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June 27, 2023 Feature

New Virtual Platforms Raising Old Questions: Potential Impacts of the Metaverse on Intellectual Property

Megan C. Parker

©2023. Published in Landslide, Vol. 15, No. 4, June/July 2023, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

The metaverse: this popular buzzword describing a variety of different virtual platforms and internet-based spaces is growing in legal significance, especially when intellectual property (IP) is concerned. Is the metaverse changing how IP law should be applied to newly emerging internet technologies and online infringement capabilities?

Over the span of a few years, the internet evolved “from a technical curiosity to an increasingly important and pervasive aspect of modern business and culture.” IP owners benefit from a practically unlimited market through the growth in the internet’s reach, popularity, and reliance in society. With the internet’s evolution came new questions on how IP owners could protect their rights online. “Because [IP] infringement takes place on the Internet countless times every day, . . . [IP] owners have to make difficult decisions about how to allocate resources to identify and stop infringement.”

The evolution of the internet has presented a need for copyright law, trademark law, and IP owners to constantly adjust, sometimes with new laws and sometimes with new practices. For example, tracking online infringement has proven difficult given the size of the internet, the speed of posting content, and the limitations of search engines. Moreover, once online infringement is found, many IP owners struggle to enforce their rights because they “are forced to grapple with a 21st-century problem within a 20th-century legal framework.” Similarly, trademark law has needed to adapt to online marketplaces and new forms of advertising.

With the emergence of the metaverse, IP owners, legal scholars, and attorneys are asking the same questions the internet once raised: whether IP laws can be applied to this new virtual world, or if new legislation and policies will be needed. “[IP] owners assessing their options, lawyers undertaking enforcement actions, and judges tasked with rendering decisions must understand not only the statutory and case law framework but also how emerging technologies operate, how consumers interact with them, and what various parties’ roles are in any alleged infringement.” While the metaverse is creating uncertainties, we can look to the changes with the introduction of the internet and traditional applications of IP law for guidance.

The Metaverse, Virtual Goods, and Non-Fungible Tokens

Generally, the metaverse is described as “the next generation internet: a 3-D version that users can ‘step inside’ and experience via virtual reality, augmented reality, or mixed reality, among others.” Users access various metaverse platforms, such as Sandbox, Decentraland, Roblox, or Meta’s Horizon Worlds, using avatars and either virtual reality headsets or an internet browser on a computer. Many predict users will be able to travel between platforms and interact with others the same way they do in the physical world.

Another important aspect of the metaverse is non-fungible tokens (NFTs), digital assets that are encoded with unique identifiers to provide exclusive ownership. The possibilities for IP owners and NFTs in the metaverse are virtually endless because both “feed off the well-known human desire to be unique and own something that everyone else around you wants,” to the point many believe NFTs constitute the best form of metaverse currency.

Although the internet once “fractured existing models of exploiting [IP] rights” through changes to authorization, monetization, and enforcement, these challenges are still relevant today as new technologies create new complications in copyright and trademark law. The metaverse and digital goods created to resemble their real-life counterparts are raising questions on how traditional IP law should be applied to fast-moving technologies. But in order to understand the questions the metaverse raises, it’s important to remember that these questions were initially raised with the introduction of the internet.

Emergence of the Internet: Early IP Law Concerns, Changes, and Innovations

In the early 1990s, the U.S. government removed restrictions on use of the internet for commerce, started privatizing the internet’s infrastructure, and left its further development to the private sector. Scholars believe this constituted the government’s declaration that the internet would no longer need to be fostered or administered directly by its subsidiaries. But the introduction of electronic networks started to pose challenges to existing IP laws. As a result, IP owners increasingly looked to statutes for ways “to shield themselves from competition, obtain exclusive rights to intangible property, and protect the investments they [had] made towards the creation of valuable information, ideas, and innovations.”

Internet innovators encouraged Congress and courts to expand enforcement of IP laws. Database compilers lobbied Congress for legislation, such as the Collections of Information Antipiracy Act, which would have extended IP rights to databases that didn’t qualify for existing copyright protection. Entertainment industries initiated more lawsuits to slow the dissemination of pirated works after “[t]he rise of new technologies . . . enabled ordinary people to circumvent [IP] laws like never before.”

Difficult issues nevertheless remained because of “the ease of copying and distribution of copies and the relative anonymity afforded to these digital transactions.” When the internet reached individual consumers, another challenge arose from the expectation that IP on the internet should be provided through unrestricted access, dissemination, and use. Further, the increasing divergence between tangible and intangible property resulted in “many corporations—particularly businesses unfamiliar with modern digital technology—initially over-enforc[ing] and over-litigat[ing] their [IP] rights.”

Despite avenues for combating traditional forms of infringement, “a great deal of [IP] infringement takes place on the Internet every day” by anonymous infringers. Enforcement of rights against online infringement became complicated as infringers were often individual fans of the protected IP. An additional complication was determining the appropriate jurisdiction for litigation, which acted as the “primary mechanism for shaping the parameters of [IP].”

Several early concerns with IP’s application to the internet, however, have since been addressed. The Digital Millennium Copyright Act “added two key sections to Copyright Law: one to prevent circumvention of technological measures used to protect copyrighted material and another to delineate online service provider liability.” Courts developed legal precedent on applying general jurisdiction doctrines to online infringing activities. And evolving international policies showed that “cyberspace’s transcendence of national boundaries does not alone guarantee the unenforceability of [IP] laws.”

This is not to say there are no issues remaining with how IP protections can be applied to the internet. “The adaptation, over the last decade, of [IP] to the internet context is at the center of a deep struggle between democratic governance and network governance. This struggle is a fundamental battle over the control of rulemaking for the new information society.” This fundamental struggle is once again being tested with the rise of the metaverse.

Current Legal Actions Involving the Metaverse and Digital Goods

The metaverse created a demand for virtual assets and a sharp increase in trademark applications related to virtual goods. “[P]rominent brand owners, including Nike, Ralph Lauren, Converse, and Wal-Mart, have filed trademarks for a range of virtual goods and services.” For example, Kobe Bryant’s estate filed three applications to register KOBE BRYANT as a trademark for a range of digital and virtual goods to protect his name in the metaverse. The sports apparel industry is also increasing its attention to virtual goods and platforms, as Nike opened a digital world within Roblox and acquired a digital collectibles company.

With these increased trademark filings comes the rise of trademark ownership disputes as third parties are applying to register popular trademarks for metaverse goods or services before the actual popular brand owners can file. “Companies like Prada and Gucci reportedly are challenging applications filed by unaffiliated individuals attempting to register PRADA and GUCCI marks in classes for metaverse-related categories, including downloadable virtual goods, virtual worlds, and virtual clothing used in virtual spaces.”

With the anticipated increase in demand for virtual goods and the amounts paid for them, more litigation over the metaverse can be expected. “Established and developing cases illustrate the types of claims that may shape the future metaverse ecosystem.” Several “high-profile examples have already emerged to call into question the rights that attach to digital goods.” Many believe the law would ultimately favor a user’s ability to recreate copyrighted works or trademarks in the metaverse so long as the purpose was to enhance the general sense of realism within the digital environment.

With the recent resolution of two NFT cases, however, application of IP law to the metaverse may instead weigh in favor of protecting IP owners’ rights. There may now be an answer to the following hypothetical: “If a player wants to build a realistic model of their own home and include things that really exist there, like placing a MacBook Pro on an Eames chair,” what level of protection can those brands claim?

First NFT Trademark Infringement Trial Results in Win for Trademark Owner

In a case of first impression regarding NFTs in trademark law, Hermès International SA received a jury verdict in its favor holding digital artist Mason Rothschild liable for violating rights to the BIRKIN trademark through his “MetaBirkin” NFT. “The trial was the first ever to examine how NFTs . . . should be viewed through the lens of [IP] law.”

Rothschild created 100 MetaBirkin NFTs linked to digital images of Hermès’s Birkin handbag depicted as being covered in colorful and cartoonish fur instead of leather. “Physical Birkin bags range in price from $12,000 to close to $200,000. Rothschild first sold the NFTs for around $450 each, but their resale value rocketed to tens of thousands of dollars.” During the trial, a blockchain expert testified that Rothschild earned around 55.2 Ethereum tokens, which are worth around $87,700.

A major question was whether Rothschild’s creation of the MetaBirkin NFTs was entitled to First Amendment protection like the protections of Andy Warhol’s art depictions. On the first day of the trial, however, the judge ruled that Rothschild could not present testimony from famed art critic Blake Gopnik, who studied Warhol’s work. “Hermès argued in court filings that Gopnik shouldn’t be allowed to testify because his expertise in art history isn’t based on reliable data or a clear methodology.”

Rothschild nonetheless attempted to rely on the First Amendment defense to trademark infringement articulated as a two-part test in Rogers v. Grimaldi. The two-part Rogers test “allows artists to use a trademark without permission as long as it meets a minimal level of artistic relevance and doesn’t explicitly mislead consumers.” Rothschild’s attorneys tried characterizing the MetaBirkin NFT project as an “artistic experiment” entitled to First Amendment protection. Ultimately, the jury “determined that the NFTs are more akin to consumer products subject to strict trademark laws that protect brands from copycats and those looking to capitalize on their goodwill.”

The nine-person jury found Rothschild liable for trademark infringement, trademark dilution, and cybersquatting and awarded Hermès damages in the amount of $110,000 for trademark infringement and dilution and $23,000 for cybersquatting. Although Rothschild will likely appeal to the U.S. Court of Appeals for the Second Circuit, the outcome of this case will surely impact “pending and future NFT cases that test the often blurry line between art and consumer products.”

Yuga Labs “Bored Ape” NFT Theft and Counterfeits

In 2022, the theft of actor and producer Seth Green’s “Bored Ape” NFT, which depicted a cartoon ape, sparked debate about copyright ownership and the unusual licensing structure for this popular digital asset. Bored Ape Yacht Club took a unique approach to NFT sales by “giving the purchaser of each Bored Ape NFT licenses to use the digital primate art in various capacities, including developing and exploiting the properties commercially.” The licensing rights with the NFT raised numerous questions about when an NFT could be stolen, “adding to the growing list of to-be-answered legal concerns around NFTs and other crypto assets.”

Green intended on showcasing his Bored Ape #8398, called “Fred Simian,” on an upcoming television show before his plans were halted. A phishing attack by an anonymous scammer led to the “kidnapping of Fred Simian,” which was subsequently purchased by a third party, presumably in good faith. This led to currently unanswered concerns about whether sublicensing contracts Green entered for Fred Simian’s use would still be valid. Attorneys concluded that “trademark law [is] best positioned within the current legal system to protect NFT owners from similar attacks going forward.”

More issues arose early this year when Bored Ape Yacht Club maker Yuga Labs Inc. accused NFT market developers of tricking consumers into buying counterfeit versions of its NFT. “The two lawsuits . . . allege that Ryan Hickman and Thomas Lehman are central parts of the team enlisted by conceptual artist Ryder Ripps to create copycat ‘RR/BAYC’ NFTs using Bored Ape’s images and part of its name.” The original suit against Ripps and artist Jeremy Cahen filed in June 2022 alleged that consumers were scammed into purchasing “fake Bored Ape NFTs using Yuga Labs’ registered trademarks.”

Less than a month later, Yuga Labs and Lehman arrived at a confidential settlement and filed a “proposed permanent injunction order that would prevent [Lehman] from using the BAYC mark or confusingly similar marks in any capacity, including in connection with the RR/BAYC NFTs.” This order also required Lehman to destroy any materials he possessed or controlled that publicly displayed Bored Ape Yacht Club or similar marks. The cases against Hickman, Ripps, and Cahen are still ongoing and could result in more guidance on NFTs’ impact on trademark law and its application.

Protecting Copyrights and Trademarks in the Metaverse

While the emergence of the metaverse and related technologies has created some uncertainties for content creators, IP owners, and their lawyers, the use of familiar IP laws in a new context provides guidance.

First, many works created or based in the metaverse are most likely subject to copyright protection. However, there are practical challenges to relying on copyright law. One is the challenge of policing piracy. Another is the consideration of whether existing licenses can be extended to cover uses of copyrighted works in the new digital space—a familiar problem from when publishers and other businesses transitioned to digital and online environments. Another example of the difficulties the metaverse presents is that copyrighted works may be included without permission in metaverse environments as mere elements of the environment or background. “[I]f the use of the copyrighted work is de minimis, the copyright owner may have difficulty proving infringement.”

To maximize the potential copyright protections within the metaverse, IP owners and lawyers should consider the following actions: (1) review agreements for distribution of third-party content for proper licenses to copyrighted works; (2) ensure that agreements with customers protect against unintended distribution of copyrighted works; (3) promptly register copyrights in metaverse assets and software; (4) properly mark copyrighted works within the metaverse; and (5) implement technological measures to protect against unauthorized distribution of the works.

Next, trademark owners also repeatedly face difficulties protecting against infringement in virtual spaces. “With the proliferation of user-generated content in the last few decades, as well as online ‘virtual world’ games such as Pokémon Go, The SIMS, and Second Life, a new set of issues have arisen involving the use of third-party trademarks in virtual worlds.” Because the lines between the physical and virtual worlds are increasingly blurred, trademark owners will need to increase their protection efforts.

Although the MetaBirkin decision provides some guidance for trademark protection against NFT usage, there are still uncertainties about trademark protection within the metaverse. Practices to secure and maximize trademark protections within the metaverse include: (1) updating trademark registrations to include virtual goods or services; (2) subscribing to a trademark watch service or using law firms to police the metaverse; (3) immediately notifying the metaverse platform of infringing activity; (4) evaluating how potential claims may impact the marks’ reputation; and (5) establishing a presence in the metaverse to preempt infringement.

The Metaverse Will Continue to Impact IP Systems

The internet and emerging technologies continuously shape the way IP law is viewed, analyzed, and even exploited—especially when user-generated content is at the heart of the debate. Now with the growth of the metaverse and an increasing call to take advantage of this new virtual space, emerging technologies are once again creating cases and controversies on how IP can and should be applied. “The importance of inventiveness and creativity in promoting economic development is well recognized. Under the new conditions of the digital economy, the sources of wealth are increasingly found in intellectual, as opposed to physical, capital.”

Not only are attorneys, courts, and IP owners faced with uncertainties around balancing IP protections with the internet’s goal of providing free access to information, but creative industries and consumers are also being impacted by the upcoming decisions involving the metaverse. With the recent NFT trademark case resolutions, the law appears to slowly be applying the same IP protections to this new space as it once did when the internet raised the same uncertainties.

While this development of emerging technologies occurs through quick bursts of innovation and the law adapts through a slow-and-steady approach, one key question will remain: whether the law should allow the metaverse to act as a catalyst for unleashing creativity and intellectual capacity, or whether long-standing doctrines on the importance of IP protections will preserve works from unfair use.

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    Megan C. Parker

    University of Akron School of Law

    Megan C. Parker is a third-year JD/LLM candidate at the University of Akron School of Law. After graduating in May 2023 and taking the Ohio Bar Exam, she will join Benesch, Friedlander, Coplan & Aronoff, where she intends to focus her practice with the firm’s 3iP practice group.