Can the Legalverse Tame the Metaverse?

Uncertainty and unanswered questions characterize intellectual property (IP) enforcement in the metaverse, but some solutions are likely to emerge from pending cases in the United States. James Nurton reports.

Panelists focused on three pending court cases in yesterday’s session, Counterfeiting in the Metaverse: Protecting, Policing, and Enforcing Digital Rights as Technology Races Forward.

Moderator Heather McDonald, of counsel at Baker & Hostetler LLP (US), opened the session by inviting audience members to define the metaverse. The range of answers—which included “any kind of virtual world” and “any kind of layering of virtual or augmented reality”—demonstrated the difficulty of understanding what it is.

Monique Couture, partner at Gowling WLG (Canada), said trademark lawyers should anticipate both the metaverse and non-fungible tokens (NFTs) when advising clients on filing, contracts, settlement, and enforcement.

“NFTs have the potential for significant revenue streams. If they’re ignored in settlement agreements, that could be a massive problem,” she said.

The metaverse exists in virtual locations such as Sandbox, Decentraland, Roblox, and Fortnite, and both brands and rogue third parties are already present there and filing trademark applications covering the metaverse.

“We’re anticipating hybrid lawsuits across trademarks and copyright, and territoriality is a massive challenge,” said Ms. Couture. “If you’re in the metaverse, where are you?”

Minelli Manoukian, executive director at the Center for Art Law (US), a nonprofit organization, said blockchain is used in the art world to track provenance and ownership (though it is only as accurate as the information it is based on), while NFTs can be sold alongside a work of art as a guarantee that it is genuine.

But questions remain as to whether NFTs themselves can be works of art, and what rights come with an NFT, she said.

“Any artist in the digital space is at the risk of having their work turned into an NFT against their wishes. Even those creating NFTs themselves risk their work being stolen in that manner,” Ms. Manoukian said.

To address this, some artists are now including disclaimers saying they are not giving customers permission to create an NFT. The good news is that there is some guidance coming from the courts. The speakers highlighted three cases.

In one case, in the U.S. District Court for the Southern District of New York, Nike is suing resale marketplace StockX for trademark infringement over the sale of NFTs depicting Nike shoes. StockX argues its NFTs are used simply to prove and track ownership of the sneakers, akin to a coat check.

“NFTs have the potential for significant revenue streams. If they’re ignored in settlement agreements, that could be a massive problem.”
Monique Couture, Gowling WLG (Canada)

Ms. Couture said this case raises questions such as: Do a trademark holder’s rights extend to virtual goods and services? Does the first sale doctrine provide a defense? Would the public be confused? And can NFTs be the subject of a delivery up and destruction order?

Ms. Manoukian observed that while NFT marketplaces such as OpenSea have adopted takedown policies, NFTs are never destroyed; they can only be “burned” or put out of circulation.

“Think of these marketplaces as a window to a gallery. They can close the window at any time, but the gallery is still there,” she said.

Another pending case at the U.S. District Court for the Central District of California centers on NFTs that represent chapters from the screenplay of the movie Pulp Fiction, which are being sold by filmmaker Quentin Tarantino. Miramax, which owns trademark rights to PULP FICTION, has brought breach of contract, trademark, and copyright claims against Mr. Tarantino. The dispute raises questions about whether the trademark rights extend to NFTs, whether an NFT can be subject to trademark law, and whether Mr. Tarantino has any rights to sell NFTs deriving from his screenplay.

“If someone is creating NFTs of existing trademarks or copyrights, is it far enough removed even if using the substantiality of the original work?”
Minelli Manoukian, Center for Art Law (US)

The third case discussed was Andy Warhol Foundation for the Visual Arts, Inc. v. Goldsmith, which the U.S. Supreme Court agreed to hear in March 2022. This concerns 16 silkscreen pictures of the musician Prince, which were created by artist Andy Warhol based on a photograph by Lucy Goldsmith. Ms. Goldsmith alleged that Mr. Warhol copied the Prince photo. The first instance judgment held that the work was transformative, but the U.S. Court of Appeal for the Second Circuit found the works were substantially similar and there was no fair use.

The Supreme Court will address whether a work of art is transformative when it conveys a different meaning than its source material.

“The crux of this dispute is the fair use argument,” said Ms. Manoukian: “If you’re in a case where you have an NFT that was created, is that creation a transformative move? Or if someone is creating NFTs of existing trademarks or copyrights, is it far enough removed even if using the substantiality of the original work?”

With investments pouring into the metaverse and NFTs, more such disputes are likely, said Ms. Couture: “Think NFTs, think revenue stream. It will sharpen your pencil and put lead in it.”

Video courtesy of Envato Elements / eungchopan

Wednesday, May 4, 2022

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