Does a Non-Fungible Token (NFT) of Another Company’s Consumer Product Infringe the Product’s Trademark?
By Linnea Vail
In May of 2022, the court in Hermès International, et al. v. Mason Rothschild answered the question above in the affirmative – an artist’s Non-Fungible Tokens (NFTs) based on the Hermès Birkin handbag infringed Hermès’ trademark rights. Trademark owners can escape the uncertainty and expense of dealing with such situations, however, by applying to register their trademarks to cover NFT use.
An artist operating under the name Mason Rothschild produced and sold NFTs that he called MetaBirkins. Each MetaBirkin was a digital image of the Hermès Birkin handbag depicted as if made of fur. Hermès filed a lawsuit against him in federal court in New York, one of the many actions that have already been instituted by trademark owners against NFT holders for trademark infringement.
The central allegations for Hermès was that the NFTs infringed and diluted the Birkin trademark, falsely designated the origin of the NFTs as if they were Hermès-authorized digital products, and injured and diluted Hermès’ business reputation. Essentially, trademark dilution refers to the claim that a third party’s use of a trademark owner’s mark is so similar such that it is likely to reduce the distinctiveness of the mark, harming the consumer’s perception of the mark as well. When Rothschild moved to dismiss the action, the court denied the motion, holding that Hermès had adequately alleged that the MetaBirkin label was explicitly misleading.
The court basically decided that Rothschild’s activities indicated an eye to potential future sales of virtual goods in a metaverse or enhanced reality context, which ultimately weighed heavily against Rothschild. Part of the appeal of the NFT market is the potential to sell and resell multiple goods in this context, and the court felt that it was likely that Rothschild was looking to accomplish this. The court further noted that the increasing prevalence of virtual objects and their potential applications and uses in connection with “metaverse” technologies will require further analysis.
The decision serves as an indicator that trademark rights can extend to NFTs as a medium of communication, and can infringe the rights of the trademark owner. For trademark owners who may use NFTs, it is advisable to apply for registration of the same mark for NFT services. Also, if the trademark includes artwork by an artist who was not the trademark owner, copyright in the artwork must be considered
There is an underlying issue with this, however. Part of the confusion of NFTs is a critical question: who owns the physical equivalent of the digital asset, and the subsequent legal rights attached to it? Purchasers of NFTs typically acquire neither a physical object nor the copyright to a digital one. Also, only an image’s lawful copyright holder can transfer the reproduction rights to that image. Traditionally, a copyright holder owns the exclusive right to reproduce the work, create derivative works based on the work, distribute copies of the work, publicly display the work, perform the work, and, in the case of sound recordings, perform the work publicly by means of a digital audio transmission. None of these rights, unless explicitly stated in the transaction, are conferred upon the buyer of the NFT. An NFT holder does not even maintain ownership of the digital asset itself; in fact, the holder owns a token that merely refers to the underlying work. The value assigned to it is only based on what the market determines it to be, at any given time. For this reason, despite its staggering growth, the NFT market is nonetheless incredibly volatile. The growing popularity of NFTs is due in large part to the growing desire to buy and sell digital artwork at a premium; in fact, the market was estimated to be worth $41 billion in 2021.
Conclusion
Despite the fascination around NFTs and the potential financial upside to them, the market is still incredibly unpredictable. The potential regulatory impacts have far-reaching implications, and it is still not yet clear how the courts will rule on the growing number of lawsuits being filed. It is imperative that organizations take a careful look at the risks of entering the NFT market, with a particularly close eye towards the nuances of intellectual property laws.