'BAD' insights: IP rights in the metaverse

Welcome to the latest episode of Gowling WLG's Global Intellectual Property podcast where we discuss a range of topics to help you protect your brands, creations and inventions.

Charlie Bond: Hello. Thank you for listening to this Brands and Designs Podcast on the metaverse. My name is Charlie Bond and I am a principal associate in the Gowling WLG IP team. My practice spans all IP rights but focuses more on brands.

Lucy Singer: Hi. My name is Lucy Singer. I am an associate in the IP team. I work also across a variety of IP rights, but I am currently honing in on the world of brands and advertising.

Charlie: So, now we have introduced ourselves, we will get into the nitty gritty. As you will likely know, there is a lot of jargon associated with this topic, so hopefully by the end of the podcast you will be better equipped to understand what is being discussed when the metaverse crops up. In this Podcast, we will be covering three things: firstly terminology, so the basic terminology associated with the metaverse. Some of you may be very familiar with these terms but others will not and this will hopefully mean we are all on a level playing field in the future. Secondly, what is the metaverse? - We will then move on to discussing what the metaverse is conceptually, how it will or may work as well as where it has actually got to. And then lastly, IP rights and the metaverse, so we will take a high level look at how the different IP rights are involved in the metaverse.

So without further ado, let's get our digital swimming costumes on and take a dip in the ocean of the metaverse.

Lucy: So, there are a lot buzzwords associated with the metaverse, which are continuously thrown around in discussion so we are going to begin with a quick rundown of these as they are key to understanding the concepts underlying the metaverse. So, the first term is blockchain. This is probably a more familiar one by now. In essence, blockchain is a technology that permanently records transactions and it does so in a public database known as a ledger. This technology allows the same data to be stored globally on thousands of servers with any network user being able to see all the entries that appear at any time in a public blockchain - though certain blockchains can also be private. Blockchain technology is useful because it is a proven and robust method which tracks anything involving transactions or ownership. The core aspect of blockchain is decentralisation. so blockchain is preferred as there is no vulnerable point of control, which makes a blockchain network very difficult to fall or gain control. As we will come to later, the metaverse will not be built by a single company but it is instead conceived by multiple networks. so this decentralisation aspect provided by a blockchain is vital in allowing proof of ownership assets across these worlds. Users therefore have little incentive to purchase digital assets without this and blockchain will play a central role in enabling the metaverse to become a reality.

Charlie: Perhaps less familiar is the concept of a node. In order to understand this we need to look at how a blockchain network functions. A blockchain is nothing more than a growing chain of blocks or records. Each of which holds information about transactions taking place. These are presented in chronological order. The ledger then records these transactions and this information is duplicated across the entire network on the blockchain. Each block in the chain contains a number of transactions and therefore every time a new transaction occurs on the blockchain, a record of that transaction is added to every blockchain's ledger. Network nodes are responsible for the correctness and reliability of storing the entered data in the distributed ledger. Each node can store a complete copy of the distributor ledger, thanks to the blockchain nodes any user can access the data and can view all transactions on the network.

Lucy: Next up is cryptocurrency. In simple terms cryptocurrency is the implementation of blockchain for the purposes of currency using the technology to track transactions made in that currency. The currency then basically takes advantage of the decentralisation and transparency of the blockchain. This is perhaps the most famous, lucrative (and/or ruinest depending on your perspective) form of blockchain. The most well-known of these is of course bitcoin but there are now innumerable others. It is speculated that cryptocurrencies will be widely used in the metaverse environment for much the same reason as blockchain – there decentralisation enables consistency across the different world and their security makes them ideal for the job.

Charlie: NFTs. NFT is an acronym for non-fungible tokens. Non- fungible tokens are digital tokens that are transferrable between two people but unlike other digital assets are not inter-changeable. Think of them as a crypto Picasso rather than a crypto pound. Like cryptocurrency, each NFT is issued or minted and its ownership tracked and verified using blockchain. NFTs are therefore just metadata files that refer to a digital version of a particular work of art or any other assets stored on a blockchain. It is speculated that they will provide the bridge between real and virtual property, enabling users to conclusively prove ownership of a virtual good, which they can then use or display on their digital avatar in the metaverse. For those unaware, an avatar is simply a digital version of yourself or a character you create in a digital world.

NFTs also create scarcity in the digital world, as NFTs themselves cannot be duplicated, although it is worth noting that the asset underlying NFT certainly can. NFTs have seen an extreme gain in popularity recently and I am sure many of you have seen the headlines about how much they can fetch on the open market. Some of you may have seen that Damian Hurst made artworks in both NFT and material form and buyers had to choose which they wanted with the other being destroyed. I am somewhat sceptical about the value of NFTs but I do think this represented a genuine value because in this case if the buyer opted for an NFT then the underlying artwork no longer existed.

NFTs are not a perfect solution to ownership of virtual goods, people expect that transferring an NFT would also transfer ownership of the underlying artwork, but this is not necessarily the case. It is worth reiterating that all an NFT is, is a unit of data that is stored on a blockchain. It is an on-chain asset i.e. in the metaverse different which is different from an off-chain asset i.e. in the real world. There is no legal basis to say that transfer of the on-chain asset necessarily also transfers any legal rights to the underlying off-chain asset. Instead, whether legal ownership is transferred is dictated by what is written in the terms and conditions of the party that originally minted the NFT which itself only works if that party actually owns the necessary rights to the underlying artwork in the first place. This contract must describe exactly what the legal effect of transferring the NFT will be. An example of this is the creator of the Cryptopunks NFT who attempted to retroactively add a copyright licence, having already released and sold a number of NFTs with no licence agreement in place. It is doubtful that doing this is even legally viable but does illustrate a recognition that simply transferring an NFT in the absence of an effective contract describing the legal effect of that transfer will likely be problematic.

Lucy: So, now we have spoken a little bit about the terminology, we will now delve into the further detail about what the metaverse is now and what it might become in the future. The first reference to the metaverse is actually in a cyber-book named Snow Crash by Neal Stephenson. This was published in 1992. The idea is that it will be an ultimate immersive 3D reality where every part of your life can be replicated in a digital universe. Facebook now Meta, brought the term metaverse into the public lexicon in late 2021by pitching a concept of an interconnected virtual and real world where people can interact and socialise free of constraints of the physical world. The metaverse therefore is a concept defined by two major features. The first of these is that it does not identify a single virtual space but is decentralised across various platforms. And the second is that it exists as a parallel, an interactable version of our physical lives. The reality is that nothing of this description currently exists. Commentated currently instead of referring to different separate metaverses, often citing games, such as Decentraland or Sandbox as examples. At their core, these are really basic traditional video games, with blockchain technology underlying a number of background systems, such as voting for and against updates, micro-transaction purchases, virtual currency or virtual item ownership. Not only does this fall short of the metaverse as envisaged in Meta's 2021 pitch, it is not clear what defines this as 'metaverses' rather than games. If it is a social element, games have existed as vehicles for social interaction for decades if you think of things like Habbo Hotel or VRChat. If it is the blockchain element, again games with virtual currencies have also existed for decades without the 'metaverse' label. Whilst it might be argued that use of the blockchain technology for these systems is novel, it currently does not exist in this way. The technology required for that element of the metaverse to function also does not currently exist. VR headsets in their current form are limited. Wide headsets for instance require the user to be connected to a powerful desktop PC within range of tracking sensors, and wireless headsets have their own issues with tracking delay and a range of motion.

Charlie: So looking at the future, the metaverse as a concept has no shortage of attention and investment. It is easy to be sceptical but ultimately nobody is suggesting that the metaverse exists in its complete form today. There is already huge amount of investment on its way to the metaverse. Facebook has already changed its brand to Meta and in 2021 spent $10 billion acquiring or developing metaverse orientated VR software and hardware, although this may slow down with the recent news of their staff cuts. Google continues to develop its augmented reality technology and has recently invested nearly $40 million in a private equity fund for its metaverse projects. And there are various estimates of the worth of the metaverse market. Bloomberg estimates an $800 billion market by 2024, whereas JP Morgan estimates $1 trillion annually and lastly Goldman Sachs estimates $8 trillion. That spectrum probably tells you a bit about how in the dark we are about where this all might go, but it is clear it will go somewhere. The significant investment in the metaverse is yielding great strides in VR technology. Meta's Project Cambria headset is being developed with the capability to track face and eye movements in the user, which may then be mapped on to their digital avatar. Microsoft's HoloLens and the Magic Leap are each being developed to enable the user to see the real world through transparent lenses, with augmented reality imaged superimposed. And technologies like these will be vital to achieving interactivity between the real world and the metaverse and they are already highly capable despite being in their infancy. On the consumer side, a trade in virtual metaverse goods and even real estate is already well established. Looking at real estate, Every Realm, which describes itself as a digital real estate company, recently announced that it will be purchasing $4.3 million of digital real estate within the Sandbox platform. Looking at market places, Decentraland similarly has its own marketplace where users can buy and sell virtual items, as well as real estate within the game. Major brands such as Samsung, Atari, Adidas, PWC and Miller Lite have shown willingness to purchase virtual land within the Decentraland. Gucci unveiled a virtual Gucci Garden Space on Roblox, while concurrently opening its doors to a physical space with an immersive multi-media experience. Nike, Vans and Ralph Lauren have also created a Roblox experiences offering the ability to purchase digital clothing and accessories.

Looking at events and concerts, events such as an auction hosted by Sotherby's and even fashion events featuring appearances by brands including Dolce & Gabbana, Tommy Hilfiger, Ellie Saab, Nicholas Kirkwood, Perry Ellis and Estée Lauder have all been hosted in platforms. Metaverse concerts have also massively increased in popularity and have been hosted by Lil Nas X and Twenty One Pilots in again Roblox. While Travis Scott, J Balvin and Ariana Grande have all performed to virtual crowds in Fortnite. Clearly, even if the metaverse does not exist as envisioned just yet, there is a huge push on all fronts to accelerate its progress. People are already familiar with the new principles that will underline commerce in the metaverse and the requisite technology is taking huge strides towards viability. What is perhaps note here is the underlying system to join all of these elements together into one package.

Lucy: So we will now go on to discuss some of the pros and cons of the metaverse. I will be discussing the pros. So as a parallel digital reality the benefits of a metaverse cited by its components are many and far reaching. Let's have a look. So in terms of social, connecting with friends and family could evolve from 2D video calls, comment boxes and media sharing on a screen, to a place where you can meet and talk in 3D using a digital avatar. This could involve having a group friends over for a takeaway in a digital replication of your living room or taking your partner to the cinema without actually leaving your house.

Virtual office platforms can simulate the office environment with colleagues meeting face to face through VR headsets from anywhere in the world. People would no longer be restricted geographically and the experience would be if the person is right there in the room with you. Retail outlets can also take the next step from online shopping where avatars could browse high street shops digitally and purchase items for their digital world or order items for delivery to the physical world. In terms of brands and advertising, just as in the physical world, the metaverse could provide a myriad of advertising opportunities. From the branded clothes you might buy to dress your avatar in, to the virtual billboards in popular real estate areas.

Going on to real estate, virtual tours on screen are already gaining popularity in the real estate sector, but the metaverse could allow you to take a full tour of a house several hundred miles away, including everything from strolling around the local town, to sitting in the garden as your avatar. In terms of education and tourism, the travel times and restrictions are not an issue in the metaverse. Theoretically you could visit a digital replica of any place in the world at your leisure. And imagine taking a trip to ancient mine ruins in Mexico or walking across a volcanic lava field, all whist sitting in a classroom or your bedroom.

Charlie: So turning to the pitfalls, it could be argued that not only do many of the elements we have discussed already exist, often the format goes beyond the rudimentary, many of these do not require a unified persistent metaverse as envisioned in fiction and by Mark Zuckerberg. At their core, discreet experiences such as touring a house in VR, visiting a VR theme park or conducting a virtual business meeting do not need a persistent avatar or economy in order to function. Rather they work independently and are already widely available without the metaverse label, or any persistency but are not yet widely adopted. The opponents of the metaverse may say that this is simply because VR technology is not yet widely adopted, rather than this signalling a lack of demand.

Critics also point to other issues such as privacy. Existing concerns surrounding privacy and tracking online are likely to only be amplified by the metaverse. As the technology becomes more sophisticated, so to do the opportunities for marketers and advertisers to take advantage. For example, in headset eye tracking may allow marketers to track exactly what we are looking at in the metaverse and for how long. Wearable or haptic feedback devices will enable our physical reactions or emotive responses be measured, stored and used.

Looking at child protection, there are existing challenges for parents around child safety and monitoring online, and they will only be amplified as the stakes raise and online interactions become more personal and immersive.

There are health concerns; internet and gaming addictions are already recognised as the disorders by the WHO and as virtual experiences become increasingly immersive, it is likely that more people will struggle with this. People are already known to be prone to post-VR sadness, which can be brought on by the stark contrast between the real world and the virtual world.

Access and equality, VR tech is expensive and requires reliable connectivity and it is inevitable that this will preclude many from accessing the metaverse. Although this is an existing issue with the internet in general, there is a large leap in technological sophistication, from straightforward online access to VR access. This may lead to a double jeopardy combination of a heightened bar for access with an increase in the importance of being able to access the metaverse.

Looking at desensitisation. Immersive VR experiences feel very real and could lead to a general desensitisation, violence or other anti-social behaviours.

And lastly, identity hacking or theft. As the line between our digital and physical identities blur, the risk posed by identity thieves heightens, as well as the means of deception available to them. Imagine for example the opportunities the metaverse may present to today's phone scammers. they will be able to replicate the appearance and voice of a close relative.

Lucy: So now we are going to take a look at IP in the metaverse. So we have already seen how many brands are going to great expense to engage with the metaverse. Users will develop their virtual identities through an online avatar able to display virtual clothing and accessories. This is a fantastic opportunity for brands to engage with users on the metaverse and therefore is clearly a huge appetite on the consumer side to engage virtually with their favourite brands.

So looking a bit at brand protection, it is clear that brands are already being proactive in protecting themselves in the metaverse. For instance, the US retail chain Walmart for example has already filed a number of trademarks relating to producing and retailing virtual goods. The ticket market place Ticket Master has partnered with NFL to produce certain game tickets as NFTs and as part of this process they have filed applications for trademarks to cover this virtual activity. Vanity Fair has also launched an online digital art exhibition known as Meta Vanity and to this end has filed a trademark application for the transmission of video and audio content through its digital networks. And finally, Nike has prioritised staking its position in the metaverse - filing a number of separate trademark applications for virtual goods, as well as launching a virtual store known as Nikeland, which interestingly enough attracted almost seven million people.

Charlie: Given the extent of metaverse oriented trademark activity we are already seeing, this backs the question where is the metaverse for trademark purposes? Similar to the internet, the metaverse exists independently of geographical boundaries. This raises issues for brand owners seeking to enforce their trademark rights against infringers. The good news is that they will not need to drastically alter their existing strategy for online infringement continuing to focus on key jurisdictions and markets. However, the protection offered by trademarks is geographically restricted. Brands must register their trademarks in the jurisdictions where they would like protection. Whom are not registered in the US will not provide protection against what would otherwise be an infringement in the UK.

The question that naturally arises then is; when a trademark is used in the metaverse, where in the physical world is it being used? And therefore which courts have jurisdiction to adjudicate any disputes? In the US, this question was tested to some extent, as long ago as 2007, when a user of the virtual world Second Life brought an action against the virtual world's operator alleging that they had unlawfully confiscated his virtual property in suspending his account. In considering whether it had jurisdiction the court looked at the way in which Second Life was marketed, finding that it did because the game was marketed to adduce users throughout the US to purchase virtual property. This ruling indicates that courts may be willing to find grounds for jurisdiction and trademark infringement actions purely based on the fact that the virtual world was marketed in a way that partially targeted that jurisdiction. Someone suggested that the answer to this issue is to create a new Meta-jurisdiction with rules that maybe enforced by many stakeholders and not just states. But as we all know, legislative change is slow at the best of times let alone when it involves collaboration between multiple jurisdictions.

The metaverse has also raised some interesting issues around trademark registration. When registering a trademark a brand owner must specify which categories of used the registration should protect using the NICE classification system, which is adopted more or less globally. At present the only category discussed today that is directly mentioned is downloadable digital files authenticated by non-fungible tokens, within class 9. This has not prevented trademark offices around the world receiving thousands of applications over the past year alone for goods and services related to the metaverse. Registrants have discovered that there is often a disconnect between the appropriate category for a real good and its virtual equivalent. Take the example of a shoe design, the physical good neatly fits into class 25 for clothing, footwear and headwear for human beings. A virtual representation of that physical good however does not fit into this category. The current favoured approach when submitting applications for metaverse trademark is to use the following categories: class 9 for virtual goods, including goods authenticated by NFTs; class 35, including marketplaces and exchanges for virtual goods; class 36 covering financial exchange services related to virtual goods, cryptocurrencies, tokenisation and fractionation of physical assets; and class 41 for virtual experiences. However, while thousands of applications have been submitted for metaverse trademarks, comparatively few have yet been examined and accepted. In the coming months and years it is likely that a fuller picture will emerge of whether this favoured approach is effective.

Lucy: So we will now go on to where the trademark registrations for physical goods cover their virtual equivalent. This is all mute if it turns out that actually trademark registrations of physical goods do also protect their virtual equivalent. The issue is currently being mitigated in the US. Hermés, the designer of luxury handbags, is taking artist Mason Rothschild to court for selling virtual 'MetaBirkins' authenticated by NFTs. Hermés alleges that Rothschild is infringing their Birkin trademarks, as well as other IP rights owned by them. Commentators argue that a judgment in Rothschild's favour would open up an unacceptable new form of metaverse trademark squatting. A free for all where brands would be set on a race to the virtual world to stake out their territory and individuals would be free to profit from the existing goodwill in the physical products.

Certain individuals already spotted this as an opportunity to profit from existing brand goodwill, resulting in bad faith trademark applications being filed by a number of luxury brands, including Prada and Gucci for use in the metaverse. Even if these applications are unsuccessful, brand owners are nonetheless subject to the expense of potentially significant legal fees and a drain on corporate resources and monitoring these registrations. Similarly, Nike has recently filed proceedings in the US against online marketplace StockX for minting NFTs portraying its trainers, alleging trademark infringement and claiming that StockX was taking unfair advantage of its reputation. StockX argued that NFTs are not virtual shoes but are simply tradeable tokens. The court is set to shed some light on the question of whether NFTs are a representation of the asset they tokenise or if they are in fact a separate virtual product.

As already mentioned, many brand owners therefore have already filed trademark applications covering virtual goods and services offered in the metaverse in an attempt to avoid this issue.

We are now going to look at brand promotions in the metaverse. Given significant investment by Meta, we can see that the metaverse offers huge advertising possibilities and we are already seeing brand exploit this. For example, Gucci through its collaboration with Roblox gave players the opportunity to win a digital version of one of its bags. It was not an NFT and its use was limited to Roblox. In 2021, it was resold for the equivalent of USD$4150, yet the physical version of the bag retails for much less around USD$3400. Do not get caught out thinking that because the metaverse is a new area that it will not be regulated or looked into. For instance, the Committee of Advertising Practice (CAP) have already published brief guidance this year on the advertising in the metaverse. As ever, we advise businesses to be as explicitly clear as possible when differentiating between entertainment experiences which may be common in the metaverse versus advertisements.

Charlie: We hope you have found this podcast insightful and interesting. The key takeaways are as follows. Firstly, the metaverse is a parallel online world, while it does not yet exist, all the necessary elements are converging and key among these is the use of blockchain technology and its various implementations. This is because decentralisation is key to the creation of the metaverse, so brand owners need to be thinking about this now.

Secondly, enforcing brands may be harder than ever in the metaverse, especially for brands that fail to take a proactive approach to protecting their IP.

Thirdly, brands should not assume that their existing protection for physical goods will necessarily carry over to the metaverse and should carefully consider the categories of goods that their existing registrations apply to.

Those are our takeaways and that brings us to the end of our podcast and thank you very much for listening. If you have any questions do get in touch with either me or Lucy.

Thanks for joining Gowling WLG for this podcast. If you enjoyed this episode, be sure to check out our website at gowingwlg.com for more useful insights and resources and do not forget to subscribe to ensure you join us for our next episode.