The days of questioning the relevancy of NFTs may be behind us. These tiny units of blockchain data have captured the attention of brands across nearly every major consumer goods industry, and the momentum continues. What is less certain is how these digital investments will be treated in the eyes of the law.

Of the few active NFT-related cases, the battle between French luxury brand Hermès and artist Mason Rothschild has drawn much attention. A recent decision from the Southern District of New York, Hermès Int'l v. Rothschild (S.D.N.Y.), adds both clarity and ambiguity as to how intellectual property law will treat products in the metaverse. While the world waits for future, and more definitive, decisions, we analyze what this ruling means, and what brands and legal professionals should do about it.

Background

Back in January, Hermès filed a complaint in federal court claiming trademark infringement, trademark dilution, and cybersquatting against Mason Rothschild, a “marketing strategist” who created digital images of faux-fur-covered versions of luxury Birkin handbags. On May 18, 2022, District Judge Jed Rakoff ruled that Hermès’ complaint could not be dismissed, rejecting Rothschild’s arguments that his digital images are merely non-infringing artwork.

The court’s opinion starts by addressing whether the Second Circuit’s long-standing test for balancing artistic expression against trademark protection is applicable. Rothschild argued that his use of the term “MetaBirkins" was a protected expression citing Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989), under which use of even a famous trademark in a work of art is not infringement so long as (1) the name is “minimally artistically relevant” to the product, and (2) the use does not “explicitly mislead” as to content, authorship, sponsorship, or endorsement.

Considering this, the court acknowledged that “using NFTs to authenticate an image and allow for traceable subsequent resale does not make the image a commodity without First Amendment protection any more than selling numbered copies of physical paintings would make the paintings commodities for purposes of Rogers.” The court concluded that the Rogerstest applies.

The court then went on to find that Hermès sufficiently alleged that Rothschild’s use of “MetaBirkins” is not artistically relevant and may be explicitly misleading as to the source of the work, precluding dismissal under Rogers, the court holding that “[t]his Court may not resolve these factual disputes at the motion to dismiss stage.” While the decision does not resolve the merits of the case, it offers some initial insights into how courts will consider trademark infringement claims regarding NFTs.

Trademarks in the Metaverse

Trademarks are a valuable tool in the marketplace, but the ability to control those who want to reference others’ trademarks in their endeavors is not unlimited. When trademarks are registered, a class of goods or services must be designated. If one party sells goods bearing a registered mark owned by another party, the first party is not necessarily infringing if the product is completely unrelated to the product of the other party and the class designated in the trademark registration.

For example, Delta Airlines has no reasonable claim of trademark infringement against the company that markets Delta faucets. The services and products offered by either company are so different that there is no likelihood that consumers would be confused as to the source of the services and products, so both may use the DELTA mark.

However, unlike goods and services in the real world, arguably all “products” available in the metaverse and the associated NFTs are essentially sold as entertainment services, and as a result, all of them compete with allothers.

Alternatively, NFTs may be treated as investments, as mentioned in the Hermèsopinion. But whatever treatment is more apt, competing NFTs are being sold using trademarks associated with different goods or services which in the real world marketplace (here, artwork and handbags) do not compete.  In the metaverse, all these different types of goods can be seen to compete for attention and sales.

It is only a few decades since we last saw another instance of technological advancement connecting disparate channels of trade that were previously thought to be completely unconnected.  When domain name registration arrived in the early days of the internet, similar-sounding brands suddenly had to compete for registration of the same domain name, even though they manufactured goods that had never competed with each other in the market—note the Delta example; only one can own “www.delta.com.”

Initially, ownership of desirable domain registrations was hotly contested among competing trademark owners and those wishing to exploit them.  As a result, new sections of the Lanham Act, and new proceedings such as ICANN mediations, were devised to prevent “cybersquatting” by those attempting to register or sell a domain registration to which they had no good faith connection.

In a similar “gold rush” type of legal activity, major brands have recently been filing trademark applications designed to stake out protection in the metaverse. In April 2022, Mastercard filed 15 new trademark applications related to the metaverse, with many other major brand owners following suit.

Time to Take Action

To protect themselves in this new frontier of possible trademark exploitation, consumer brands will need to remain diligent, and actively police the new arena, as well as obtain registrations for goods and services in the metaverse.  In time, new rules will have to be devised to regulate uses of trademarks as NFT marketplaces evolve.

Meanwhile, the court’s decision in Hermèsrecognizes that trademark owners have legitimate interests in preventing others from exploiting their marks in the new, purely digital realm of minting NFTs. Trademark law may prevent third parties from misleading consumers by selling these new types of entertainment services (or investments) using false associations.

We will have to wait and see if we are gifted with a final ruling in the Hermèscase, and if we are unlucky the case will settle, leaving many issues unresolved.  But even if a court decides the case on the merits, any final ruling will likely not be the last word as to where society will next draw the line between illegal use of false associations on the one hand and the right to reference trademarks in expressive artworks on the other.