NFTs and trademark law – Protection of IP rights in the digital space

For large parts of human history, we have defined ourselves by the things we wear. From trying to score the latest pair of Air Jordan shoes on the drop to high-end designer brands, what we choose to wear is often a form of self-expression. As blockchain technology and NFTs have become more widespread, fashion brands have sought to take advantage of this new technology by “starting to create and offer digital copies of their real products to put in digital fashion shows or otherwise use in the metaverse.”[1] As with many Internet advancements, the rise of NFTs has led to cases of cybersquatting and potential trademark infringement, but as of February 8, 2023, no US court had rendered any decision to answer this question

Overview of the dispute

In December 2021, Mason Rothschild created a series of non-fungible tokens (NFTs) titled “MetaBirkins.”[2] These NFTs depicted an image of a faux fur bag similar to the world famous Hermès Birkin bag. Rothschild described his NFTs as “a tribute to Hermès’ most famous bag, the Birkin, one of the most exclusive, well-crafted luxury accessories.”[3] Rothschild told Yahoo Finance “for me, there is nothing more iconic than the Hermès Birkin bag … I wanted to see as an experiment whether I could create the same kind of illusion that it has in real life as a digital item.”[4] Rothschild created and sold 100’s of NFTs, some selling for tens of thousands of dollars.[5]

On January 14, 2022, Hermès International filed a complaint in the US District Court for the Southern District of New York against Rothschild for trademark infringement, trademark dilution and cybersquatting.[6] In March 2022, Rothschild moved to dismiss Hermès’ amended complaint for failure to state a claim upon which relief may be granted under the Federal Rules of Civil Procedure.[7]

In determining whether the NFTs infringed the Hermès trademarks, the court agreed with Rothschild that the test outlined in Rogers v. Grimaldi[8]where the First Amendment protects artistically expressive use of a trademark (and thus is not infringing), should be used in contrast to Gruner + Jahr[9] test that Hermès advocated.[10] Rothschild claimed that his NFTs satisfied both parts of the two parts Rogers test because: the use of the trademark (1) had some artistic relevance and (2) was not explicitly misleading in serving as a source identifier for the NFTs.[11]

On this first motion to dismiss based on the artistic relevance of Rogers test, the court found that Hermès’ complaint contained “sufficient allegations that Rothschild fully intended to associate the ‘MetaBirkins’ brand with the popularity and goodwill of Hermès’ Birkin brand, rather than intending an artistic association.[12] As to the plainly deceptive scope, the court found that, like the artistic association claim, Hermès’ complaint contained sufficient allegations of plainly misleading to allow the court to deny the motion to dismiss the trademark claims against Rothschild.[13] As to the other claims of trademark dilution and cybersquatting, the court held that they rose and fell with Rothschild’s First Amendment defenses to the infringement claims and therefore denied the motion to dismiss on similar grounds.[14]

Both Hermès and Rothschild filed cross-motions for summary judgment, which were denied on December 30, 2022.[15] In deciding these cross-claims, the court again used Rogers test to evaluate the claims of trademark infringement.[16] By explaining Rogers test, the court said that, consistent with the judgments of other district courts, “as long as the plaintiff’s trademark is used to promote plausibly expressive purposes, and not to mislead consumers about the origin of a product or imply that the plaintiff endorsed or is associated with it, it protects first added this usage.” ID. The court reasoned that Rothschild’s MetaBirkins could be seen as a form of artistic expression, and for that reason Rogers the test was correct.[17]

The court first analyzed the case using the “artistic relevance” factor from Rogers test. This is a bar easily met, as “it is fulfilled ‘with less [use of the mark] has no artistic relevance to the underlying work at all.”[18] But when a trademark is used solely to exploit its public value, relevance will not be met.[19] Because it was not legally clear that the mark was being used for exploitative purposes, the court denied both parties’ motions for summary judgment on this issue.[20]

The court then analyzed the case under the “explicitly misleading” prong.[21] A work will be explicitly misleading when it leads the public to believe that the work was the creation or authorized work of the trademark owner.[22] Courts use the likelihood of confusion factors below Polaroids[23] to decide whether the work was expressly misleading.[24] The court again denied the cross-motions for summary judgment on this issue, concluding that Polaroids Factors are fact intensive and there were genuine issues of material fact.[25]

After both parties’ motions for summary judgment were denied, the case went to trial before a jury. On February 8, 2023, a nine-person jury returned the first ever verdict in a trial involving the intersection of NFTs and trademark rights.[26] The jury found in favor of Hermès, finding Rothschild liable for trademark infringement, trademark dilution and cybersquatting.[27] The jury also ruled that the First Amendment did not protect the MetaBirkin NFTs.[28]

On March 13, 2023, Rothschild filed a motion for judgment as a matter of law or a new trial.[29] In this motion, Rothschild claims that the district court judge gave improper instructions to the jury, which resulted in the findings against him.[30] It is expected that Rothschild will appeal the case if this proposal is rejected.

Implications

As with many landmark cases, the question for most people is how this decision affects them. Although it is a victory for Hermès, many questions remain unanswered when it comes to intellectual property rights in the virtual space. One takeaway is that the same intellectual property rules that govern goods in the physical world exist in the metaverse.[31] And many companies, especially the more well-known brands, have applied for or obtained trademark registrations of their names in classes of goods that include those in the virtual world, such as NFTs.[32]