Imitation is not always flattery: A U.S. perspective on luxury brands and intellectual property in the metaverse

Luxury brands need robust intellectual property (IP) protections to prevent and deter counterfeiting of their valuable products. The production and sale of counterfeits can, at best, reduce profit margins, and at worst, cause permanent reputational damage and reduce consumer trust¹.

Until recently, brands could primarily concern themselves with counterfeiting in the real world. However, the expected proliferation of the metaverse over the next decade² means that luxury brands must now consider new types of digital products, and be prepared to address unauthorized uses of IP that do not fit neatly into traditional U.S. legal frameworks.

The U.S. has a long history of protecting luxury physical goods and marks from IP theft and infringement under principles of U.S. trademark and copyright law, while exempting nonliteral depictions (in video games or paintings, for example) from infringement only in limited circumstances – for example if they qualify as artistic expressions or parodies protected by the First Amendment to the U.S. Constitution.

Are NFTs protected by the U.S. Constitution?

In the metaverse, though, users buy and sell virtual assets such as non-fungible tokens (NFTs). In some cases, NFTs confer ownership rights in exact digital replications of goods and marks that exist in the physical world.³ Are these copycat NFTs the digital equivalent of traditional counterfeits, or are they more akin to artistic expressions that should qualify for protection under the First Amendment?

In March 2023, in a first-of-its-kind trial, a jury in the U.S. District Court for the Southern District of New York explored the boundaries between art and infringement in the metaverse. The verdict provides at least one data point in answering these complex questions.

The case was filed by Hermès International against Rothschild. In 2021, Rothschild had created a series of digital “MetaBirkins” (digital replicas of Hermès’ signature Birkin bags). Rothschild converted the MetaBirkins into a limited number of NFTs and sold them for tens of thousands of dollars each – prices that approach the cost of Birkin bags in the physical world. Hermès claimed trademark infringement, trademark dilution, and cybersquatting.⁴

In defense, Rothschild alleged its MetaBirkins were protected as artistic expression under the First Amendment. They argued that the MetaBirkins were akin to parody, which is inoculated from trademark infringement.

The jury agreed with Hermès that the MetaBirkins were not a case of protected speech, and awarded Hermès $133,000 in damages.⁵

How can companies protect their IP in the digital world

While the scope of IP protections in the metaverse continues to develop, the Hermès case shows that it is essential for companies to develop strategies for protecting their brands from counterfeits and reputational damage in the digital world.

What can luxury brands do to protect themselves? To start, they should expand their trademark monitoring programs and services to include searches across the metaverse for digital replications and NFTs. Brands that hire third-party trademark infringement search firms should add the metaverse to the scope of the search parameters.

In-house legal teams may consider designating a person or persons to oversee IP infringement in the metaverse, just like any other market.

Once a potential problem is identified, to decrease legal costs in addressing IP infringement, brands may also consider the feasibility of future dispute resolution forums and protocols offered by companies operating digital worlds or NFT marketplaces. These are akin to those currently being offered by some online marketplaces.⁶

As the number of possible claims expands in the coming years, brands should consider how best to streamline the resolutions of these cases in cyberspace. Using in-house dispute resolution forums may prove cost-effective in certain circumstances.

Footnotes

_{1 The Organisation for Economic Cooperation and Development (“OECD”) estimated that trade of counterfeit goods accounts for between 2.5 and 3.3% of all global trade (over 450 billion USD), and 5.8% of all EU imports. OECD/EUIPO, GLOBAL TRADE IN FAKES: A WORRYING THREAT (2021), at 4. Footwear, clothing, leather goods, watches, and jewelry are all in the top ten product categories affected by counterfeits and piracy. Id. at 29.
2 MCKINSEY & CO., VALUE CREATION IN THE METAVERSE (June 2022), available at https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/value-creation-in-the-metaverse (last visited Jan. 27, 2023).
3 The digital economy of the metaverse is expected to reach $5 Trillion by 2030. See MCKINSEY & CO., supra note ii at 6; see also generally supra notes iii and iv.
4 See No. 1:22-cv-00384-JSR, D.I. 1 (Compl.) (S.D.N.Y. Jan. 14, 2022); see also No. 1:22-cv-00384-JSR, Order, D.I. 49 (May 5, 2022); id., Memo. Order, D.I. 50 (May 18, 2022), at 6 and 16 (“Consumers posting on the “MetaBirkins” Instagram page have expressed actual confusion, believing that there is an Hermès affiliation with Rothschild’s “MetaBirkins” collection. Similar confusion exists in the media. For example, the magazines Elle and L’Officiel and the New York Post have all mistakenly reported that the “MetaBirkins” NFTs were unveiled by Hermès in partnership with Rothschild.”) (internal citations omitted).
5 See Hermes Int’l v. Rothschild, No. 1:22-cv-00384-JSR (S.D.N.Y.), D.I. 144 (Jury Verdict) (Feb. 8, 2023).
6 For example, there is a detailed protocol for Amazon sellers and/or legal teams to file an IP complaint directly with Amazon for resolution, which can remove a company’s products from the online retailer altogether. See, e.g. Report Infringement, Amazon.com, available at https://www.amazon.com/report/infringement (last visited Jan. 27, 2023). If infringement is found, the company and its products can be banned from sale on the marketplace—offering a strong remedy outside of court.}