United Kingdom February 28 2022
Imagine the scenario: after countless hours spent designing and refining, your brand’s first virtual wearables in the metaverse are minted as NFTs and ready to be sold. You head to bed, nervous, hopeful and excited to see the uptake. Lying awake in bed, curiosity gets the better of you and you open your laptop. The nightmare begins. No sales made and replica after replica popping up as others rip-off your hard work. What do you do?
The metaverse provides an exciting new world of opportunities for businesses, but smooth sailing is not guaranteed. As mainstream brands flock to market new products (such as virtual wearables and accessories) in the metaverse in the form of NFTs (whether on Decentraland, the Sandbox or elsewhere), knock-off NFT products have similarly proliferated. By way of example, Mason Rothschild, the seller of the “MetaBirkins” bag (itself the subject of trade mark infringement proceedings by Hermès), complained that more and more fake MetaBirkins were sold every hour, with approximately $35,000-$40,000 sold in counterfeits.
In the real world, making a counterfeit product takes a certain amount of skill and effort. Re-creating a pair of designer trainers is just not feasible or practical for the average consumer. Counterfeiters need some kind of infrastructure to create replica products at a scale that will reap financial reward. The same practical and financial constraints are unlikely to apply in the metaverse. All a consumer will need to make their virtual knock-off is a computer, an Internet connection and a sprinkle of patience. And unlike their real-world equivalents, copycat NFTs may be virtually indistinguishable from that produced by the originating business.
In a new world where end consumers can make their own designer products, how best can brands protect and promote the use of their brand names and logos?
Trade mark and copyright infringement
UK trade mark law provides protection against counterfeits through its double identity infringement provision at section 10(1) Trade Marks Act 1994 (“TMA”). If a brand has a registered trade mark covering the relevant virtual goods, it would appear – at least at first glance – relatively straightforward to substantiate an infringement claim.
But the TMA is focused on use of the mark in the course of trade. Where a digital counterfeit in the form of an NFT is being offered for sale on a platform such as OpenSea, then the issue is unlikely to be contentious: use in the course of trade will be established. However, in the event tech-savvy consumers simply wish to bling up their avatars by creating digital equivalents of a brand’s physical or virtual products, the question therefore arises as to whether such apparent personal use could be said to be use in the course of trade.
By contrast there is no such prerequisite for use in the course of trade under the UK’s copyright laws (although much infringement does have a commercial motivation). Duplication of an existing NFT could give rise to copyright infringement through reproduction of the NFT code and/or reproduction of the underlying work, as well as a communication to the public (particularly where the underlying work of the NFT is held on a host site such as the InterPlanetary File System rather than being uploaded to the blockchain itself). However, even in cases such as these, there is still the practical difficulty of identifying/locating the infringer and jurisdictional issues over where to bring the claim, both of which, in some cases, make formal litigation unfeasible.
Notice and takedown
NFT operators such as OpenSea have shown a willingness to take down advertisements of infringing content on their platforms when notified by brands, which may also be the simplest and most cost-effective way of dealing with digital counterfeits (subject to the legal issues outlined above). However, notice and takedown is not without its challenges. An effective notice and takedown procedure typically requires the brand owner to invest in a watch service to monitor infringing items. The onus then falls on NFT operators to respond quickly and effectively to takedown requests. In addition, there remains a risk that NFT counterfeiters will simply move to different NFT platforms or mint NFTs outside of a mainstream platform. Finally, for infringing items purchased already, a notice and takedown method will be ineffective. NFTs stored on the blockchain are immutable and it is unclear whether an owner of an infringing item can be forced into returning the item.
Change marketing strategy
Businesses have long tackled counterfeits in the real world, but there is some (reluctant) acceptance from brands that removing all counterfeits may be impossible. In the early stages of the metaverse, businesses could choose to use the sale of virtual goods as a way to boost brand image. Experiences and real-world goods tied to NFTs are a simple way to distinguish legitimate, authorised, items from digital counterfeits and are likely to increase customer loyalty in the process. Another option is to consider wearables and other virtual goods in the metaverse as a form of advertising: if everyone in the metaverse is wearing a brand’s virtual clothing, the brand’s real-world clothing is likely to receive an uptick in sales.
New technological methods may develop to reduce the attractiveness of counterfeits. For example, in 2021, various luxury brands including Prada joined together to create a blockchain tool to verify the authenticity of the goods they sell, to prevent counterfeiters, and to make their products easily traceable. Developed authentication tools in the metaverse seems like a logical step.