Intellectual Property, Freedom of Expression and NFTs: Hermès v Rothschild

by Kanerva Jalas

Questions of the interplay between freedom of expression and artistic freedom, intellectual property and Non-Fungible Tokens (NFTs) have arisen since the rise of the blockchain based digital art form. But what constitutes a NFT, and what are the potential legal conflicts between intellectual property legislation and digital commodities? NFTs consist of tokens establishing ownership for a certain digital good. The token which one owns is stored on blockchain ensuring secure and permanent proof of ownership over the token. NFTs differ from another frequently used token on blockchain - Bitcoin - in the sense that unlike the latter, NFTs are non-fungible. This means that they are all unique, and vary in their monetary value. Another difference between Bitcoin and NFTs lies in the use of smart contracts: the utilisation of smart contract technology within the NFT transactions allows for an efficient and fast verification of transactions, and hence, ownership. With the purchase of a NFT, the owner receives a certificate representing the ownership and the authenticity of the purchase. Through secure token-based technology and unique artworks, the NFT market has gained large-scale attention, raising the value of some NFTs to several million dollars. The most expensive NFT up-to-date has been sold for almost 92 million US dollars. An example of a NFT collection which has been able to increase its value is the Bored Ape Yacht Club, a collection of 10 000 digital assets, the tokens of which are stored on the Ethereum blockchain.

Since the creation of NFTs, a discussion has arisen on the interplay between intellectual property rights and the ownership of NFTs. Intellectual property rights in general refer to the ownership of intangible goods, such as a song, or a picture. The right of ownership allows the exclusion of others from using or recreating the good. Intellectual property rights are usually divided into five main categories: copyright, related rights or neighbouring rights to copyright, patents, trademarks and industrial designs. In connection to NFTs, the first important distinction must be made between the original copyright rights which the creator of the artwork immediately gains from the creation of the work, and on the other hand, the ownership of the token which has been purchased. The division of these rights are in most cases indicated in the smart contract which the parties enter into through the transaction. A common agreement in this connection (similarly to the purchase of a tangible artwork) entails that the purchaser of the NFT token receives the rights to e.g. display the NFT piece, but the entitlement to the artwork remains with the creator. However, the possibility to transfer all economic rights of the NFT - with the acquisition of the token - remains, but is subject to an agreement from the creator of the work. An area of intellectual property where the use of NFT technology has resulted in multiple lawsuits relates to the trademark functions of a certain mark. Trademarks refer to distinctive registered marks used in a commercial setting to indicate origin of certain goods or services. Conflicts between trademark holders and NFT owners have arisen, for example, with the resale of a NFT. Some NFTs include trademarked, or marks that resemble trademarked content. Where such assets are sold, questions arise on whether the inclusion of a registered mark within the work was a contributing factor resulting in the existence of a trademark infringement. Where this is argued to be the case, three considerations must be taken into account: first, whether there was unauthorised use of a registered trademarked; second, whether the unauthorised use was made in connection with a sale or distribution of a good or a service, and third, whether the unauthorised use will amount to a trademark infringement on the basis of, for example, likelihood of confusion or tarnishment or reputation.

A conflict between trademark and NFTs was present in the case of Hermès v Rothschild. In November 2021, luxury brand Hermès sent a cease and desist letter to Mason Rothchild, an LA-based designer and artist. Rothschild, the creator and co-founder of retail concepts such as Terminal 27 and Gasoline, for releasing a Hermès inspired artwork collection ‘Metabirkins’. The artist released a digital collection of NFTs where each piece of art depicted a digital illustration of a fur-covered handbag. The collection was inspired by the infamous Birkin collection by Hermès, on which the artist took a twist by adding a colourful fur-coating and making the works in an NFT format. The collection was named ‘Metabirkins’. After Rothchild refused to cease selling his artwork collection, Hermès filed for a civil lawsuit at the Southern District of New York for a trademark infringement on the grounds of likelihood of confusion, cybersquatting, and dilution of the company’s brand. Rothschild argued for defence on the basis of the First Amendment enshrining the protection for freedom of expression in the United States. The New York Court proceeded to apply what is known as the ‘Rogers test’, including a balancing exercise between the public interest to avoid confusion within the consumer base, and the right to freedom of expression.

Hermès’ lawsuit could be seen to rely on the initial positioning of the collection on the NFT market: Rothschild presented the Metabirkins to constitute a ‘tribute’ to the Birkin collection, and wished to see whether the works could create a similar effect on the NFT market as the designer bag has held in the fashion world. The NFTs proved to be able to acquire such a status, with some selling for almost 45 000 US dollars. In the beginning of February of 2023, the New York jury found - in favour of Hermès arguments - the existence of a trademark violation on the grounds of dilution of brand, cybersquatting and likelihood of confusion, resulting in an award of damages for Hermès worth 133 000 US dollars. In the judgement, the court concluded that there had been visible confusion within consumers of whether the NFT collection was in collaboration with the luxury brand. The artist and his legal team, on the other hand, argued that the NFTs contributed to commentary of animal cruelty within the fashion industry, and should therefore rely on the parody exception to intellectual property rights. This argument was dismissed by the court due to a finding of the collection as a ‘tribute’ to Hermès Birkin design, instead of a criticism.

The conflicts between the existing intellectual property rights and NFTs has resulted in lawsuits which will establish the general framework for NFT transactions. The new situations will require either the initiation of new legislation addressing the new type of technology, or adaptation of existing intellectual property legislation to the developing digital assets. For now, the latter has been applied by courts; however, with constant development of technology, enactment of new legislation could prove necessary.

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