What is the Metaverse?

As terms like metaverse expand into the popular lexicon, it becomes easy to fall into the same hyperbolic craze around futurism and virtual reality that was common in the late 1990s and early 2000s. Depictions of interconnected virtual worlds have invoked media like Ready Player One, the 2011 science fiction novel which envisions a massive, multiplayer virtual world that people access to escape a declining real world. These imaginings of virtual worlds, complete with avatars and holograms, have proliferated over the past year, and with them a flurry of questions from those seeking to understand the role intellectual property plays in the NFT-crypto craze. What is the metaverse? And how can brands effectively prepare for what is coming next?

When Facebook rebranded itself as Meta in October 2021, it signaled its intent to focus on its vision of the metaverse. Meta has partnered with virtual-reality hardware unit Reality Labs and has invested about ten billion dollars into the project but has had a difficult time effectively describing what this universally owned, decentralized “constellation of technologies, platforms, and products” will look like in practice. Recent reports from senior officers within Meta have said that it won’t be a “Meta-run metaverse,” but many are skeptical as to what the alternative will be, given Meta’s huge financial investment.

The term metaverse has, on the other hand, become broadly synonymous with cyberspace, especially from a marketing and advertising perspective. In April 2022, Coca-Cola  revealed that its newest flavor was born in the metaverse and meant to invoke the innovative taste of pixels. In October 2021, Chipotle partnered with Roblox as part of a metaverse-themed advertising campaign, where users whose avatars wore virtual Chipotle-inspired costumes could receive not only virtual Chipotle gear, but promotional codes for real products. These examples highlight the advertising-side of the metaverse: as the trendiness and “hype” of the metaverse increases, it detaches itself from more grounded definitions and can often mean whatever the user wants it to mean.

Still, there are some consistencies to the most common definition of the metaverse: shared social spaces, avatars which represent users, a world for avatars to interact in, virtual property and the ability to create or share the virtual property. For example, one of the earliest, most recognizable virtual worlds is the multiplayer role-playing game Second Life, where users can create virtual worlds, sell their own creations, build an online business presence and buy and sell virtual goods with the trademarks of third parties. Other imaginings of the metaverse, including Meta’s vision, may differ or be harder to define, but as the concept expands, it is important to understand the role that intellectual property will play and how brands today should be planning for tomorrow.

Intellectual Property in the Metaverse

Brands have been paying close attention to how their intellectual property rights might be impacted by the expansion of the metaverse and how they might take advantage of increased opportunities to license or sell digital goods.

Virtual worlds provide a range of licensing opportunities for brand owners, and many have already taken advantage of the metaverse phenomenon. Battle royale game Fortnite licenses hundreds of characters from properties like Marvel, Star Wars, DC Comics, and various video games to allow users to pit their favorite characters against each other. Platforms like Snapchat allow avatars to wear clothing designs by a number of real-world brands, including Ralph Lauren and Levi’s. The incorporation of recognizable IP into virtual spaces allows brands to reach wider audiences and users to connect with favorite characters and brands.

As with licensing in “real life,” it is important to consider the scope of the rights, territory, duration and exclusivity of any licensing agreements. It is also important for brands to register virtual goods. Common International Trademark Classes include Class 9 for audiovisual goods and downloadable material, Class 35 for advertising and marketing services online, and Class 41 for online entertainment and online gaming services. DKNY and Nike, for example, have both recently registered goods in all three of these classes as they seek to expand their digital goods portfolio and announce upcoming collaborations in the metaverse space. As of this writing, there have been no updates to the federal Lanham Act, and Class 9 serves as a catch-all for digital goods, but rights holders should monitor how these trademark classes could shift and if any proposed revisions carve out a separate class for digital goods.

The most notable example of digital goods in the metaverse are Non-Fungible Tokens (NFTs). As we have previously discussed, NFTs are unique, non-replaceable digital objects typically part of the Ethereum blockchain. Blockchains are public ledgers of transactions made with a certain cryptocurrency, and when a transaction is requested with a cryptocurrency such as Ethereum (ETH), a high volume of computers analyze the entire ledger to determine if the user possesses enough of that currency (here, ETH coins) to complete the transaction. Brands may digitize real-world objects or create and sell NFTs of purely digital goods.

NFTs are uniquely situated to play an important role in the metaverse. The public ledger of relevant transactions can make it more difficult to counterfeit a legitimate NFT, and because of this, brands can offer an additional layer of verification to customers that they are buying a true digital Gucci bag or any other digital good. This can allow for a safer resale market, where sellers and buyers can check every transaction against the blockchain to ensure that the digital good connected to an NFT is exactly what it purports to be. However, it is not foolproof, as demonstrated by recent reports of Bored Ape and Mutant Ape thefts, so brands interested in NFTs should not only be aware of the potential benefits but also know how best to manage security risks.

Some of the confusion surrounding NFTs arises because ownership of an NFT does not automatically grant ownership of any underlying content or associated IP rights. Supporters and investors in NFTs compare ownership of an NFT to ownership of a physical work of art: although purchasing the work gives the owner physical possession, it does not necessarily imply ownership any underlying IP rights in the work. For example, one can own a painting by Picasso, but the heirs of the master artist own the copyright underlying the work. It is the heirs of Picasso, not the owner of the painting, who can replicate it, put images on T-shirts, or otherwise exploit the underlying work in derivative and public ways. 

When the original work is digital only, i.e., the NFT, how to manage the underlying rights, such as the right to make copies or prepare a derivative work, it becomes more complicated legally. Critics of NFTs argue that there is a distinction between an original painting and copies of that painting, such as prints, and an NFT that can be recreated by saving the image to one’s computer. The right to save a NFT to a computer, or publicly display it, may follow from the terms of the original NFT acquisition; as a result, brands should be aware of how their purely digital goods might be valued, under what circumstances customers are willing to pay for the NFT, and thus the terms and conditions of the sale or license of the NFT.

More than one thousand applications for trademark registration in the first three months of 2022 included NFT as part of the description of goods and services, as companies and individuals turn their attention to what’s coming up next. Fashion brands especially have made an early entrance to the NFT and metaverse scene. This development reflects the interest of luxury brands to be early adopters and to reflect the need to embrace innovation in order to remain relevant in an increasingly short trend cycle dominated by social media rather than traditional print media. Additionally, the opportunity to strengthen their brand reflects the advantages typically afforded by trademark law, which protects the words and symbols associated with fashion, as opposed to copyright law, which is loath to recognize articles of clothing as copyrightable. However, fashion NFTs may offer a new degree of copyright protection, even for clothing. Any steps that companies can take to strengthen their presence and stake a claim in this new area even as early, and sometimes unsuccessful, experiments, will position brands for the evolution of fashion content in the metaverse.

Fashion in the Metaverse

On March 24, 2022, virtual world browser-based platform Decentraland hosted a fashion week in the metaverse, with luxury brands like Dolce & Gabbana and Tommy Hilfiger in attendance. Attendees could dress their avatars in virtual versions of some designs, often costing thousands of dollars, and watch virtual shows on a digital catwalk. The event was widely covered by the press and was considered an early mainstream opportunity for users to enter and better understand the metaverse. Although generally well-received, some difficulties with hardware, glitches and lags were reported, leading to questions about the technology needed to make these concepts a widely-available reality. Additionally, the requirement to present a crypto wallet prior to attendance turned into a barrier to entry for many and lowered attendance numbers. However, connecting the virtual events with real-life physical events reportedly increased overall engagement, and the event sparked conversation and press about how fashion and luxury brands may move forward in the space.

Many luxury brands have already taken the step to release NFTs and collections of their own, often with very high price points and collaborations with various virtual platforms or digital artists. Gucci, through Gucci Vault, its off-shoot, experimental brand, has released a series of Gucci Grail NFTs, which are minted on Ethereum. As with entrance to Decentraland’s fashion week, there were several requirements for initial entry including a “mint pass” which required that the potential purchaser already own an NFT from a list of projects and additional passes given to those who participated actively in the Gucci online Discord server. While this burdens new entrants, it also reinforces and rewards early adoption of the metaverse and brand affinity. Gucci also sold a virtual bag using Robux currency for $4,000—nearly $1,000 more than the equivalent, physical Gucci bag, answering the question, at least for that fashion house, of the potential value ascribed to a non-tangible good.

Louis Vuitton created a mobile game embedded with NFTs to celebrate its founder’s 200th birthday anniversary, and Burberry collaborated with Mythical Games to launch a virtual world of their own with NFT toys and accessories—both further examples of brands testing the waters and entering into partnerships with established players in the metaverse and cryptocurrency world. Prada and Adidas collaborated to collect and market unique, anonymized NFT artwork. Unusually, rather than requiring some previous crypto experience, additional technology, or a high price point to participate, the press release emphasized that this project was free to join and announced that the artist contributors would maintain full ownership over their own NFT. These various approaches underscore that each brand should have its own strategy for potential collaborators, requirements or barriers to entry, and the assortment of digital goods it intends to release or invest in.

Legal Protections for Brands in the Metaverse

Brands should continue to register, subscribe to trademark watch services, review contracts and licensing agreements and engage when necessary in enforcement actions. They should also be aware of pending and likely lawsuits in the metaverse, especially those which feature recognizable brands. For example, in January 2022 Hermes sued digital artist Mason Rothschilds, whose Birkin bag NFT artwork sold for $23,500 in 2021, followed by another collection of the digital assets. Hermes alleged that virtual Hermes products are examples of fake products in the metaverse and constitute trademark infringement. The case is pending in the Southern District of New York.

Similarly, in February 2022 Nike sued online marketplace StockX for NFTs it is releasing based on Nike shoes. Especially given that these NFTs cannot actually be redeemed for physical shoes, there are novel questions facing courts today on how to best regulate “fake” virtual products; for example, should fake virtual products be prohibited as false designations of origin or trademark dilution; are NFTs products in their own right or merely digital receipts of ownership; what if any role does the first sale doctrine play;, and, arguably most important, do these products cause consumer confusion. Because this area of law is so new and there are few regulatory measures or court decisions to rely upon, drawing parallels between digital world concepts and real-world concepts is key in applying existing IP law to the metaverse. Moving forward, as the law and technologies continue to evolve, questions about what future trademark licensing deals and digital goods in the metaverse look like will adapt as well. Further questions, such as whether a trademark can be deemed famous in the metaverse but not the physical world, will be asked and answered. This area of law is continuously changing and Lutzker & Lutzker is closely following the shifting landscape to help companies and individuals understand both the opportunities and potential pitfalls of trademarks in the metaverse.