The first major legal battle involving art versus commerce in the world of digital assets has landed, and score one for trademark owners. But the subsequent rush to declare non-fungible tokens (“NFTs”) dead as an artform is wildly premature, and represents a misunderstanding of the law as well as the jury’s decision in the Hermès v. Rothschild case.
That case, which we’ve covered in the past — see The Art of the “Real”: When Commerce and Creativity Clash in the World of NFTs, Who’s Left Holding the Bag? — turns upon the sometimes fine line between artistic speech and commercial enterprise, a line with which courts always struggle, particularly in connection with new technologies.
The verdict that follows an eight-day trial came as a surprise to many in the art and tech communities, who have decried its apparent favoritism towards big brands over creators, but as we’ll explain below, the sky is not falling over web3.
A Quick Primer on NFTs as Art
When we call an NFT a work of art, we are using a shorthand that may cause confusion. An NFT is a blockchain token that represents a piece of digital art but is not the artwork itself. To be more technical, the token is a unique identifier with metadata and code attached, which typically contains a pointer or link to some other digital object, such as an image, video or music file. So the token and the digital art are associated with each other, and the token owner can sell the token in order to convey rights in the artwork to the purchaser (so long as legally effective licensing or assignment language accompanies the transfer).
2020 saw the NFT boom, although that fervor has cooled somewhat during the “crypto winter” that began in the late spring of 2022. Lawsuits around NFTs have begun to mushroom and now in early 2023, Hermès v. Rothschild became the first major NFT case involving intellectual property rights to be decided by a jury.
The Jury Verdict, Part I: A Risk of Confusion
It is important to note that the MetaBirkin case was not about copyright interests, which are often more prominent in cases involving artwork, such as the pending Supreme Court case involving whether Warhol’s silkscreen portrait of the musician Prince was a “fair use” of the underlying photograph on which it was based. Copyright law protects the content of works of artistry and authorship.
In the Hermès v. Rothschild case, however, trademark law takes center stage; trademark law protects brand names, logos, and other indicators of the source of goods and service. In this case, Hermès claimed that it held trademark rights in the name “Birkin” and the design of its handbags, and that Rothschild’s sales of his NFT artwork under the name “MetaBirkins” and featuring digital images of bags that resemble the design (trade dress) of the iconic Birkin handbags would confuse consumers.
Trademark analysis is highly fact-based, and the jury was asked to take into consideration multiple factors to determine whether there was a risk of consumer confusion, including the strength of Hermès’ mark, the similarity between the two trademarks; whether the public exhibited actual confusion about Hermès’ affiliation with Rothschild’s MetaBirkins collection, and the competitive proximity of the products in the marketplace. The jury found that Rothschild infringed on Hermès’ trademark and that consumers would be confused into believing that Hermès was associated with the MetaBirkins, regardless of how many disclaimers were displayed on the site.
The Jury Verdict, Part II: Artistic Expression Yields to Intentional Attempt to “Cash In”
But the case did not end there. Under long-standing precedent, in particular Rogers v. Grimaldi, a case involving a suit by actor Ginger Rogers against the makers of a film entitled “Fred & Ginger,” where a claim of trademark infringement involves a creative work, courts must take care not to allow trademark law to overrun First Amendment protections for speech.
In the “MetaBirkins” case, defendant Rothschild took the position that the digital images associated with the NFTs “could constitute a form of artistic expression.” Art critic Blake Gopnik — whose report in defendant’s favor was excluded from trial evidence by the judge — argued that Rothschild’s NFTs fall within “Business Art,” a term coined by Andy Warhol, because they were works “commenting on the world of commodities”. Blake Gopnik recently summarized his position for Marketplace.
In a ruling addressing the parties’ motion for summary judgment briefing, Judge Rakoff found that there was “a genuine factual dispute as to whether Rothschild’s decision to center his work around the Birkin bag stemmed from genuine artistic expression or, rather, from an unlawful intent to cash in on a highly exclusive and uniquely valuable brand name.”
The court, in its instructions to the jury, acknowledged that it was “undisputed” that “the MetaBirkins NFTs, including the associated images, are in at least some respects works of artistic expression, such as, for example, in their addition of a total fur covering to the Birkin bag images.”
While in many cases First Amendment protections for artistic expression prevail, in some cases — as where a seller deliberately confuses consumers — the risk of consumer confusion trumps such concerns. As noted again by Judge Rakoff: “In certain instances, the public’s interest in avoiding competitive exploitation or consumer confusion as to the source of a good outweighs whatever First Amendment concerns may be at stake.”
Hermès thus had to prove to the jury that the use of its marks was “not just likely to confuse potential consumers but was intentionally designed to mislead potential consumers” (emphasis added). The jurors presumably agreed, finding that Rothschild’s rights under the First Amendment did not suppress Hermès’ interests in preventing any potential or actual consumer confusion that may arise from Rothschild’s use of the BIRKIN mark.
Consequences For web3: A Cause for Caution, Not Panic
Significantly, despite major media outlets such as the New York Times covering the decision with breathless language such as “Jurors Not Convinced NFTs Are Art,” it should not be understood from the jury’s finding that all artwork sold as NFTs cannot be treated as art. Rather, the jury appears to have relied on the circumstances around the MetaBirkins project to decide that the Lanham Act claims in this specific instance outweighed the artistic aspects of the artwork. This seems especially likely given Judge Rakoff’s instruction, noted above, that the MetaBirkin NFTs constituted “artistic expression” in some respects.
Indeed, the fact that piece of digital art is traded on a blockchain through an NFT platform should not, on its own, be sufficient for a finding against artistic speech, any more than would the fact that a painting is sold for money at a real-world auction. That is, both are commercial transactions involving a work of art. As Judge Rakoff noted in his summary judgment ruling, “as long as the plaintiff’s trademark is used to further plausibly expressive purposes, and not to mislead consumers about the origin of a product or suggest that the plaintiff endorsed or is affiliated with it, the First Amendment protects that use.”
This line drawn by the court, derived from the Rogers v. Grimaldi case mentioned above, is the one that creators of artwork intended to be sold as NFTs must observe. First, one can only use trademarks of another party in service of an expressive purpose, something Rothschild seems to have done with his MetaBirkin artwork. Second, one must not deliberately mislead consumers, which is apparently where Rothschild fell down.
Judge Rakoff’s final judgment confirmed the award of $133,000 to Hermès on Valentine’s Day, wrapping up the case in a shiny red (virtual?) bow, which Rothschild plans to rip open on appeal.
Concluding Thoughts
Contrary to the knee-jerk reaction from some observers following the Hermès v. Rothschild verdict, traditional intellectual property and free speech laws and precedent do and will continue to apply in the context of NFTs, although it always takes time for lawmakers and courts to settle on the specific application of those existing principles to evolving technologies.
Are there unique aspects of NFTs that could require existing laws to change or evolve? If so, it is likely their tripartite nature, comprised of a blockchain token, and piece of content, and a set of terms (usually a license), which act together to transfer ownership of the token and rights in the accompanying content. Interestingly, Hermès argued in its case against Rothschild that what the artist was really selling was just the blockchain token itself, as the accompanying images could readily be replaced by the artist even after an NFT sale. Had the Court agreed, this potentially could have eliminated the need for the jury to consider Rothschild’s First Amendment defense. However, Judge Rakoff held that from a consumer’s perspective, “they were purchasing a digital handbag image and not just a digital deed divorced from that image.” One could imagine other courts viewing NFTs from a more technical perspective, and reaching different conclusions.
Although the temptation to monetize art through NFTs may be great, artists must understand that if their art incorporates a third party’s brand or designs, they must be careful to avoid misleading the public in the manner in which they conduct their sales. Brands, too, in exploring the use of web3, should keep in mind that the law provides latitude for artists to provide commentary on third-party goods and services. Given the gray area at the intersection of these competing interests, the MetaBirkins case is likely to be the first, not last, of many skirmishes to come.
Lance Koonce is a partner at Klaris Law in New York where he focuses on litigation, intellectual property, and blockchain.
Louise Carron is an associate at Klaris Law in New York who advises content creators, start-ups, and nonprofits across creative industries.
This post originally appeared on the Klaris Law blog and is reproduced with permission and thanks