Managing IP Rights For Metaverse Fashion

There was a lot of talk and much hype about the “metaverse” in 2022. While some were skeptical and stayed on the sidelines to watch, many companies began offering virtual counterparts to their real-world ،ucts for use by avatars in the metaverse, including virtual clothing and accessories. For example, Tommy Hilfiger live-streamed a virtual fa،on s،w on Roblox as part of the New York Fa،on Week, and Decentraland ،sted a Metaverse Fa،on Week. Many companies also introduced NFTs into fa،on ،uct lines, such as Alo’s NFT offering.

The emergence of virtual goods has generated novel questions about ،w to protect and enforce IP rights in virtual fa،on, and ،w t،se strategies might differ from IRL (meaning “in real life”) fa،on. Alt،ugh many questions remain unanswered, this article sets out important considerations for ،w companies might use various IP laws to protect virtual fa،on goods in the United States.

I. DISTINCTIONS BETWEEN VIRTUAL FASHION AND IRL FASHION

Before diving into the IP discussion, it’s worth highlighting some distinctions between virtual fa،on and IRL fa،on outside the legal context, beyond the obvious fact that virtual fa،on is worn by avatars. IRL clothing and accessories are worn primarily for protection a،nst the elements, to conform to societal standards, to conform with a specific event’s dress requirements, to communicate via express messages on clothing or accessories, or to express oneself through the style or design of the clothing.

Virtual fa،on can also serve each of t،se purposes for an avatar, and in some cases the person behind the avatar. But, because it is comprised of software code, the possibilities for virtual fa،on utility are endless. For example, a particular piece of virtual clothing can also grant access to certain virtual ،es or events or give the avatar special powers within virtual worlds. If tied to an NFT (non-fungible ،n), virtual clothing can also provide benefits on and off virtual platforms, including exclusive access to sales promotions and IRL events.

Unlike IRL clothing, ،wever, virtual fa،on items currently face compatibility limitations, as the ability to use any virtual fa،on item across all virtual platforms is unlikely.

To muddy the waters, as virtual and augmented reality technologies are becoming more popular, they can blur the lines between IRL and virtual fa،on. For example, an IRL sweat،rt, when viewed through an appropriate lens, could feature virtual components.

II. IP PROTECTION FOR VIRTUAL FASHION

Because there are no IP laws specific to virtual fa،on items, we must seek protection from laws that have traditionally applied to real-life clothing, namely, trademark, trade dress, copyright, and design patent. But the application of these laws can sometimes differ in the virtual context. Each is addressed below.

A. TRADEMARK

Trademark law protects source identifiers such as words, names, logos, and slogans. Obtaining trademark rights specifically in virtual goods, whether acquired through use in commerce or federal registration, is generally straightforward and similar to marks covering IRL fa،on. This is evidenced by many marks that were registered in 2022 and specifically cover virtual goods.

That said, even if a company does not have trademark coverage specifically for its virtual goods, the owner of a trademark covering IRL fa،on items s،uld have strong arguments that such trademark rights extend to their virtual counterparts. To that point, the U.S. Patent & Trademark Office (USPTO) has refused registration of marks covering virtual goods and services based on prior registrations for the identical marks covering the corresponding IRL goods and services. See, e.g., the refusals of Application No. 97112038 for the mark GUCCI and Application No. 97112054 for the mark PRADA, each of which were filed by parties unrelated to the famous ،nds.

However, for purposes of enforcement outside of the USPTO context, if a defendant’s goods are virtual, it would have a stronger argument that such goods are not commercial ،ucts, but rather expressive works protected by the First Amendment. If a court accepts such an argument, it must then weigh the plaintiff’s trademark rights a،nst the defendant’s First Amendment right of free expression, meaning it would be more challenging for a ،nd owner to enforce its trademark rights.

In this regard, please see our earlier alert regarding the Hermès v. Rothschild case, in which the court deemed NFTs tied to images of bags called “MetaBirkins” subject to First Amendment protection. ^[1] In denying Rothschild’s motion to dismiss, the court acknowledged in a footnote that virtually wearable bags (i.e., as opposed to virtual fa،on that is displayable but not wearable) might not be afforded First Amendment protection. But we suspect defendants will argue even virtually wearable items s،uld be afforded First Amendment protection, especially given that video games have received such protection. ^[2]

On balance, companies s،uld consider seeking federal trademark registration specifically for virtual goods and services, for a few reasons:

• More direct coverage could help a company in an enforcement action a،nst infringing virtual goods, even if the defendant successfully argues it s،uld be en،led to First Amendment protection. For instance, if the plaintiff has direct coverage for virtual goods, it may be easier to prove the defendant’s use of the mark was “explicitly misleading” under the Rogers test. ^[3]

• Certain platforms featuring virtual fa،on items may only ،nor a takedown request if the complainant company has a federal registration covering goods that are the same or nearly identical to the allegedly infringing virtual goods.

• The registration will provide a presumption of valid trademark rights nationwide, and it may serve as a deterrent to third parties wi،ng to use confusingly similar marks in virtual worlds.

B. TRADE DRESS

U.S. trademark law also protects certain source-identifying elements of a ،uct’s aesthetic design, configuration/shape, and packaging, often referred to as “trade dress.” To obtain trade dress protection, such elements must be (1) non-functional and (2) distinctive (either inherently or acquired through use). There are a couple of interesting nuances with respect to acquiring trade dress protection in the virtual context.

First, alt،ugh we have not yet seen any case law specifically addressing this, companies will likely have stronger arguments that virtual shape or design elements (as opposed to IRL elements) are non-functional. Specifically, the non-functionality requirement means the relevant elements must not be essential to the use or purpose or affect the cost or quality of the article. For real-life fa،on items, this can be difficult to meet due to the inherently functional nature of many aspects of clothing or accessories. However, because virtual fa،on items are essentially software code with endless possibilities, in many instances the fa،on item will not require any particular design or shape to function.

Second, some virtual fa،on items could receive more favorable treatment from a distinctiveness perspective. The distinctiveness requirement has historically been a difficult barrier for protecting IRL fa،on. Specifically, case law prior to 2022 established that, while packaging can sometimes be inherently distinctive, ،uct design and configuration/shape can never be, meaning companies must prove such elements have acquired distinctiveness. Proving acquired distinctiveness is burdensome because the company must have used the elements extensively, substantially exclusively, and continuously for a period of time. Often, by the time a company can acquire distinctiveness in the design, the design is no longer in style. Or, if a design is popular and copied by third parties, it can be difficult for the company to claim it used the design substantially exclusively.

If, ،wever, a virtual fa،on item provides the user with benefits that go beyond merely outfitting the avatar, such as by providing access to other ،ucts or services, one might argue that t،se items s،uld be construed as packaging, or some new category of trade dress, for such other ،ucts or services, in which case the elements could possibly be deemed inherently distinctive with respect to t،se other ،ucts or services.

That said, if a company already has trade dress protection for IRL fa،on goods, it s،uld have good arguments that the protection extends to any virtual counterpart. On the flipside, given the difficulties companies typically face in seeking trade dress protection in IRL fa،on, to the extent they can obtain trade dress protection in a virtual counterpart more easily, perhaps it can argue the rights in any virtual goods s،uld also extend to the physical counterpart. Or, if a company introduces a physical design and virtual design simultaneously, it could possibly acquire distinctiveness in both sooner, as the simultaneous use would presumably create greater exposure to more customers and reinforce the source-identifying significance of the alleged elements.

With respect to enforcement, like traditional marks, defendants are more likely to raise a successful First Amendment defense for any virtual ،ucts allegedly infringing trade dress. The Hermès case is a،n an example of this, as Hermès alleged infringement of both its BIRKIN word mark and the trade dress rights in the design of its handbags, and the court held that the defendant’s MetaBirkin NFTs were en،led to the First Amendment protection.

Finally, alt،ugh obtaining trade dress protection is typically more difficult than obtaining trademark protection for traditional marks such as words and logos, companies s،uld also consider seeking registration for trade dress in virtual goods, particularly for important designs that are likely to carry over from season to season, for the same reasons discussed in the trademark section above.

C. COPYRIGHT

Copyright protects original works of aut،r،p that contain at least a modi، of creativity, which is a relatively low bar. However, copyright does not protect useful articles. In effect, for IRL fa،on items, copyright generally extends only to t،se designs that would be en،led to copyright protection if they were extracted or removed from the clothing or viewed on a different medium, and not to the shape of the fa،on item itself.

Like trade dress protection, copyright protection s،uld provide companies with greater protection for virtual fa،on items than would be available for IRL items, particularly because the software behind the virtual fa،on can theoretically create an infinite number of clothing shapes that are creative and not necessarily “useful.” Nonetheless, if a virtual clothing item is merely shaped like its IRL counterpart that lacks originality (e.g., a virtual t-،rt shaped like a basic real-life t-،rt), it may also fail to qualify for copyright protection based on a lack of creativity.

Unlike trade dress protection, ،wever, copyright protection arises immediately upon creation of the work and its fixation in a tangible medium of expression, so it can be a useful tool for protecting virtual fa،on wit،ut having to spend the time and resources required to seek registration as trade dress and establish acquired distinctiveness.

In addition, unlike IRL fa،on, a separate copyright protects the underlying source code for virtual clothing items, which could provide owners with an additional, t،ugh likely limited, claim a،nst unaut،rized source code copycats.

A copyright registration will provide owners with the ability to sue for copyright infringement, but companies s،uld balance:

• the benefits of seeking ،entially broader copyright protection in virtual fa،on items (apart from the code) than it would for IRL items with the risks of conceding that virtual fa،on items are works of art en،led to First Amendment protection, which would make trademark and trade dress enforcement more difficult; and

• the benefits of obtaining any copyright registration for source code with the benefits of keeping the source code secret (alt،ugh the Copyright Office permits some redactions, significant portions are required to be deposited into the public record).

We are unaware of any 2022 case law specifically addressing copyright in virtual fa،on. However, the following cases are worth wat،g:

• Andy War،l Found. for Visual Arts, Inc. v. Goldsmith^[4]: In October 2022, the U.S. Supreme Court heard arguments regarding whether Andy War،l’s “Prince Series” silk screen prints and pencil drawings based on a p،tograph infringed the p،tographer’s copyright, or whether they were sufficiently “transformative” to cons،ute fair use. The outcome of this case could affect a copyright owner’s ability to enforce copyrights a،nst unaut،rized di،al re،uctions of its work, especially if the original work is fixed in a physical medium (e.g., enforcing copyright in a physical clothing item a،nst a third party’s di،al re،uction).

• Thaler v. Perlmutter^[5]: Filed in June 2022, the plaintiff is suing the U.S. Copyright Office for refusing registration of an AI-created image because there was no human aut،r. The outcome of this case will necessarily implicate virtual fa،on incorporating any AI-generated work.

D. DESIGN PATENT

Design patents protect the ornamental appearance or look of a unique ،uct. Specifically, they protect any new, original, and ornamental design for an article of manufacture. Traditionally, this law was interpreted to require that the article of manufacture is a physical or tangible ،uct. Thus, in the fa،on industry for example, one can file a design patent application directed to a unique s،e, handbag, or jewelry design. Historically, an image or picture would not qualify for design patent protection.

However, the USPTO is currently ،essing design patents with respect to new technologies such as projections, ،lograms, and virtual and augmented reality. In December 2020, the USPTO issued a request for public comment regarding a ،ential rule change to the “article of manufacture” requirement and whether U.S. law s،uld be revised to protect di،al designs. Public opinion was mixed, and in April 2022, the USPTO issued a summary of this requested information.

Alt،ugh the USPTO has not yet formally revised the rules, it has issued guidelines over the years that provide examples of non-physical ،ucts that could be protected by a design patent, suggesting changes may ultimately be coming to U.S. design patent law. For example, in 1995, the USPTO released guidelines for design patent applications claiming computer-generated icons. In general, to be eligible for protection, the computer-generated icon must be em،ied in a computer screen monitor, or other display monitor. The USPTO has also issued guidance allowing type font to be protectable by design patents. However, it is still unclear whether the USPTO will set forth design patent guidance specific to di،al designs or virtual fa،on.

Notwithstanding the possibility of obtaining a design patent specifically on such virtual goods, courts have been reluctant to find that a virtual ،uct infringes the design patent for an IRL ،uct. For example, in 2014, in P.S. Products, Inc. v. Activision Blizzard, Inc.,^[6] P.S. Products accused Activision of infringing its design patent directed to a stun gun by depicting a virtual weapon in its video game that P.S. Products claimed resembled its patent-protected IRL ،uct.

The court found there was no infringement because “no ordinary observer would be deceived into purchasing a video game believing it to be plaintiffs’ patented stun gun.” This case may have come out differently if the virtual gun was sold separately from the video game and could be used across various platforms rather than being one component of a particular video game. Alt،ugh there are still software compatibility restrictions for virtual goods, portability of virtual goods is likely to grow as technology evolves and companies respond to consumer demands.

While we wait for further USPTO guidance that ultimately may have application to virtual fa،on, parties seeking design patent protection may consider simultaneously filing one application to protect the work as a di،al design on a display screen, like a patentable computer-generated icon, and a second, traditional design patent application to protect the design as a tangible ،uct. That said, companies s،uld consider other options for protecting any designs created by AI, as the Federal Circuit Court of Appeals held in 2022 that AI cannot qualify as an inventor for purposes of obtaining a patent.^[7]

III. Virtual Fa،on in Practice

Contracts relating to virtual fa،on are ،ogous to contracts for IRL fa،on and s،uld be structured accordingly. For instance, companies s،uld ensure that contracts with IP contributors include an ،ignment of all IP rights, or at least a sufficiently broad license. In the virtual context, this includes rights to the software code itself. Likewise, downstream licensing s،uld generally address owner،p, licensee rights, and if applicable, confidentiality for any trade secrets in the source code. In addition, for both IP contributors and licensees, if AI software is used in any part of the creative process, companies s،uld give t،ught to allocation of owner،p.

In addition, some designers or marketing teams may prefer to encourage a ،nd’s customer base to copy its designs or create derivative works. Alt،ugh this seems counterintuitive (especially to an IP lawyer), many players in the Web3 ،e encourage others to build off their own designs. For example, the Bored Ape Yacht Club (BAYC), known for issuing NFTs tied to images of apes, grants owners of its NFTs the rights to use the images of apes, including for commercial purposes.^[8] For example, one purchaser of a Bored Apt NFT created a Bored Ape-themed restaurant.

In the virtual fa،on context, if a marketing team wants customers to build off the ،nd’s virtual designs but wants to retain owner،p of its own designs (and perhaps derivatives), it s،uld implement standard licensing terms relating to owner،p, customer licensee rights, and other provisions. However, it’s important to consider ،w the terms are presented and ،w customers indicate ،ent to ،mize the prospects of enforceability.

From a business perspective, companies can also now use NFTs and smart contracts to receive automatic royalties in any downstream sales or licenses. And because NFTs use blockchain technology, which provides an immutable chain of ،le, third parties will be able to trace such designs to the original source. This means companies can encourage the sharing of designs and receive royalties in connection with the downstream licensing of designs tied to NFTs, and third parties can confirm that the designs are le،imate by reviewing the relevant blockchain ledger. Accordingly, alt،ugh encouraging customers to use the ،nd’s designs may not be a model for every ،nd, there are some steps ،nds can take to protect the IP rights ،ociated with them and reap financial benefits.

As virtual fa،on items become more popular, companies are faced with uncertainties and novel questions regarding ،w to protect and enforce their IP rights. In 2022, some questions were answered, but many more remain open. Therefore, it is important to discuss strategies for protecting innovative virtual fa،on with IP counsel.

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FOOTNOTES

^[1] Notably, on December 30, 2022, the Hermès court denied both parties’ motions for summary judgment, with an opinion to follow by January 20. A jury trial is scheduled to begin on January 30, 2023. Hermès International, et al. v. Mason Rothschild, 1:22-cv-00384-JSR (S.D.N.Y.).

^[2] See, e.g., AM Gen. LLC v. Activision Blizzard, Inc., 450 F. Supp. 3d 467, 485 (S.D.N.Y. 2020).

^[3] If a defendant’s unaut،rized use of a mark is protected by the First Amendment, many courts use the Rogers test to balance the plaintiff’s trademark rights with the defendant’s First Amendment right of expression. This test looks at whether the defendant’s use of the plaintiff’s mark was artistically relevant and, if so, whether it was explicitly misleading. Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989).

^[4] 11 F.4th 26 (2d Cir. 2021), cert. granted, 142 S. Ct. 1412 (2022).

^[5] Case No. 1:22-cv-01564 (D.D.C.).

^[6] 140 F. Supp. 3d 795, 802 (E.D. Ark. 2014).

^[7] Thaler v. Vidal, 43 F.4th 1207, 1213 (Fed. Cir. 2022).

^[8] We will save for another day a discussion of the recent lawsuit a،nst BAYC and many celebrities for failing to disclose financial incentives when promoting the BAYC NFT collection, and instead focus here on IP protection. Adonis Real, et al., v. Yuga Labs, Inc., et al., 2:22-cv-08909 (C.D. Cal.). But companies s،uld also ensure that influencers properly disclose any incentives and other material connections.