Misuse of IPRs a major challenge in metaverse

It is clear that while the present legal and intellectual property framework has largely accommodated legal challenges posed by Web3 and crypto assets. (Representative image)

Web3, the new evolutionary stage of the internet, presents itself with the core concept of decentralisation, immutability and ownership. Key elements of Web3 include blockchain, smart contracts, crypto-currency, non-fungible tokens (NFTs), and the metaverse. NFTs and the metaverse are poised to change how businesses, especially those related to finance, retail and entertainment operate. NFTs have moved from being mere collectibles to having multiple real-world use cases. As the adoption of NFTs and other Web3 elements by businesses grows, legal issues related to intellectual property rights (IPRs), which may arise due to the decentralised and anonymous nature of this technology, will also pose challenges for various stakeholders.

NFTs record digital ownership and store it on the blockchain. They are a significant element of the metaverse economy as they enable the authentication of possessions, property and even identity. NFTs provide a unique means for artists and creators in securing, sharing, and monetising their work. This is already leading to a fundamental change in the music industry where song NFTs are gaining popularity, allowing artists to become less reliant on big producers and studios. Besides creative industries, NFTs have been used in gaming, retail, and even as proof of ownership in the case of the fractional ownership of property and other assets. Companies like Nike and several other luxury brands are using the opportunities in the metaverse and NFT space to promote and sell their virtual products. Nike recently launched .Swoosh, a metaverse marketplace, that allows users to connect with each other and conduct activities, obtain virtual products and engage in other immersive experiences. The size of the metaverse economy is poised to grow to $800 billion by 2024 and $3 trillion by 2031.

The nature of NFTs and their use in the metaverse has led to a proliferation of IPR issues related to copyrights and trademarks. While NFTs provide creators and rights holders with a unique means to monetise underlying intellectual property, purchasers of NFTs often face real challenges in terms of uncertainty regarding rights that have actually accrued to them with the purchase. There have been instances where NFT marketplace platforms have been involved in unilaterally changing the terms associated with NFTs without the consent of the community or users. It must be noted that NFTs by themselves have no value and they get value from the underlying asset attached to them. Typically, NFTs come with different terms and conditions and the following types of licenses are predominantly granted through NFTs to the purchasers:

a)License granting unfettered commercial rights;
b)License granting limited commercial rights;
c)License granting rights for personal use only; and
d)Creative commons where no personal right is granted and everything is in the public domain

Despite being a new and novel technology, there have been numerous legal cases on trademark and copyright infringement globally, as the space is rife with violations of real-world trademarks and copyrights. One can view NFTs with unauthorised images of well-known celebrities on various NFT marketplaces. Similarly, there is a blatant and unauthorised use of well-known trademarks by third parties in the metaverse.

IPR Challenges

Earlier this year, shoe manufacturer ike initiated a lawsuit against online sneaker retailer StockX for launching an NFT that it felt was in violation of its trademark. In January 2022, StockX launched the Vault NFT collection, where each NFT in the vault was tied to a physical item that the online retailer sold on its platform and had already acquired the same for resale. Nike alleged that StockX minting NFT tied to its trademark amounts to infringement of its intellectual property. StockX argued that since the NFT is tied to an authentic physical product, its service was no different from any e-commerce seller or marketplace that uses images of products to sell. It has also relied on the doctrine that no trademark rights remain attached to a genuine product once it is legally sold and as a purchaser, it was free to further sell the product as it deems fit.

In the case of Hermes versus Rothschild, the luxury goods retailer Hermes sued artist Mason Rothschild for trademark infringement of its famous BIRKIN trademark. Rothschild had added the generic prefix ‘meta” to it and launched MetaBirkins as an NFT containing a digital image of the faux-fur covered Hermès Birkin handbags.

One of the most famous NFT projects Bored Ape Yacht Club (BYAC) sued Ryder Ripps, a digital artist and satirist, when Ripps offered an identical NFT collection which he called the RR/BYAC collection. Yuga Labs, the plaintiff, sued for trademark infringement relying on the use of the BYAC trademark by Ripps. Although BYAC images are works of art, Yuga relied on trademark rights rather than copyright infringement claims for a variety of reasons - the NFT licenses granted to purchasers were of the unfettered type with most rights vesting in the BYAC copyrights transferred to the purchasers of NFTs, and the US copyright laws do not recognise the copyright in the images generated by algorithms and require human authorship.

Another issue before the courts has been the status of NFTs as property and the anonymous nature of parties in most cases which leads to difficulty in identifying the culprits and service of legal documents in cases before the courts. Recently the Singapore High Court in Janesh Rajkumar versus Chefpierre recognised NFTs as legal property on the grounds that it is definable, capable of being recognised by third parties, capable of being assumed by third parties, and possessing some degree of permanence. Anonymous and decentralised nature of ownership of digital assets have led to courts in the UK and the US to order the service of documents via airdropping as NFTs to wallets to which the stolen NFTs were transferred. Further, the courts have ordered various NFT wallet and marketplace service providers to disclose the details of the owners of anonymous wallets and account holders.

It is clear that while the present legal and intellectual property framework has largely accommodated legal challenges posed by Web3 and crypto assets, there remains a key challenge to the effective legal framework namely, jurisdiction, anonymous identities, tracking of infringers and enforcement of court orders. Lastly, it is imperative that NFT creators and purchasers be aware of their legal rights and obligations.

Siddharth Mahajan is Partner & Pratyush Gupta is Associate at Athena Legal, New Delhi. Views are personal and do not represent the stand of this publication.