Legal issues in the metaverse / Part 2 - Trademarks and copyright, NFTs and civil law principles in the metaverse

Part 2 - Trademarks and copyright, NFTs and civil law principles in the metaverse

In our first article, we examined the nature of the metaverse, the shared virtual world. In the metaverse, trade in virtual goods and services between avatars, as well as the names, clothes, accessories worn by avatars, lead to several trademark and copyright issues. Virtual commerce in the metaverse requires the tokenisation and virtualisation of products and services that exist in the real world, which makes NFTs an indispensable element of the metaverse. In the second of our metaverse articles, we look at issues related to intellectual property law, NFTs and general civil law.

Trademarks and copyright in the metaverse

Various forms of intellectual property exist in the metaverse, one aspect of which is trademarks, as the name, logo, slogan, melody (sound trademark), visual forms of any distinctive characters in the metaverse, the graphic appearance of virtual goods that can be purchased, the names of avatars, and unique colours (colour trademarks) can all be legally be protected, which is worth prioritising when creating IP inside the metaverse, to protect the brand. The other side of the relationship between the metaverse and trademarks is that goods can be tokenised and potentially purchased in the metaverse, including brands that are used in the metaverse. Brands that have not yet covered services, virtual goods, virtual services, software, graphics, etc. related to the metaverse in the classes of goods and services covered by their trademarks will be forced to revise the classes of goods and services covered by their trademarks and potentially file new trademark applications to protect their brand and trademarks, as has been done by, e.g. Victoria’s Secret in the US (Official: Victoria’s Secret forays into NFTs and metaverse with 4 blockchain-related trademark filings), which filed trademarks for its virtual clothing line, and McDonald’s (McDonald’s files trademarks for virtual restaurants in metaverse) regarding virtual food, drinks and virtual restaurants.

The copyright protection of software and graphical and musical works that form part of the metaverse is self-evident and identical to the traditional world of copyright. It does not raise any particular issues in the existing copyright environment. However, this is not the case with tokenised works, such as NFTs for digital and virtual works of art that can be purchased in the metaverse, where it is important that by purchasing the NFT, the holder of the NFT does not acquire any copyright in the tokenised work on which the NFT is based, and will not be entitled to use the underlying work in any way other than the free uses that have existed in copyright law until now, without the permission of the copyright holders and without paying royalties.

An interesting question arises if someone tokenises a digital work that they did not create: in this case, copyright infringement will not necessarily be established for the tokenisation itself, but the online display of the work as a token in the metaverse, even in thumbnail form, may constitute a copyright infringement.

In addition, the question of authorship arises in copyright law if an avatar creates a work of authorship in the metaverse, and since only an individual person can be an author and an avatar is a virtual person, the question is whether the individual person who created the avatar will be entitled to copyright in the work so created. As an analogy, reference can be made to the well-known copyright practice of pseudonymous works, where the individual person behind the pseudonym will be the copyright owner, not the artificially created pseudonymous person. Consequently, the copyright in works created by an avatar will also belong to the individual person who created the avatar. It is a question of how the creator proves through their avatar that they are the author of the works.

However, the biggest challenge for trademark and copyright holders will be the detection and enforcement of infringements in the metaverse, for which the application of artificial intelligence to the metaverse is essential. Without it, the detection and discovery of infringements would face serious obstacles. In the area of enforcement, the transnational and cross-border nature of the metaverse will raise questions of applicable law, jurisdiction and competent authorities, especially if the action is not against the metaverse provider but against the user of the metaverse hiding behind an avatar.

NFTs in the metaverse

NFTs are a solution based on blockchain technology, which is primarily used to tokenise digital assets and to trade these tokens. NFTs can be the enablers of interoperability between areas of the metaverse and have made it possible and easy to channel the trade in virtual assets in the metaverse into the real economy. The issuance of NFTs raises several legal issues, but in most countries such as Hungary, it is not yet subject to specific regulation. In addition to copyright and trademark aspects, the issuance of NFTs may also raise general contractual, civil law issues related to the smart contracts that are automatically created and executed on blockchain for the sale of NFTs together with the payment. In the case of these smart contracts, enforceability and provability, especially regarding anonymity, hiding behind avatars, formal validity, and the handling of breaches of contract, are always relevant issues. Fundamental legal questions also arise as to which country’s law applies to the purchase of NFTs in cross-border metaverse transactions, and what rights the person acquiring the NFTs has in the NFTs purchased. The property regime (which currently applies only to physical objects and money in Hungary, but not to NFTs) can be used as an analogy. In the near future, the forthcoming Mica Regulation (a draft regulation on markets in crypto-assets) will settle the legal situation of crypto-assets at the EU level, but will not cover all crypto-assets, as the current text of the draft Mica Regulation has identified as an exception to the scope of the Regulation crypto-assets that are unique but not fungible with other crypto-assets, which may include NFTs.

Civil law principles are also called into question in the metaverse

Even basic civil law principles become complicated regarding the metaverse and the avatars it contains. For example, if the person who created an avatar dies, can their avatar, the virtual assets (NFTs) assigned to it (acquired by it) be passed on? On the other hand, can the avatar itself die in the metaverse without the person who created it dying?

Is the personality right of the individual person who created the avatar affected if the good reputation of the avatar is violated in the metaverse, or if their avatar is hacked and private communications made through the avatar accessed (violation of privacy), or their personal data relating to the avatar are misused, which personal data relate to the virtual avatar and are not the same as the personal data of the person who created the avatar (protection of personal data, right to informational self-determination)?

Can anyone be sued for infringements in the metaverse against another avatar? And if yes, who?

What rights do users who buy a virtual plots/land/property in the metaverse have in these areas? Can other users enter such areas in the metaverse with their avatar without permission?

There are so many issues for which there is no legislation or case law, only some of which can be addressed in the general terms of use of the metaverse, which are published by metaverse providers.

The second part of our article continues with questions regarding data protection, cybersecurity, artificial intelligence, advertising and employment law.

Proposed actions for companies involved in the metaverse

Based on the above, the responsibilities of companies and organisations involved in the utilisation of the metaverse are:

• The trademark portfolio should be mapped and, if necessary, new ones should be registered for the metaverse.
• It is worth looking for technological solutions to detect copyright, trademark and other IP infringements in the metaverse.
• It is recommended that copyright and trademark holders issue their own NFTs for their protected products, services and works themselves, and offer them in the metaverse to prevent others from tokenising and selling their works, products and services.
• As a metaverse service provider, the areas and issues not yet settled by legislation should be settled in the general terms and conditions.

For more information on the metaverse in Hungary, contact your CMS client partner or local CMS experts.