On February 9, the Wall Street Journal reported a “victory” for intellectual Property (IP) rights, with the subhead: “Case Seen as test of how a company can exercise its IP rights against virtual assets.”
Okay, we kind of get that: This is about assets that exist in cyberspace. The French luxury brand, Hermès International SA, had gone to federal court in Manhattan to sue an “entrepreneur and artist,” Mason Rothschild, and won modest damages ($133,000)—but “the legal principle was large.” The court upheld Hermès right to the “Birkin” trademark in cyberspace.
The story quoted Felicia Boyd, an attorney with Norton Rose Fulbright LLP, as saying that brands like Hermès had sought clarity on the their legal rights “as virtual reality expands.” In this case? Their legal rights regarding non-fungible tokens (NFT) that can be “transferred to digital worlds in the metaverse.”
The concept of IP has been repeatedly expanded and redefined. Readers once read stories about “property rights” in the airwaves, including rights to specific frequencies. David Henderson writes in “How the Electronic Spectrum Became Politicized:
We learn how Hoover’s decision [not to enforce property rights to the airwaves] started a path leading to government control that is still with us today. [Thomas Winslow] Hazlett shows that the FCC has, for over 80 years, set itself up as a central planner, creating the usual problems that central planning creates. The planners are in the dark about the best uses of the electromagnetic spectrum, but that hasn’t stopped them from planning. Hazlett shows how FCC regulation slowed FM radio, cable television, and cellular phones by decades, destroying many hundreds of billions of dollars of value. And, as a bonus, FCC regulation reduced free speech on radio and TV, something that still exists today.
The same confusion could engulf cyberspace. That is why the decision in favor of Hermès may qualify as “landmark,” the first trial ever of the NFT/intellectual property nexus.
So, what are nonfungible assets (NFTs)? On the blockchain—a online distributed ledger with the same version on the computer of every participant so all transactions and exchanges are known to very participant—“tokens” have been currency. The prime example is Bitcoin, but there are legion others. These tokens, created by “mining” under a strictly defined set of rules, are used to pay for goods, settle contracts, pay debts, and can be exchanged for other tokens or national currencies at a rate reset continuously on exchanges like Coinbase. There is a huge market for these cryptocurrencies, establishing their value at any given moment.
An innovation introduced to the blockchain has been non-fungible tokens (NFTs). As just explained, blockchain tokens like Bitcoin are fungible—that is, exchangeable at a known rate for other tokens or for national currencies. NFTs are not fungible; they are unique. In some cases, they represent ownership of “things” and the blockchain makes it possible to give each a unique, unduplicatable identifier. They can be a digital “chit” for a piece of real estate or a share in a company or collectibles. The advantage is that this property can be exchanged without a broker, or a commission, online.
NTFs also can be valuable and collectible in themselves. An artist creates a certain digital image, an “artwork,” in the form of an NTF. Each instance of the image is a unique token, a digitally defined concrete that no one can duplicate. Even if there are thousands that look the same. What the artist sued by Hermès created is called a “MetaBerkin.”
NTFs began in a small way in 2014 with a design tokenized by Kevin McKoy on a blockchain. Every blockchain and every token is created to conform with a standard. The most popular and powerful standard is Ethereum, which specifies all rules and requirements of a blockchain, including, for example, transfer of ownership and confirmation of transactions.
With this foundation, by 2021, a group of NFTs by a digital artist, Beeple, sold for more than $69 million—at that time, the most expensive digital art ever sold. The artwork sold was a collage of Beeple’s own work. Subsequently, tokens of the work of photographers, sports celebrity art, trading cards, ownership in virtual worlds (want to own an avatar?), art, other collectibles, domain names, and music all were tokenized—made into unique property, registered, and verified on a blockchain ledger. NFTs became a hot business.
Hermès sued Mason Rothchild for using the image of the Hermès Birkin handbag, released in 1986 and today a symbol of luxury with a price tag beginning at $12,000 but in some case as high as $200,000. It is an icon of luxury spending.
Mr. Rothchild transferred an identifiable but cartoonish version of the Berkin image to an NFT. To own this NFT meant that you owned one unique image of a Birkin handbag called the MetaBerkin. Rothchild launched a frenzied marketing campaign, raised financial backing, and sold some 100 hundred MetaBirkins. The first few sold for about $500, but their value soared, and they began to sell for the same price as the real Birkin handbags. (It is not within the scope of this article to speculate on the motives of buyers of these NFT artworks.)
Hermès argued in court that Mr. Rothchild was profiting unlawfully from the brand-recognition of Birkin—in effect, selling the company’s trademarked product in the virtual marketplace. And undercutting the company’s potential market if it did enter the virtual marketplace. Bloomberg reports that Hermès filed suit when a survey “found a net confusion rate of 18.7 percent among potential NFT buyers.”
Mr. Rothchild and his attorneys disputed the accuracy of the survey but argued, above all, that Mr. Rothchild is an artist creating work protected by the First Amendment to the U.S. Constitution. His work is protected as free expression, they claimed, making a socially significant statement about “conspicuous consumption.”
During the trial, Mr. Rothschild’s attorneys argued that the brand’s trademark rights didn’t apply to his series of MetaBirkins just as trademark rights did not apply to the artworks of Andy Warhol, who depicted consumer products.
Commenting on the jury’s decision, Rothchild’s attorney, Rhett Millsaps, lamented: “Great day for big brands. Terrible day for artists and the First Amendment.” He went on to say that big Hermès is picking on individual artists.
Mr. Rothschild called the jury’s decision the result of a broken justice system, vowing: “This is far from over.”
In fact, however, companies such as Nike and Miramax LLC are doing or planning the same thing as Mr. Rothchild: to create NFTs of their products to market just as the MetaBirkin “art” is marketed. Except they view it as marketing a different version of their trademarked product, not creating art. Hermès told the jury that it does not yet sell NFTs but has been developing plans to do so and MetaBirkins harmed its ability to break into the market.
If Mr. Rothchild had won, said one IP attorney, Maurico Uribe, with the firm of Knobbe Martens, there would have been significant disruptions in IP law. In other words, it would have been open season for “artists” using brand images and company reputations to sell high-priced digital “knockoffs” of their products online.
Did Mr. Rothchild incorporate the Hermès Birkin image into his “digital art” to make a point about conspicuous consumption? And only incidentally because of the huge bucks involved in selling “virtual” ownership of a Birkin bag? Hermes attorneys cited emails Mr. Rothchild sent to potential backer saying “We’re sitting on a potential goldmine.”
The blockchain can create “virtual assets” but if their market value depends on the market value of brands created and promoted by companies in the real world, then the value of intellectual property created by Hermès or any other company is being stolen.
The issue at trial became the “blurred line” between the right to artistic expression under the First Amendment and property rights. The jury decided that the issue was property. To turn to philosophy for a moment, “artistic or intellectual rights” do not trump property rights. That is a false premise based on the mind-body dichotomy.
The complexity, and the blurred lines, arose because the alleged artistic creation was in cyberspace, and sold on a blockchain. The did not seem to baffle the jury, however, which decided that the monetary value of what the artist sold had been created by Hermès.
The decision seems an initial promising victory for intellectual property rights in a new era of complexity introduced by new technology. But either juries will have to draw new “bright lines” for intellectual property in virtual reality or Congress will barge in as always. It is a fond hope that Congress will take the approach of clarifying the application of property rights instead of creating a new field of government regulation so that bureaucrats can call the shots.
Walter Donway is an author and writer with more than a dozen books available on Amazon and an editor of the e-zine Savvy Street. He was program officer or director at two leading New York City foundations in the healthcare field: The Commonwealth Fund and the Dana Foundation. He has published almost two dozen articles in the Blockchain Healthcare Review.