When a cheap Hermès or Gucci handbag shows up on a street corner table or an online marketplace, we all know the drill. What’s on offer is almost always an illegal counterfeit; the sellers can be sued or even arrested; and the consumer knows it’s a fake (or at best, stolen).

To fight counterfeiting, companies like Hermès rely primarily on trademark laws, which preclude the promotion and sale of goods under another party’s brand name, logo or other source indicator, leading to consumer confusion. This can include protection for what is known as “trade dress,” for the packaging or appearance of products.

In the metaverse – virtual world environments accessible via the internet and made more lifelike by the use of virtual reality (VR) or augmented reality (AR) – a false handbag may be harder to spot. Because of this, some metaverses are blockchain-based, meaning users can buy virtual land and other digital assets, like handbags, in the form of non-fungible tokens (NFTs) and register their ownership on a blockchain, tracing back its authenticity all the way down to its maker. We have already seen numerous fashion and luxury brands look to NFTs to identify real-life products and act as a proof of ownership of both virtual and corporeal collectible assets, such as Nike, Burberry and Ralph Lauren.

But if we’ve learned anything over the past year with the arrival of NFTs, it’s that these digital assets can throw a monkey (or Bored Ape?) wrench into the legal analysis. We’ve been anticipating a corollary explosion of litigation for months now, and with the high-profile Miramax v. Tarantino matter and a new suit brought by Hermès against the creator of “MetaBirkins” NFTs, we may be seeing the beginning of that legal storm.

In the MetaBirkins case, Hermès v. Rothschild, filed in New York federal court on January 14, 2022, Hermès objects to NFTs sold by an individual named Mason Rothschild that replicate the iconic Hermès handbags in digital form. Hermès takes the position that the NFTs infringe its trademarks and trade dress, as described in further detail below. The MetaBirkins creator, however, has claimed that his NFTs are protected expression under the First Amendment, and in a public response to an initial cease and desist letter, Rothschild notably threw down the gauntlet by saying “Selling my MetaBirkins as NFTs is akin to selling them as physical art prints. It should not be my job to educate you on advancements in the world and the culture of art. Art is art.”

But is art really just art, in the context of NFTs? The law has always walked a bit or a tightrope when it comes to commercialization of art based on underlying, real-world goods. Now the question becomes what happens when the “art” itself has aspects of a product, and arguably becomes a digital good?

Artists like Andy Warhol are known for taking consumer products and creating art from them. This type of artistic appropriation also has led to legal disputes, but typically focusing on copyright rather than trademark issues, and often turning on whether the appropriation is a “fair use” rather than infringement. In this context, the underlying “brand” generally is not a key factor because the use of any trademarked elements in the artwork usually will not confuse consumers – that is, consumers will not think the company that sells the underlying product sponsored or is affiliated with the artwork. Is the same true for NFTs however, where authenticity is part and parcel of the value offering of the digital asset?

The Birth of Digital Baby Birkins

In June 2021, two creatives, Mason Rothschild and Eric Ramirez, offered an NFT for sale that consisted of an animated “Baby Birkin” – a digital spin on Hermès’ handbag, featuring an animation of a growing baby inside it,  which Rothschild reportedly said resulted from a desire “to make something that was a literal take on the words Baby Birkin” with the additional aspects making the piece “a bit more special.” Rothschild went on to say that they decided to “translate this work into an NFT cause that’s the only way we could express this odd, ethereal vision. A still image or poster wouldn’t do it justice, it had to move, spin, have a heartbeat, have the fleshly smoke fill the bag gradually.”

The sale of this NFT garnered $23,500, or more than the selling price of some real-world Birkin handbags. Reports suggest that only one NFT of the handbag was sold, as opposed to many NFT sales that include multiple versions of the same NFT. Apparently, Hermès did not seek to stop the sale of this particular NFT, possibly because the one-off item fit more within the rubric of a piece of art commenting on societal trends.

However, Rothschild later went on to sell a collection of several MetaBirkins NFTs on the NFT platform OpenSea, described as “a collection of 119 unique NFTs created with faux fur in a range contemporary color and graphic executions.” This led to a demand from Hermès, the public response by Rothschild, and now the lawsuit.

Alleging trademark infringement of its BIRKIN mark, Hermès claims that the sale and distribution of the MetaBirkins NFTs are “leading the public to believe that the METABIRKINS NFTs emanate or originate from Hermès, or that Hermès has approved, sponsored or otherwise associated itself with Defendant.” Hermès also seeks relief based on Rothschild’s use of the BIRKIN trade dress, “despite repeated requests from Hermès stop such use.” Other causes of action alleged in the complaint include trademark dilution, cybersquatting, and injury to business reputation.

So Who’s Left Holding the Bag?

There is a significant spectrum between digital artworks being offered in one-off sales or limited editions, and merchandise-like items that resemble things like trading cards or physical collectibles such as Beanie Babies. But just as in the physical art world, there are no clear divisions and semantic labels may not paint the whole picture. NFTs themselves have an uneasy relationship with IP law, as they consist of a digital token that can be readily traded combined with a media asset like a photo, and may or may not also include some type of license governing use of that media asset.

When designing those assets, how much of a creative license can you get under the First Amendment? The complaint argues that “just as a t-shirt or a greeting card may reflect some artistic creativity, the title of “artist” does not confer a license to use an equivalent to the famous BIRKIN trademark in a manner calculated to mislead consumers and undermine the ability of that mark to identify Hermès as the unique source of goods sold under the BIRKIN mark.” Brands usually draw the line (pun intended) when their goodwill gets attacked, whereas people in Rothschild’s position may respond that the First Amendment protects them “just as it gave Andy Warhol the right to make and sell art depicting Campbell’s Soup Can”.

In Search of Authenticity

NFTs are designed to be traded, and therein lies the rub. Once a user starts to sell digital items based on real-world branded products, it is likely the fame of the original brand that drives interest in the digital good in the marketplace. In these cases, trademark owners may have a path to combatting “counterfeit” NFTs because the sellers are openly referencing the brands in their promotion of the NFTs. This is essentially Hermès argument, except that creative freedom may hinder their claims.

The value of an NFT turns on that very connection between the item being sold and an “authentic” source. Many NFT marketplaces today are awash in NFTs created by users who have no relationship to the brand represented in the NFT, or with the author of the image or other work on which the NFT is based. Most of these NFTs either do not sell at all, or sell for small amounts. Because “bragging rights” are often the primary benefit of owning an NFT, buyers are typically looking for NFTs offered by the authentic source.

Which points to the fact that at least something more than mere digital counterfeiting is going on in the Hermès v. Rothschild case, making it an interesting one to watch. Rothschild began his MetaBirkins series with a single piece of digital art that arguably acted as commentary, giving he and his co-creator a First Amendment/fair use argument. But the question remains whether his pivot to selling more such works, under the name “MetaBirkins,” crosses the line into infringement.

Lance Koonce is a partner and Louise Carron an associate at Klaris Law