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From Louis Vuitton to Gucci to Nike, leading brands are both leading the charge into the metaverse and defending their brands from incursions from it.

Fashion brands have shaped markets and clothing trends for many decades, and it appears that this trend will continue as we move into the metaverse. Several luxury fashion giants are leading the charge into the metaverse and will be pushing the virtual boundaries on the potential of blockchain as it relates to NFT technology in the fashion space.

Blockchain technology has enabled rapid development in the digital and virtual space, creating a decentralized mechanism to track the ownership and authenticity of digital assets. In a world in which digital items are proliferating at a blistering pace, and in which we are spending more and more time online and in virtual spaces, like video games and even Zoom meetings, assets that you can own and use in the metaverse are becoming more and more attractive.

One application of blockchain is as a holding space for such digital assets in the form of non-fungible tokens, referred to as NFTs. NFTs are blockchain-based tokens that represent a unique asset like a piece of art, media, or other digital content. An NFT can be thought of as a digital certificate of ownership and authenticity for a given asset, whether digital or physical. While this emerging technology allows for creative ideas to be implemented, there are some potential drawbacks and plenty of risk for the nascent technology at this point in time. For example, the World Intellectual Property Organization asserts the following:

“In some way, all NFTs could be seen as a form of registration, insofar as blockchain could operate as an immutable record of ownership claims, acting as a means of verifying or determining authenticity. But this idea quickly runs into practical problems, not least, the fact that anyone with sufficient technical knowledge and the appropriate tools can generate their own token, and this token can include any information that is entered by the author. This means that anyone can make erroneous ownership claims and write them into the blockchain.”

While the prospect of theft, fraud and other potential risks may deter some industries from participating, the fashion industry seems to be full steam ahead and “all in” on the metaverse and blockchain.

More specifically, a number of major luxury brands have recently incorporated NFTs in promoting, selling, and increasing brand awareness around their products:

• For example, in celebration of its 200th anniversary, in August 2021, Louis Vuitton released “Louis the Game”, a new interactive phone app and video game on the scale of Epic Game’s famous Fortnite game, in which the main character must collect 200 candles to celebrate Louis Vuitton’s 200th birthday and can discover 30 embedded NFTs in the game. These digital collectibles are only available through the game and serve to encourage individuals to interact with the Louis Vuitton brand and products and further spread its brand.

• Similarly, in May 2021, Gucci launched an interactive space in the metaverse in partnership with Roblox, a major game-building platform, and continues to build on its virtual presence, raising brand awareness with a younger generation and an increasing market of consumers.

• In an effort to promote diversity and equitable representation in the metaverse and using NFTs, L’Oreal launched an NFT campaign celebrating women by hiring female NFT artists and centering its marketing around the gender disparity in the NFT industry. To further increase diversity in web3 spaces, L’Oreal’s subsidiary NYX is partnering with The Sandbox and People of Crypto (POC), to launch an avatar collection with different color shades, ethnicities, sexual orientations, and gender identifications. This initiative seeks to represent various minorities and also demonstrates how important skin tones and makeup can be for web3 users to design their ideal avatar. Id.

In addition to purchasing virtual real estate and creatively fusing the metaverse with reality, brands have also begun pursuing trademark registrations for use within the metaverse. This could have a number of implications in the metaverse and reality in terms of advertising and use of big brand products and can spark optimism about the projected profitability of engaging with brands virtually in video games and other metaverse spaces. For example, Nike and McDonald’s are two major brands who have purchased trademark registrations in connection with use in the metaverse. The possibilities are broad – whether to increase brand awareness or to enable avatars in virtual spaces to enhance their wardrobe or to earn or purchase possessions linked to brands, like Nike’s sneakers or a McDonald’s Happy Meal.

In anticipation of increased profitability of NFTs and other virtual goods that can be traded and utilized across platforms throughout the metaverse, other companies have also started investing in NFTs of various digital products with the hope that they will be utilized across various gaming platforms and continue to increase in value. A venture capital fund, originating out of the Chicago-based firm Sfermion, plans to invest in virtual ice swords and other NFTs designed for video games and has already raised one fifth of its proposed $100 million in order to begin investing in the NFT space. Sfermion plans to hold onto the tokens until the assets’ value appreciates and then allow them to be used in video game tournaments. (VC Fund Will Invest in NFT Swords and Other Video Game Items.) Sfermion is also exploring additional funds in NFT land and consumer categories like collectibles, fashion, and music. This growing interest in the venture capital sector is only another indicator that industries are placing large value on increased interest in NFTs and their vast potential – from metaverse real estate opportunities, to digital, traceable titles connected to physical products, all tied to more advertising and additional brand awareness in virtual space.

Where big brands go, trademark skirmishes inevitably follow, and the metaverse and NFT space appears to be no exception. Two high profile pending cases, Hermes Int’l v. Rothschild, S.D.N.Y., No. 1:22-cv-00384, and Nike, Inc. v. StockX LLC, S.D.N.Y., No. 1:22-cv-000983-VEC, have litigants grappling with trademark issues raised by the sale of third party NFTs that reference a brand’s product.

In the Hermes Int’l case, Hermes argues that an artist, Mason Rothschild, is infringing on its trademarked luxury Birkin handbag by selling NFTs of fur-covered handbags that he named “MetaBirkins.” Hermes argues that the MetaBirkins NFTs are replicas of Hermes’ luxury Birkin handbag, and that Rothschild’s NFT product is causing consumer confusion. In response, Rothschild filed a motion to dismiss claiming that his depiction of the handbags constitutes art and qualifies for protection under the First Amendment. According to Rothschild’s attorney, “At the end of the day, the legal analysis rises and falls on the fact that the NFTs are connected to artwork, not commodities like an actual handbag. . . [MetaBirkins] are just static digital images of fanciful Birkin bags – that is, they’re artworks protected by the First Amendment.”

The court agreed that the MetaBirkins NFTs were entitled to First Amendment protections and applied the Rogers test to determine whether the title of the NFTs was “explicitly misleading” so as to infringe on Hermes’ trademark. In Rogers v. Grimaldi, 875 F. 2d 994 (2d Cir. 1989), the court applied a balancing test to determine whether “the public interest in avoiding consumer confusion outweighs the public interest in free expression.” Id. at 999. Specifically, when evaluating a title, under the Rogers test, a court will address whether a title has no artistic relevance to the underlying work of art, or if the court determines that the title has some artistic relevance, will address whether “the title explicitly misleads as to the source or the content of the work.” Id. However, the court in the Hermes case noted that in order to determine whether there was a likelihood of confusion that the MetaBirkins NFT title was misleading, the likelihood of confusion would need to be “sufficiently compelling to outweigh the public interest in free expression.” Ultimately, the court did not grant Rothschild’s motion to dismiss, holding that Hermes sufficiently pled that Rothschild’s use of “MetaBirkins” could be explicitly misleading.

In the Nike, Inc. v. StockX LLC case, Nike is seeking injunctive relief, damages, and declaratory judgment that StockX LLC (“StockX”) has infringed on Nike’s trademarks and has included a number of other causes of action, including false designation of origin/unfair competition, trademark dilution, injury to business reputation, counterfeiting and false advertising. StockX, the operator of a market resale platform similar to eBay, represents that it offers authentication services of the various luxury goods, sneakers, apparel, electronics and other collectibles that its platform resells. Although historically StockX does not have its own inventory, StockX has begun marketing and selling a set of Vault NFTs (including pictures of Nike sneakers, SwooshTM and all). Each Vault NFT corresponds to physical pair of sneakers that StockX owns and keeps in its warehouses. Nike, on the other hand, alleges that StockX does not have the right to create and sell Vault NFTs of Nike’s products, because that trades on Nike’s brand’s value and constitutes trademark infringement. In addition, Nike argues that StockX’s marketing and selling of its new Vault NFTs has caused much confusion among consumers, and that StockX’s actions threaten to dilute Nike’s brand and goodwill among its customers. Nike seeks permanent injunctive relief enjoining StockX from manufacturing, minting, promoting or otherwise dealing in any NFT products under Nike’s Asserted Marks or any symbols that are likely to cause confusion or deceive people into thinking that StockX’s products are affiliated with or authorized by Nike.

Meanwhile, in its Answer to the original Complaint, StockX alleged that while most NFTs are tied to digital art and other products, StockX’s Vault NFTs are tied to a physical product and enable secondary trading on StockX to “[be] more efficient, track ownership of goods, and cut out unnecessary costs and fees for customers.” StockX further argues that the process of maintaining a Vault NFT in place of the physical item for sale is to increase efficiency and be able to track a previously authenticated product – for those customers who want to trade current culture products but do not want to take physical possession of those products for use.  StockX also describes the Vault NFTs as a “claim ticket, or a ‘key’ to access the underlying Stored [physical] Item” in StockX’s possession.  StockX Answer, Preliminary Statement at *3. The Vault NFTs can also not be “traded separately, or decoupled, from ownership of the underlying Stored Item.” Id. at *7-8.  Accordingly, StockX argues its use of Nike’s images constitutes nominative fair use (a fair use doctrine that allows reference to a third-party brand when naming or referring to that brand). StockX asserts that its utilization of Vault NFTs are analogous to “major e-commerce retailers and marketplaces who use images and descriptions of products to sell physical sneakers and other goods [without confusion] every [] day.” Id.

Now the court must decide which theory will prevail. Ultimately, while this case is still in the preliminary pleading stage, the issues presented in this case and others to follow will have the potential to shape the industry and to better define how the law will function at the intersection of trademark law and NFTs.  

Regardless of how the courts rule in this first set of cases, they illustrate that NFTs and the metaverse can raise some difficult issues for brands. In addition, these disputes make clear that the strong and informed legal guidance from the court and policymakers will be critical to support healthy growth and frameworks for this exploding technology to thrive and benefit communities and markets in this space.