Commercial issues when structuring deals in the Metaverse

After a brief introduction to non-fungible tokens (NFTs) and the Metaverse, including an explanation of the various, multiple metaverses which currently exist (referred to collectively as the ‘Metaverse’), Joel Smith, together with associate Andrea Constantine, discussed what to consider when structuring deals in the Metaverse, such as the sale of an NFT. Joel said that managing and allocating risk in contracts is critical to setting up virtual stores, offering digital assets and opening new platforms in the Metaverse. Andrea emphasised that, in order to avoid disputes, it is important to be precise about what you are (or are not) selling, setting up or offering access to, in terms of the digital asset, the virtual store or the metaverse platform (the “Virtual Offering”). Whilst many businesses, particularly luxury brands, are keen to make a foray into the Metaverse, these are some of the questions which brand owners should be considering first:

• Do you have any contractual rights or restrictions, or do your historic contracts need updating to support your move into a Virtual Offering?

• Do you have the right to create the Virtual Offering in terms of use of the brand, content or technology?

• What rights are you giving the purchaser/user of the Virtual Offering in terms of exclusivity, the underlying IP rights and the ability to trade unfettered (with or without a share of resale proceeds)?

• Consider your legal exposure (and extent of your own responsibility/liability) for the Virtual Offering and how you might mitigate, limit or exclude such liability?

• How much control do you have to remove or disable access to the Virtual Offering (in terms of burning a NFT, making a digital asset non-accessible or takedown, suspension or termination of user access to the Virtual Offering, or monitoring, removal or editing of non-compliant content)?

• Consider the wider financial regulatory, tax, online harm, advertising regulatory, data security and ESG implications of the Virtual Offering, including the jurisdictional impact of borderless access.

Protecting your brand in the Metaverse

Emily Sharkey and Charmaine Kwong then moved on to how brand owners can protect their brand in the Metaverse. Emily noted that Metaverse related trade mark filings have increased substantially in the past two years, both at the UKIPO and EUIPO, which suggests that brand owners are investing in the virtual world and are keen to protect their brands in it.

Emily and Charmaine recommended a filing strategy for the Metaverse. They said the key reasons to re-file for virtual goods, rather than rely on existing registrations for real world goods, are: a) the ability to use platform takedown services; and b) the costs of enforcement will be lower and enforcement more straightforward if your registration covers identical “virtual goods” to the infringing item, rather than relying on existing registrations and ‘likelihood of confusion’ arguments or reputation based claims (both of which are not guaranteed to succeed and will result in increased legal spend).

Whilst there is currently no official UKIPO guidance on how to specify Metaverse related goods/services, Emily said the message that is coming through from other offices (e.g. EUIPO) and UKIPO examination reports is that broad terms such as “NFTs” or “virtual goods” are not acceptable. Therefore the specification should specify the types of virtual goods being supplied (e.g. downloadable virtual goods, namely virtual clothing) and the goods to which an NFT relates (e.g. downloadable art authenticated by non-fungible tokens).

IP enforcement in the Metaverse

Alastair Shaw, Grace Gladdle and Laura Alvarez Otero ended the session with a case study on enforcing your trade mark rights in the Metaverse, looking at jurisdiction issues, injunctions, how to enforce court orders and methods of service. Joel observed that "digital reality is stretching traditional concepts of trade mark infringement, which courts have jurisdiction and the effectiveness of remedies.  We are now beginning to see how the Courts approach these challenges in a number of ground-breaking cases around the globe."

The speakers highlighted that not all metaverses are built the same way: centralised and de-centralised metaverse architectures demand different enforcement strategies and mechanisms to achieve rapid results. Metaverse terms and conditions relevant to enforcement, such as jurisdiction, governing law and crucially notice and takedown rules also vary widely. It is important to get to know the key Metaverse contract terms and focus on the Metaverses where the greatest opportunities and threats arise. The team also thought that crypto fraud cases have been helpful in driving new law. A surge of disputes around hacks of digital wallets has led to rapid adaptation by the English courts, of existing enforcement mechanisms, such as service by alternative means and third party information (Norwich Pharmacal) orders, providing templates for Metaverse enforcement mechanisms.

The key message was: it’s business as usual for the courts. Pre-conduct rules and unjustified IP threat laws also still apply to an online, virtual world, just as they do in the real world.

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Authored by the speakers of this event.