Trouble in NFT Paradise – Lessons for Brand Owners

As with many new technologies in the past, questions have arisen as to how traditional IP laws, many parts of which were written in more archaic times, should be applied to NFTs. To put things in perspective, a US judge (Judge Katherine B. Forrest), commenting on the difficulty with adapting copyright law to swiftly-changing technology, famously quipped in 2008 that “[w]hen the Copyright Act was amended in 1976, the words ‘tweet’ and ‘viral’ invoked thoughts of a bird and a disease…”. Whilst it is often copyright law that bears the brunt of these challenges, NFTs have also turned the heat on trademark laws.

We examine two NFT fights that are currently ongoing before the US courts which touch on brand-related issues and distil from them some takeaways for brand owners.

No rest for the wicked

1. Nike v StockX

In Nike Inc. v StockX LLC, 22-cv-983 (SDNY), Nike sued an online marketplace, StockX, for, inter alia, trademark infringement, unfair competition and trademark dilution, for launching an NFT collection tied to actual Nike sneakers.

A key question that arose in the case is whether StockX’s NFTs are mere “claim tickets” to facilitate the trading of the physical sneakers to which they are tied (as StockX claims) or digital products in and of themselves. StockX is arguing that it is using NFTs in the same way e-commerce retailers use images and descriptions of products online. Nike, on the other hand, is contending that StockX’s NFTs are more than mere digital receipts because they are bundled with additional StockX services and benefits, can be redeemed by StockX for a fee thereby depriving the NFT owners of the physical goods, and are also at times sold for many times more than the price of the actual sneaker in a Nike store.

This distinction is important because if the NFTs are mere claim tickets as StockX says, Nike could be prevented from enforcing its rights by virtue of the US “first-sale doctrine”, which is similar to the “exhaustion doctrine” in Singapore and some other parts of the world. The doctrine prescribes that the enforceability of the trademark (or copyright) in a product are exhausted after the product is first sold by or with the authority of the IP owner. If the doctrine applies, Nike may not be able to successfully prevent use of its IP by StockX in connection with the legitimate reselling of Nike sneakers.

2. Hermès v Rothschild

In another case, Hermès International et al. v Mason Rothschild, 22-cv-00384 (SDNY), Hermès sued the creator of a suite of “MetaBirkin” NFTs for, inter alia, infringing its registered trademarks for BIRKIN and the configuration of its iconic BIRKIN handbag, false designation of origin and trademark dilution. The “MetaBirkin” NFTs are based on digital images, created by Rothschild, of Hermès’ Birkin handbags covered in fur, as “a commentary on fashion's history of cruelty to animals, and its current embrace of alternative fur-free and textile initiatives”. To be clear, unlike in the StockX case, these NFTs are not tied to actual handbags.

Rothschild applied for the lawsuit to be dismissed for violating his First Amendment free speech rights, arguing that he is using “MetaBirkins” as the title of his artworks rather than, as Hermès is alleging, to identify the source of his NFTs, as. Under US law, in the context of titles of artistic works, free speech rights would ordinarily defeat any trademark infringement claim unless the use of the mark either had no artistic relevance to the work; or where there was artistic relevance but the use was explicitly misleading as to the source of the works.

However, the NY federal court has refused to dismiss the suit on the basis that both of these issues – that is, whether the use of Hermès’ trademarks had artistic relevance or was explicitly misleading - were issues that had to be fully considered by the court. The lawsuit will therefore proceed to trial (unless the parties settle).

Lessons for brand owners

There are no clear answers as yet to the issues that are before the US courts and, even after the US courts have decided, it remains to be seen whether the courts in Singapore other jurisdictions will adopt a similar approach. Be that as it may, we can decipher some lessons for brand owners from these fights.

1. Consider trademark protection in the Metaverse

To succeed in a trademark infringement claim, the brand owner has to show that the alleged infringing goods or services are identical, or at least similar, to the goods and services covered by the brand owner’s trademark registrations.

Both Nike and Hermès have a string of registrations for physical goods - footwear or handbags, but neither has protection for virtual versions of these goods. Nike had, in October 2021, filed applications to register its marks in in connection with “downloadable virtual goods, namely computer programs featuring footwear” (i.e., digital sneaker NFTs) and “retail store services featuring virtual goods, namely footwear” (i.e., a digital sneaker NFT trading platform). However, these applications are still pending at the time of writing.

As much as brand owners would certainly argue that NFT or other digital versions of their products are extensions of their product lines, albeit in the Metaverse, so that a licence or authorisation is required to trade in such products, it remains to be seen if a court will agree that a virtual version of a good is identical or similar to its physical cousin. The analysis of similarity of goods generally takes into account factors such as the nature of the goods and their respective uses, users and trade channels. A number of these factors would appear to weigh against a finding of similarity between physical and virtual products.

Notably, under trademark law, a mark could be accorded extended protection – for dissimilar goods and services as well – if the brand owner can show that the mark is “well-known” in the jurisdiction in question. However, most brands will find it difficult to surmount the high threshold of proof required. Additionally, whilst a brand owner could rely on alternative causes of action which are not reliant on a showing of goods similarity, these are subject to their own unique requirements and challenges.

Therefore, brand owners may wish to consider extending the protection for their marks to the digital realm - to obtain registrations not just for physical goods and services but also virtual versions of the same. Even if the brand has no interest in expanding its offerings to the virtual realm, these registrations could provide important ammunition to facilitate enforcement against unauthorised use in connection with NFTs and in the Metaverse.

Thinking even further ahead, given the explosion in digital activity in recent years and the potential to exploit their brand assets even more, brand owners may wish to explore the range of practical use cases for NFTs (for instance, e-gaming) and seek protection in the relevant classes to facilitate exploitation and enforcement.

2. Potential challenges with establishing confusion

A key element of claims based on trademark infringement and passing-off (which is a common law tort premised on misrepresentation) is the requirement to establish a likelihood of confusion (that is, that consumers may be confused as to the source of the infringer’s goods or services). In other words, in order to succeed in his claim, a brand owner would need to show that consumers would be misled into believing that the alleged infringing NFT originates from or is somehow related to the brand owner.

However, there could be a plethora of factors which impact the issue of “confusion” which should form part of a brand owner’s considerations when evaluating the merits of any enforcement action - for instance:

• Disclaimers - The presence of a disclaimer on the NFT platform could go some way to dispel possible confusion. For instance, StockX is arguing that its users would not be confused because its website makes it clear that its NFTs are “not affiliated or associated with, sponsored, by, or officially connected to Nike…” and that Nike’s marks are used “solely to refer to the physical product to which [its NFT] corresponds”. Nike, however, contends that this disclaimer is not noticeable to potential buyers of the StockX NFTs and therefore ineffective.
• Identity of the creator – Another consideration is the identity of the creator and whether the offending NFT is offered as part of a line. In particular, the offer by a platform or business of a branded NFT that is part of a line would seem to be more suggestive of some form of collaboration with or endorsement by the brand owner, than an offer by an individual end-user of a standalone NFT.
• Physical NFTs – Physical NFTs are NFTs which are tied to physical goods, such as StockX’s NFTs. This type of NFTs have been touted as being useful in tracking the provenance of and title to goods such as fine art, wine and other collectibles. The more widely physical NFTs are used for such purposes, the more likely that consumers will view them as being mere digital tools to facilitate trading, rather than products in and of themselves, and the less likely that they will be misled into thinking that a NFT linked to a particular branded good must originate from the brand owner.

Ultimately, as all the surrounding circumstances can impact the assessment of likelihood of confusion amongst consumers, brand owners should ensure that they are apprised of the full facts before crafting an appropriate enforcement strategy.

3. Copyright infringement as a possible back-up claim

One other avenue to consider is copyright. Copyright infringement is not reliant on considerations of goods similarity or consumer perceptions but is premised, instead, on the unauthorised reproduction and dissemination of the copyrighted work. As such, if there is a challenge with establishing the elements of the trademark-related causes of action, copyright infringement could serve as an alternative ground of complaint. The main challenges, in this case, lies in tackling possible “fair use” defences and, in some cases, with establishing copyright ownership.

The Singapore Copyright Act 2021 provides for a US-style general fair use defence, which is not purpose-specific but instead looks to a list of non-exhaustive factors including the purpose and character of the alleged infringing use, and its effect on the potential market for or value of the original work, in determining whether a particular use is “fair”. Additionally, whilst there is no equivalent of the US First Amendment (i.e., free speech) rights in Singapore, there is a specific defence of fair use for the purpose of criticism or review.

Such defences are likely to be raised in the NFT scenario. For the general fair use defence, a key question would be whether use of works in connection with NFTs can be said to be “transformative” in the sense that it adds something new and is used for a further purpose or meaning. The specific defence for criticism or review, on the other hand, could apply in a scenario akin to that in the “MetaBirkin” case.

It is also important to note the potential challenges in establishing copyright ownership which can become a bugbear that could derail enforcement efforts.

Whilst Singapore provides a statutory presumption of ownership, this can be challenged by the defendant in good faith, upon which the claimant will have to prove ownership. For many rights owners, this could pose a challenge where there is no clear chain of title or records are patchy, or where the infringing NFTs are based on a fictional character which has been widely depicted or represented, making it difficult to trace the lineage of the particular work or works that have been misused.

Conclusion

Against this backdrop, there is increasing tension that NFTs are starting to lose their lustre given the plethora of legal issues, commercial risk and other uncertainties. Even so, given the relatively low gas fees (to mint an NFT) and the potential promise of high returns, there remains a draw. Brand owners will therefore likely have to deal with this phenomenon for some time to come.

The outcomes of the Nike v StockX and “MetaBirkin” cases will undoubtedly have a significant impact on how brand owners and IP users alike navigate the NFT minefield in the future.

Given the uncertain landscape, brand owners will be well advised to ensure that they have a good grasp of their rights, along with the relevant facts before charging forwards with all guns blazing.

Fundamentally, it is also timely for brand owners to conduct an audit of their existing IP portfolios to identify any gaps in chain of title or protection, and to plug these gaps if necessary, to ensure that they are well placed to tackle the challenges to come as companies exploit what the digital realm has to offer.