NFTs and Trademarks – What You Need to Know

Technical background incl. examples for non-technical readers

An NFT is a non-fungible token which means that each token is unique and not interchangeable. NFTs are minted (issued) via one or more smart contract(s) on a decentralized distributed-ledger technology (DLT) network that is neither controlled nor dependent of one single centralized instance. Blockchain is a well-known example of such a technology. An NFT is controlled only by the person holding the private keys to the address to which an NFT is assigned in the smart contract ledger and are freely transferable within and outside various metaverses and marketplaces.

Metaverses for their part are digital universes centrally or decentrally hosted for social interaction, gaming and experiencing things that interlink with the real world (augmented reality). For example, Decentraland is a trending decentralized metaverse project, with the NFTs minted on Ethereum. By using Blockchain or another DLT, virtual goods in the form of real-estate, items like cars, luxury goods or paintings become transferable across different universes and marketplaces. Furthermore, physical goods can be linked to the metaverse, authenticated, and their possession be transferred, by creating NFTs.

Earlier this year, for example the fashion brand Gucci announced a collaboration with The Sandbox, another trending decentralized metaverse project, and acquired a plot of virtual land in The Sandbox metaverse to develop an in-game retail experience. And while the sportswear and lifestyle brand Adidas is engaging with the “Bored Ape” creators (cf. below if you have never heard of the “Bored Apes” before), and Nike acquired the digital fashion company RTFKT, the first ever Metaverse Fashion Week (“MVFW”) launched last week on Decentraland. Consumers at MVFW have the opportunity to purchase virtual clothing for their online avatars, with the physical counterpart of the garment available right away in at least some cases.

Three related legal findings in the field of intellectual property rights, in particular trademark law

1. NFTs and the benefits of the technology can be used to fight product piracy and verify the authenticity of physical goods by storing all relevant information relating to a product in an NFT on a DLT network. In this context, the decisive factor for the successful use of the technology is usually whether and how the product to be protected can be connected to the DLT. And this can often be achieved by combining it with other technical protection measures, such as a QR Code or NFC- or RFID-chip attached to the product.
   For instance, instead of issuing physical certificates, Breitling offers a ‘digital passport’ which utilises NFT technology based on Blockchain to ensure their authenticity and seamless accessibility of its luxury watches (click here for more details ).
2. If an NFT represents a virtual good or is linked to a physical good, each NFT is only a marker (or pointer) to the virtual good or the physical good, but it is not the “the good” itself. Therefore, an NFT does not exclude that somebody other than the owner of the NFT holds property rights over or intellectual property rights (e.g., copyrights) in the represented or linked good itself. In case of art NFTs, as the famous NFT “Everydays: The First 5000 Days” sold for nearly 70 million USD (click here for more information) or the collection of 10’000 “Bored Ape” NFTs (click for more info, on sale here), no actual ownership or control of the artwork itself is transferred but a mere web link is bought that points to a digital art file with a built-in certificate of authenticity.
3. By creating and selling NFTs, not only disputes about the ownership or control of the underlying good or artwork can arise, but one can also risk infringing trademark rights by creating and selling NFTs.
   Recently, for example Hermès has filed a lawsuit with a New York federal court against the individual behind the collection of the so called “MetaBirkins” NFTs. The “MetaBirkins” NFTs include images of furry renderings of the famous Hermès BIRKIN bag, and the first of which was sold via the NFT trading platform OpenSea in December last year for 42 thousand USD. Hermès is relying on its existing trademark rights to the BIRKIN word trademark and the BIRKIN bag’s trade dress as the basis for its claims of trademark infringement, false designation of origin, trademark dilution, cybersquatting, and injury to business reputation and dilution. The defendant on the other hand relies on his First Amendment rights giving him every right to create art based on his interpretations of the world around him and claims that the illustration of Hermès’ most famous product in virtual fake fur “comments on the animal cruelty involved in the production of those bags” (Case Hermès International, et al. v. Mason Rothschild, 1:22-cv-00384 [SDNY]).

This case illustrates some of the following key points that must be considered (and some of which remain unanswered at that time) in connection with trademark rights and the use of such trademarks “as” NFTs and/or in metaverse.

• The scope of a trademark is determined by the country/territory in which it is registered. Selling physical and virtual products via metaverse to a customer in a territory where a trademark does not have existing trademark protection could lead to infringement proceedings if prior similar third-party rights exist in that country. This risk will affect smaller, less established brands in particular, as well-known brands are more likely to be able to rely on their already established reputation.
• Trademarks are always protected for those classes of goods and services for which they have been registered (so called Nice Classes). For example, while the sale of physical fashion items both in the real world and via metaverse is likely to be protected by the trademark registration for “clothing” in Nice Class 25, the question for fashion brands intending to sell virtual goods via the metaverse is whether virtual versions of the clothing could also be covered by Class 25 or whether this might require additional trademark registrations in other goods and services classes. Again, this question is rather important for smaller, less established brands in particular, as well-known brands are more likely to be able to rely on their already established reputation and therefore can claim cross-class trademark protection
• Nevertheless, it can currently be observed how also well established brands apply for already existing trademarks in additional classes that are clearly aimed at use in metaverse. This month, for example, the fashion label Saint Laurent has reapplied for its existing trademarks in Nice Class 9 for “downloadable and recorded virtual goods”, in Class 35 for “online retail store services featuring virtual goods”, as well as further services in Classes 36 and 41, which are clearly focused on use in the metaverse.
• Given the novelty that comes with NFTs and trademark claims, it will be interesting to see, how courts will treat trademarks in metaverse, and specifically, whether they will identify a potential gap for trademark holders when it comes to their rights in trademarks in the virtual world. Regarding the Hermès case, it will be interesting to see how the court treats Hermès’ profund “real world” trademark and trade dress rights in the virtual world since the brand does not offer up NFTs or virtual goods of its own.

Finally, conflicts are not only possible with older rights holders or trademark infringers, but can also arise with customers if, for example, it has not been defined what rights the NFT includes concretely. Such conflicts can be avoided by supplementing the general terms and conditions with provisions relating to NFTs and specifying, for example, how the NFTs are to be used, which rights are to be transferred and granted, and how far any limitations of liability extend.

For trademark right holders who are considering protecting their products via the use of NFTs and/or selling their physical or virtual products via NFT/metaverse as well, they should therefore seek legal advice in any case. This helps to ensure that they are optimally protected in any territory where they intend to sell items and at the same time do not run the risk of infringing third party rights (which is also possible, for example, if coexistence agreements have been concluded with third parties, although it may be unclear whether the planned use in the metaverse constitutes a breach of contract). In particular, it may be necessary to file new trademark applications.

We will keep you updated regarding this topic from time to time!