Companies face legal uncertainties to defend against NFTs

Companies face many legal uncertainties when protecting their intellectual property, copyrights and trademarks against NFT manufacturers. At least one legal expert is calling for congressional action to clear up the confusion.

Companies like luxury fashion house Hermes and sneaker maker Nike have taken legal action over alleged infringements of their intellectual property in the NFT space. However, legal ambiguities around the emerging technology make it difficult for companies to enforce their claims, said Emily Behzadi, associate professor at the California Western School of Law.

“We’re still in this very, very gray area,” she said. “It’s almost a legal purgatory.”

NFTs are unique pieces of data stored on the blockchain to verify ownership of digital assets. Popular art projects like the Bored Ape Yacht Club and CryptoPunks are selling NFT images for millions of dollars. Later this month, Sotheby’s will auction off 104 NFT CryptoPunks that could collectively fetch $20-30 million.

Researchers predict that NFT sales will increase significantly in the coming years. The global NFT market exceeded $40 billion in 2021, according to blockchain data firm Chainalysis. Investment firm Jefferies estimates the market will reach over $80 billion by 2025.

However, the impact of NFTs on intellectual property, copyright and trademarks is unclear. Companies that protect themselves against infringements by NFT makers will face unprecedented federal judges to make decisions, Behzadi said.

CryptoPunks NFT art has attracted interest from investors and collectors.

To rule on NFT cases, judges will need to determine which action, if any, of a defendant violates the law. NFTs work much like hyperlinks in that they both point to online assets. Courts have previously ruled that the hyperlinks do not violate copyright law because they do not contain copyrighted or derivative works, Behzadi said.

Under this interpretation, NFTs would not infringe copyright, so companies would have to prove that the defendant downloaded the infringing material. However, given the lack of precedent and legislation on NFT, a judge might disagree and rule that NFT violates the law on its own, Behzadi said.

Because NFTs create new issues with trademarks and copyright, lawmakers will need to draft legislation that protects property and corporate rights, Behzadi said. Current laws do not reasonably address the intricacies of new technology.

“It’s hard to put a square peg in a round hole,” she said.

In January, Hermès sued artist Mason Rothschild in federal court in New York, claiming he sold NFTs that swapped the brand name of his Birkin handbags. The lawsuit claimed the artist’s MetaBirkins, digital images of furry handbags inspired by the Hermes Birkin bag, diluted the company’s trademark.

Rothschild claims his creation is no different from Andy Warhol’s Campbell’s Soup Cans paintings. His attorney, Rebecca Tushnet, said in an email that artists have the freedom “to represent and comment on the world they see around them.”

This month, Nike sued the StockX online marketplace for its NFT program. StockX, which allows people to buy and sell collectibles, has created an initiative that allows customers to buy NFTs tied to physical items stored in a vault. StockX based eight of its nine NFTs on Nike products.

In its lawsuit, Nike claims that the prominent use of its trademarks in StockX NFTs could lead customers to believe that the sportswear product endorses the program. Nike said the confusion could hurt its future efforts to sell digital products in the metaverse.

Mike Gleason is a journalist specializing in unified communications and collaboration tools. He previously covered communities in the MetroWest region of Massachusetts for the Milford Daily News, Walpole time, Sharon’s lawyer and Medfield Press. He has also worked for newspapers in central Massachusetts and southwestern Vermont and served as local editor of Room. He can be found on Twitter at @MGleason_TT.

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