. 

Against that background, brands have launched various ventures in the metaverse – from Gucci’s Garden pop-up in the Roblox metaverse (complete with virtual Gucci-branded handbags and apparel) to Nike’s “Nikeland” experience – and at the same time, rushed to file trademark applications for registration for their current (or far more frequently, their impending) uses of their trademarks on virtual goods/services and NFTs. 

All the while, cash has been flowing into the space (with more than $2 billion and $62.8 billion being invested in augmented reality ventures and virtual world projects, respectively, in 2021, per CrunchBase), and at least a one major acquisition has taken place. With so much activity underway when it comes to the metaverse, we have put together a (running) timeline of investments and M&A events to provide a broad overview of which players are raising funding, getting acquired, and what the trajectory of this segment of the market – which only appears to be gaining in steam – looks like more generally … 

May 22, 2022 – BUD Raises $37 Million in Series B

BUD has raised $37 million in a Series B round led by Sequoia Capital India, with participation from Chinese billionaire William Lei Ding’s company NetEase, Chinese VC firms ClearVue Partners, and Northern Light Venture Capital, along with existing investors GGV Capital, Qiming Venture Partners, and Source Code Capital. The Singapore-based metaverse startup will use the funds to “launch Web3 products, the next generation of the internet that runs on blockchains,” and will also introduce NFT projects to allow users to “own and trade virtual assets derived from the metaverse,” per Forbes. The found follows from BUD’s Series A round, which was completed in February.

May 10, 2022 – Arianee Raises €20 Million in Series A Round

Arianee, the leading end to end web3 solution for brands, has raised a €20 million ($21.09 million) in a Series A led round by Tiger Global. Existing investors Bpifrance, ISAI, Noia Capital and Cygni Labs, joined the round, along with Commerce Ventures, Motier Ventures and Pierre Denis, former CEO of Jimmy Choo. In a release on Tuesday, Paris-based Arianne stated that “web3 is a unique opportunity for companies and individuals to regain control over their digital presence, especially their data, [and] it’s the time for businesses to free themselves from the dependency on big platforms and lead new usage and innovation.”

An end to end web3 solution built to create, distribute and interact with NFTs, including by enabling brands to tokenize, distribute and leverage value through NFTs, Arianee says it will use the new funds to accelerate its international presence by growing its New York office, recruiting new talent and continuing the development of its products and services. The 4-year old company says its staff has tripled since its last funding round in March 2021, and it currently boasts more than 50 clients and partners (including IBM and the metaverse The Sandbox) in Europe and North America. 

May 4, 2022 – immi App Secures $50 Million Valuation Following Seed Round

Mark Cuban, singer Pitbull, Zoom founder Eric Yuan, DJ Steve Aoki, and Paris Hilton’s 11:11 Media are among the investors in a seed round for animation app immi, a round that an immi spokesman says values the company at $50 million. Immi characterizes itself as “the only real-time animation platform making full-body 3D cinema-quality characters and facial tracking technology accessible to anyone, anywhere.”

May 2, 2022 – Yuga Labs Raises $285 in Virtual Land Sale

Yuga Labs. the company behind the Bored Ape Yacht Club collection of NFTs, raised approximately $285 million worth of cryptocurrency by selling tokens that represent land in a virtual world game it says it is building. In an online sale on April 30, Yuga Labs sold NFTs called “Otherdeeds,” which can exchanged as plots of virtual land in a Bored Ape-themed online environment called “Otherside” that is expected to launch in the near future, per Reuters. The 55,000 Otherdeeds that were offered up were purchasable using the Yuga-created ApeCoin cryptocurrency

Apr 11, 2022 – Epic Games Raises $2 Billion in Funding for Metaverse Endeavor

Fortnite creator Epic Games raised $2 billion from Sony Group and Kirkbi, the family owned holding company behind the Lego Group, in a deal that values the company at $31.5 billion. Epic will use the new cash to help fund the kid-focused metaverse endeavor that it announced last month in partnership with Lego. “As we reimagine the future of entertainment and play we need partners who share our vision. We have found this in our partnership with Sony and Kirkbi,” said Tim Sweeney, the CEO and founder Epic Games, in a statement. “This investment will accelerate our work to build the metaverse and create spaces where players can have fun with friends, brands can build creative and immersive experiences and creators can build a community and thrive.”

“All three companies highly value both creators and players, and aim to create new social entertainment exploring the connection between digital and physical worlds,” the companies said in a statement.

Apr 8, 2022 – The Fabricant Raises $14 Million

Digital fashion brand The Fabricant raised $14 million in a Series A round led by Greenfield One, and with participation from Ashton Kutcher and Guy Oseary’s Sound Ventures, and Red DAO, and among others. The Netherlands-based company says that the funding will be used to support and expand its co-creation and NFT platform, The Fabricant Studio, which enables “everyday users to become creators [and] craft high-end digital fashion NFTs in collaboration with their favorite brands,” according to Maaria Bajwa, Investor at Sound Ventures.

Jascha Samadi, Partner of Greenfield One said in a statement, “Within virtual environments we are likely going to have multiple digital reflections of our physical self. The Fabricant Studio allows any creator to become their own fashion designer in the metaverse — paired with Web3 technology, digital fashion becomes unique, tradeable and accessible for the masses. The team behind The Fabricant identified this paradigm of user-generated fashion very early on, long before NFTs caught mainstream attention.”

Mar 22, 2022 – Yuga Labs Valued at $4 Billion Following Round

Yuga Labs announced that is now at valued at $4 billion, following a $450 million funding round led by Andreessen Horowitz’s crypto fund, a16z crypto. According to Reuters, “Metaverse gaming company Animoca and its subsidiary, The Sandbox, and crypto exchange FTX are also among the investors that participated in the latest round.”

Mar 18, 2022 – Universal Music Acquires BAYC NFT for $360K

Universal Music Group has acquired Bored Ape #5537, a female character NFT now known as Manager Noët All, from its former owner for $360,817. The digital asset will join the digital musical group, Kingship, that Universal’s next-gen label 10:22PM created in November 2021. The group initially consisted of four “rare Golden Fur and Bluebeam Apes” from Yuga Labs’ collection of Bored Ape Yacht Club and Mutant Ape Yacht Club NFTs. According to Reuters, “Kingship, which exists solely in digital form, will have its own website and presence on messaging platform Discord, and will eventually produce new music and give virtual performances in the metaverse.”

Mar 11, 2022 – Yuga Labs Acquires CryptoPunks, Meebits from Larva

Yuga Labs, the titan behind the Bored Ape Yacht Club and Mutant Ape Yacht Club NFTs, announced that it has “acquired the IP of the CryptoPunks and Meebits NFT collections from Larva Labs,” another giant in the digital assets space, which means that Yuga now “owns the brands, copyright in the art, and other IP rights for both collections, along with 423 CryptoPunks and 1711 Meebits.” The company says that its first move will be to grant CryptoPunks and Meebits holders “the same commercial rights that BAYC and MAYC owners enjoy” in a move that “further align[s] CryptoPunks and Meebits with the web3 ethos.” 

Mar 8, 2022 – UNXD Raises $4 Million

UNXD announced that it has raised a $4 million funding round led by Animoca Brands, Polygon Studios, and Red DAO. In addition to partnering with brands, such as Dolce & Gabbana, to create NFTs, the B2B metaverse-focused company also hosts a Polygon-based (Ethereum-compatible) digital luxury fashion marketplace, which is says is the home of “the best of digital luxury and culture.” Founded in 2021 by Nick Gonzalez and Shashi Menon, UNXD states that it will use the new cash to further scale its “team, ecosystem, and roster of partner brands.”

Mar 7, 2022 – Space Runners Raises $10 Million 

Metaverse fashion brand Space Runners has raised $10 million in a funding round co-led by Polychain and Pantera Capital, and including Accel, Jump Crypto, Animoca Brands Chairman Yat Siu, and Twitch co-founder Justin Kan. “We are designing and launching fashion items as NFT collections, which is ongoing,” Space Runners CEO Deniz Özgür stated. “But we are also launching the first phase of our fashion metaverse. Rather than just an urban cyber style, we are giving more weight to beauty and aesthetics, and we’ve been collaborating with some of the most popular fashion agencies in New York.”

Mar 7, 2022 – Immutable Raises $200 Million

Immutable raised $200 million from investors led by Singapore’s Temasek, valuing the Australian NFT startup at $2.5 billion, the company announced. Investors include Mirae Asset, ParaFi Capital, Declaration Partners, and Tencent Holdings, among others.

Mar 3, 2022 – Nifty League Raises $5 Million in Seed Round

Nifty League, a leading NFT gaming platform, today announced the close of a $5 million seed investment round led by New York-based private investment firm RSE Ventures, along with Spartan Group, Lerer Hippeau, VaynerFund, Private Ventures Group, DraftKings Co-founder Matthew Kalish, and Gallery Media Group CEO Ryan Harwood, among others. Launched in September 2021, Nifty League is bringing “competitive gaming to Web3 – moving away from play-to-earn into a new era of play-and-earn by offering a fun and engaging gaming ecosystem.” 

Feb 25, 2022 – CollectID Raises $3.5 Million in Seed Round

CollectID closed a $3.5 million seed funding round led by SeventySix Capital and Hellen’s Rock. The Swiss-based startup combines NFT technology, backed by an immutably secure blockchain, through a tamper-proof NFC tag to provide a secure and unique identity for each product that can be applied to the majority of physical objects including clothes, accessories, shoes, watches.

Feb 22, 2022 – Metamall Raises $400K in Latest Round

Metamall, a metaverse start-up that allows buyers to own, build and develop virtual real estate has closed its Initial Dex Offering – or “IDO” – to raise $400k with the supply of 80 million tokens. With this round and previous funding (Metamall previously raised $4.6 million in its seed, strategic and private rounds and more than $2 million through NFT sales), Metamall announced that it is the first retail commerce-themed metaverse platform in the world to raise funding more than $7 million from private and public investors.

Feb 21, 2022 – Jambo Raises $7.5 Million in Seed Round

Jambo raised $7.5 million in seed funding in furtherance of Africa’s most notable metaverse venture. The Congo-based startup is angling to build Africa’s web3 user acquisition portal through “learn, play, earn” and democratizing access to crypto-based income-generation opportunities. According to TechCrunch, “Experts say Africa is poised to be disrupted by web3 in a similar fashion that has seen Southeast Asia become one of the best markets for web3.”

Feb 14, 2022 – BUD Raises $15 Million in Series A+

BUD raised $15 million funding in a Series A+ round. Founded by former Snap engineers Shawn Lin and Risa Feng in 2019, BUD allows users to create customizable 3D experiences and interact with others by way of its app. 

Feb 13, 2022 – BNV.ME Raises $4 Million to “Elevate NFT Experiences in the Metaverse”

Brand New Vision Ltd, the company behind BNV.ME, the leading platform taking fashion into Web3.0 through 3D Product Creation, NFT sales, and Future Wearability, completed a $4 million Series A funding round led by Animoca Brands. In a statement, BNV.ME said that the funding will enable it to further expand its capabilities for creating elevated NFT experiences across the metaverse offerings that already exist and those that are under development, as well as growing its visibility and presence across the worlds of fashion, gaming, and crypto communities.

Feb 3, 2022 – nfinite Raises $15 million in Series A

Next-generation visualization and e-commerce merchandising provider nfinite raised $15 million in Series A funding led by US Venture Partners. New York-based nfinite stated that the funding would be used to accelerate development of its SaaS 3D visualization platform and to scale the company’s operations in North America. 

Dec 13, 2021 – Nike Acquires RTFKT

NIKE, Inc. announced that it would acquire RTFKT, “a leading brand that leverages cutting edge innovation to deliver next generation collectibles that merge culture and gaming.” Nike President and CEO John Donahoe said in a statement that the acquisition is “another step that accelerates Nike’s digital transformation and allows us to serve athletes and creators at the intersection of sport, creativity, gaming and culture,” and one that will help to “extend Nike’s digital footprint and capabilities.” Terms of the deal were not announced. 

Nov 22, 2021 – Niantic Raises $300 Million to Build “Real-World Metaverse”

Niantic, the augmented reality platform behind Pokémon GO, raised $300 million from Coatue, valuing the company at $9 billion. The San Francisco-based startup announced that it will use the funding to build the “real-world metaverse.”

Nov 5, 2021 – VNTANA Brings Funding to $12.5 Million

VNTANA, the industry leader in 3D Content Management Software, closed its latest round of funding, with investment from Mark Cuban, former Oculus CEO Brendan Iribe, Flexport and Anorak Ventures, among others, bringing its total funding to $12.5 million in total. VNTANA says that its tech “makes it easy for brands across fashion, footwear, furniture, tools, sporting goods, and more” – including Ugg-owner Deckers Brands, Staud and Diesel – “to share and embed 3D and AR for sales and marketing use.” 

Oct 13, 2021 – Stage11 Raises a €5 Million Seed Round

Immersive music experience startup Stage11 raised a 5 million euro seed round led by Otium Capital, a European venture capital fund, backed up by founder and CEO, Jonathan Belolo. Stage11 stated that it is “setting out to redefine the interactive music experience by combining gaming, mixed reality, and digital collectibles,” including by building “a new creative canvas for artists, allowing them to invite fans to live, play, and create inside their performances and musical worlds.” 

May 5, 2021 – RTFKT Raises $8 Million 

RTFKT raised $8 million in a round led by venture capital firm Andreessen Horowitz, and that includes Riot Games co-founder Marc Merrill, Behance co-founder Scott Belsky, artist Fewocious, and former LVMH Chief Digital Officer Ian Rogers, among others, in furtherance of its quest to “empower the future of fashion.” The round valued the company – which was not even 2 years old at the time – at $33.3 million.

Apr 21, 2021 – The Fabricant Announces Funding Round

Leading virtual fashion firm The Fabricant announced the close of an undisclosed funding round in furtherance of its aim to “create tools and products that transform the fashion industry into a fully digital existence in both production and consumption, while democratizing fashion creation into a collaborative process utilizing 3D technology and the creativity of the consumer, accessible to everyone.” Participants in the round included 4impact, Borski Fund and Slingshot.

A New York federal court has elaborated on its refusal to toss out the lawsuit that Hermès filed against the maker of MetaBirkins non-fungible tokens (“NFTs”). On the heels of Judge Jed Rakoff of the U.S. District Court for the Southern District of New York denying Mason Rothschild’s motion to dismiss the trademark case that Hermès’ lodged against him early this year in a “bottom line” order on May 5, the court has issued a memorandum order, stating that while there may be an “artistic aspect” to the images tied to the MetaBirkins NFTs, Hermès has, nonetheless, sufficiently pleaded its case for trademark infringement, dilution, and cybersquatting.

One of the primary issues addressed by the court in its May 18 memorandum order is the applicable test for determining infringement in connection with the MetaBirkins NFTs, which consists of furry images that mirror Hermès’ famous Birkin handbag that Rothschild first released in December 2021. “Because the digital images of the Birkin bags that are tied to the NFTs he sells are ‘art,’” the court states that Rothschild argues that “the Second Circuit’s test in Rogers v. Grimaldi applies.” Beyond that, Rothschild claims (as summarized by the court) that since he “uses ‘MetaBirkins’ as the title of the artwork and not as a source identifier of his products,” his use of Hermès’s Birkin trademark is entitled to First Amendment protection under Rogers, and thus, the case should be dismissed. 

Pushing back against Hermès’ claim that the Rogers test does not apply (and that the two-prong test of Gruner + Jahr v. Meredith Corp. should be used, instead), Judge Rakoff stated that Rogers is the appropriate test “at least in part” for analyzing trademark infringement. In deciding on the Rogers test, the court was unpersuaded by Hermès’ argument that Rothschild is using “MetaBirkins” in a trademark capacity (i.e., as his domain url, social media handles, etc.), thereby, distinguishing the use at hand with the use in Rogers. Hermès asserts that Rothschild is using the “MetaBirkins” mark to “brand a product line, and to attract public attention and signify source,” and that First Amendment does not protect such “unauthorized use of another’s mark as a source identifier.” 

Siding with Rothschild, Judge Rakoff states that his use of “the title of the artwork for social media and online accounts dedicated to selling the artwork” is equivalent to “the marketing and advertising approved in Rogers.” Moreover, the court held that Rogers applies even though Rothschild uses the NFTs to authenticate the Birkin bag-centric images. “Because NFTs are simply code pointing to where a digital image is located and authenticating the image, using NFTs to authenticate an image and allow for tradeable subsequent resale and transfer does not make the image a commodity without First Amendment protection any more than selling numbered copies of physical paintings would make [them] commodities for the purposes of Rogers.”

(The court states in an interesting footnote that Rothschild “seems to concede” that Rogers might not apply if the NFTs were attached to a digital file of a virtually wearable Birkin, in which case the ‘MetaBirkins’ mark would refer to a non-speech commercial product.” But the court states that “Hermès’ only contention on this score is that Rothschild might branch out into virtually wearable ‘MetaBirkins,’” and since the amended complaint does not contain sufficient factual allegations that Rothschild uses, or will in the immediate future use, the mark to sell such products, the court did not consider this in connection with the motion to dismiss.)

Even against the background of the Rogers test, the court sides with Hermès in refusing to toss out the case, stating that the French luxury goods brand’s amended complaint contains sufficient factual allegations that Rothschild’s use of the trademark is not artistically relevant and that the use is explicitly misleading, which are the two prongs of the Rogers test. 

Looking first at artistic relevance, the court cited Louis Vuitton v. Warner Bros., stating that the artistic relevant prong “ensures that the defendant intended an artistic – i.e., noncommercial-association with the plaintiff’s mark, as opposed to one in which the defendant intends to associate with the market to exploit the mark’s popularity and goodwill.” Here, Hermès sufficiently alleges that Rothschild “entirely intended to associate the ‘MetaBirkins’ mark with the popularity and goodwill of Hermès’ Birkin mark, rather than intending an artistic association.” The court points to commentary from Rothschild, himself, including where he says that the MetaBirkins were intended as a “tribute to Hermès’ most famous handbag,” as evidence of this. 

As such, the court declined to resolve at this stage whether the MetaBirkins “clear the admittedly low bar of artistic relevance.” 

Turning his attention to the explicit misleadingness prong, Judge Rakoff finds that Hermès satisfies its burden here. “The amended complaint contains sufficient factual allegations to support a conclusion of explicit misleadingness,” as it sets out “more than simply use or actual confusion,” and contains “sufficient allegations as to Rothschild’s behavior, not just the impact of the use on consumers, the media, and the public, but also that Rothschild himself made statements that are plausibly interpreted as explicitly misstatements and that this engendered confusion on the part of consumers.” As such, the court denies the motion to dismiss the trademark infringement claims.

The court also refuses to toss out Hermès’ trademark dilution and cybersquatting claims, as these claims “rise and fall with the First Amendment defense to the trademark infringement claims and the application of the Rogers test: that if Rogers protects Rothchild’s ‘MetaBirkins’ uses against trademark infringement claims, it even more clearly protects against trademark dilution and cybersquatting claims.” Given that Rothschild “does not contend that the amended complaint lacks sufficient factual allegations to plausibly allege trademark dilution or cybersquatting,” and given that the court “concludes that the Rogers test does not support dismissing the trademark infringe claims at the pleading stage,” the court also denies Rothschild’s motion to dismiss these claims. 

Hermès first filed suit against Rothschild in a New York federal court in January, setting out claims of federal and common law trademark infringement, false designation of origin, trademark dilution, cybersquatting, and injury to business reputation and dilution under New York General Business Law.  The company is seeking monetary damages, including Rothschild’s profits, and injunctive relief to bar him from making further use of its trademarks, such as by “using any reproduction, copy, counterfeit, or colorable imitation of Hermès’ federally registered trademarks to identify any goods or the rendering of any services not authorized by Hermès.” 

More than merely a clash between the two parties, the case is striking, as it will potentially have significant implications for other brands and creators operating in the NFT space, which is rife with questions and uncertainty due to the relative novelty of the tech, which started garnering mainstream over the past year. 

The case is Hermès International, et al. v. Mason Rothschild, 1:22-cv-00384 (SDNY).

A copyright case over allegedly infringing non-fungible tokens (“NFTs”) listed on an online marketplace in China has resulted in what is being characterized as a “first-of-its-kind judgment.” Filing suit against Bigverse, plaintiff Shenzhen QiCeDieChu Culture Creativity Co Ltd. (“QiCeDieChu”) asserts that it is the copyright holder of a series of illustrated works by Chinese artist Ma Qianli, including one of a cartoon tiger receiving a vaccine, which was tied to an NFT and offered up on Bigverse’s NFTCNplatform without its authorization. As the operator of the marketplace site, Bigverse is contributorily liable for failing to adequately police the platform for infringements, QiCeDieChu argued.

Specifically, QiCeDieChu argued in its complaint that Hangzho-headquartered Bigverse has an obligation to review the NFTs that are minted and then offered up on its NFTCN platform – in connection with which it collects a portion of the sale – to ensure that the digital tokens are not tied to works that infringe the rights of others. Unsurprisingly, Bigverse argued in response to QiCeDieChu’s suit that it should be shielded from infringement liability, as it is merely a middleman and not the creator or the seller of the NFTs on its platform, which are created – and uploaded – by users.  

Following a hearing in April, the Hangzhou Internet Court sided with QiCeDieChu, holding that Bigverse does, in fact, have a duty to detect and prevent infringement before NFTs are actually listed on its platform, in addition to having an obligation to respond to infringement notices about infringing NFTs after the fact. By failing to fulfill that duty, which is critical when it comes to NFTs because of the generally irreversible nature of the transactions and the ability of “flaws in the copyright ownership of the underlying work of an NFT” to impact the “entire NFT transaction chain,” Bigverse infringed QiCeDieChu’s “right to disseminate works through information networks.”

As such, the court ordered that one-year-old Bigverse – which raised RMB 10 million ($1.6 million) in a Series A round in March – remove the infringing NFTs and pay RMB 4,000 ($589) in damages to QiCeDieChu. Additionally, the court also states that Bigverse should maintain a vetting system to verify that NFTs that users are looking to list on the NFTCN platform do not infringe the rights of others, as well as a takedown system to address infringing NFTs that have been listed.

The court noted that while NFTs cannot be destroyed, they can be sent to an “eater address” (or burn address) and thus, removed from circulation, which it asserted is a sufficient way to deal with infringing NFTs.  

Reflecting on the “landmark” case, DLA Piper’s Horace Lam states that it is the first time that a Chinese court has specifically spoken to the legal nature of NFTs and the obligations of an NFT platform. Specifically, Lam notes that the court characterized NFTs as “digital commodities,” and emphasized that the sale of an NFT does not equate to a transfer or license of the intellectual property of the underlying artwork, unless the terms of the sale provide otherwise. (The court also noted a party that mints an NFT should have rights in the underlying artwork, as distinct from merely having a copy of the underlying work.)

A key takeaway, according to Lam, is the court’s determination that the sale of an NFT that makes unauthorized use of another’s copyright-protected work “does not infringe upon the copyright owner’s ‘right of distribution’ in the underlying work, which is limited by the first-sale doctrine. Instead, it infringes the copyright holder’s “right of communication by information networks,” which he says is “a highly controversial issue in relation to copyright infringement of an NFT.” 

Given that the Hangzhou Internet Court is only a district-level court, Lam asserts that it is “unclear whether its ruling will be widely followed or is likely to be challenged in subsequent cases by other courts in China,” but says that the outcome is “meaningful,” nonetheless, in the light of the fact that formal NFT laws or regulations have not been enacted in China (yet). As such, he encourages players in the NFT space in China to “carefully consider the implications of the ruling.” 

In much the same way as NFTs have boomed in popularity in other countries across the globe, there has been significant interest in – and demand – for NFTs in China. The potential drawback, however, comes in the form of an inability to resell such digital tokens amid an enduring crackdown on cryptocurrency trading and mining by the Chinese government. 

MIT Technology Review reported last month that three national financial industry associations in China released a joint statement centering on NFTs. The three associations, “which collectively cover almost all Chinese banks, brokerages, and fintech companies,” according to MIT Tech Review’s Zeyi Yang, asserted that to “prevent financial risks,” they are asking their members “not to offer centralized trading platforms for NFTs, to refrain from investing directly or indirectly in NFTs, and to forbid using cryptocurrencies like Bitcoin or Ethereum in buying or selling them, among other measures.” 

“The initiative is designed to make it harder to trade NFTs and impossible to speculate in them,” Yang states. “Ultimately, the shifting political atmosphere around NFTs may help test whether they hold any intrinsic value.” 

Nike and RTFKT, the digital fashion/footwear brand it acquired last year, are making headlines with their first joint endeavor into the metaverse. In a widely-covered drop on April 23, the two companies revealed that each of the MNLTH NFT cubes that RTFKT released in February contain a pair of virtual sneakers that mirror the silhouette Nike’s Dunks but can be customized via RTFKT-created skins. In addition to setting the stage for more offerings from the Swoosh and RTFKT, including physical offerings, the drop of the virtual sneakers – which have been coined CryptoKicks – is significant as the name appears to be a nod to some of the technology at the heart of the patent that Nike received back in December 2019 for a “system and method for providing cryptographically secured digital assets,” including the “breeding” of digital sneakers. 

Nike’s “Cryptokicks” is one of the most widely-covered patents when it comes to the metaverse (and virtual fashion/footwear, more specifically), but it is certainly not the only innovation aimed at the virtual world, as leading tech players are developing new hardware and software to cater to consumers’ budding interest in the metaverse, i.e., the combination of aspects of social media, gaming, augmented and virtual reality, and the web that form “an immersive digital world.” 

Noting an uptick on interest in metaverse patents as companies that are developing the building blocks for the virtual world look to protect their innovations, ArentFox Schiff’s Michael Fainberg and Mohammad Zaryab state that among metaverse-specific technologies that they are seeing companies amass patents are “systems for optimizing shared views of virtual objects to multiple wearers of VR headsets; algorithms for generating and moving virtual shapes and scenes in a VR environment based on hand gestures, head motion, or line of sight of the user; systems for generating haptic feedback corresponding to users’ interaction with virtual objects in a virtual environment; and methods for generating 3D avatars of the users, which emulate users’ appearance and behavior,” among others. 

Pursuing patent protection in connection with the virtual world is not without challenges. Just as with physical world-centric inventions, in order to be eligible for patent protection in the U.S. (with regard to the metaverse or virtual world), an invention must new, useful process, and fall within the one of the four statutory categories (machine, manufacture or composition of matter) – or amount to a new and useful improvement on such an invention. While patent protection (i.e., the process of drafting, filing, and working with the United States Patent and Trademark Office (“USPTO”)) “for hardware technologies for the metaverse tends to be quite straightforward – and there are many existing patents for virtual reality and augmented reality headsets,” Mathys & Squire’s Dani Kramer asserts that obtaining software patents for metaverse technologies is “likely to be comparatively more difficult from a subject matter point of view.”  

Fainberg and Zaryab echo this, asserting that patent prosecution is challenging in connection with metaverse tech in large part “due to the strict subject matter eligibility requirements applied to software inventions under 35 U.S.C. 101 in view of the U.S. Supreme Court decision in Alice Corp v. CLS Bank,” which asks – in part – whether a patent application contains claims that are directed to an abstract idea. (This subject matter hurdle was demonstrated in Sandbox Software, LLC v. 18Birdies, LLC back in June 2019 when a Delaware federal court determined that one of metaverse platform Sandbox’s inventions was ineligible for patent protection because it was directed to the abstract idea of playing a multiplayer game and keeping track of its progress, and thus, did not amount to patentable subject matter.)

Software in this realm can also be thorny from novelty/non-obviousness point of view. One of the larger considerations in evaluating a metaverse innovation for novelty/non-obviousness is determining whether the process within the metaverse environment is similar to the same process outside the metaverse environment,” according to DLA Piper’s Joseph Wolfe. “If, for example, the only difference between the proposed invention and the prior art is that the proposed invention is confined to the metaverse environment, it may be difficult for applicants to clear the prior art [with the USPTO].” This is why applicants should “identify that step in the process that is unique to execution in the metaverse environment,” he asserts. 

Looking beyond utility-focused patents, companies are also expected to try to utilize design patent protection for any “new, original and ornamental designs” that they are using in the metaverse. “A virtual business may have – as a primary core asset – a virtual product design, aspects of which that may need protection as trade dress under trademark law – or through a design patent,” Holland & Knight’s Thomas Brooke stated in a recent note

Design patent protection for metaverse-focused ornamental design is certainly possible. As the USPTO states in its Manual of Patent Examining Procedure, “Computer-generated icons, such as full screen displays and individual icons, are 2-dimensional images [that] alone are surface ornamentation,” and that comply with the “article of manufacture” requirement of 35 U.S.C. 171

Protection will, of course, depends on how such designs are claimed. As of now, for instance. “a design patent for, say, a purse, would not cover a purse shown in the metaverse,” Suffolk University Law School professor Sarah Burstein tells TFL. It would be possible, she says, to patent the design of a purse for use in the metaverse “if you put a dotted line around an image of the purse and call it a ‘display screen portion with user interface,’ (e.g., the icons in Apple v. Samsung).” Burstein notes that the USPTO “seems to want to go further, to be able to issue patents for VR/AR/projected purses.” (In a December 2020 request for comments about the article of manufacture requirement of 35 U.S.C. 171, the USPTO suggested that designs for “projections, holograms, and virtual and augmented reality” are protectable.) 

Ultimately, increasing attempts by brands to engage with the consumers in the metaverse by way of games and specific metaverse platforms are “sure to present applicants and practitioners with its own unique set of challenges for obtaining patent protection,” Wolfe states. The potential good news for filing parties, per Wolfe is that “broadly speaking,” many of the same principles or best practices for patenting things like “blockchain innovations and artificial intelligence innovations can be applied to metaverse innovations to help applications successfully navigate through the patent office.”