Role Of NFTs In The Fashion Industry: An Overview – Intellectual Property

Introduction

Recently, a new trend of merging blockchain technology with the
creative intellectual property via non-fungible tokens
(“NFTs”) had taken place. The idea has spread across all
market sectors, and now luxury fashion retailers have joined the
tokenization bandwagon. The principles that govern the luxury
fashion industry are similar to those that govern other industries.
The luxury fashion and beauty industries have generated thorough
documentation to better understand the competitive marketplace
because changes are so essential and complex. Without a doubt, the
raging fires of NFTs have sparked a burning yearning in the fashion
sector for blockchain technology. This blog presents an overview of
what luxury fashion is doing with crypto technology in this
feature, as well as what to expect as fashion moves forward into a
tech-savvy future.

What are NFTs?

Non-fungible tokens, or NFTs, are cryptographic assets generated
using blockchain technology. It enables the exchange of value
through a non-replicable medium. It has the ability to be a
one-of-a-kind and unrepeatable token that cannot be split but may
be used to represent real or virtual world things, as well as the
token’s own qualities and ownership, all while remaining within
a blockchain representation. This endows NFTs with the unique
qualities that make them so desirable. NFTs are created using
“smart contracts,” which are software codes that govern
actions such as validating ownership and regulating their
transferability. When someone produces an NFT, they write the
underlying smart software code that regulates the NFT’s
properties and adds those properties to the NFT’s accompanying
blockchain.

NFTs and Intellectual Property Rights

With all the opportunities that NFTs present for a business,
there is also the inevitable opportunity for misuse of a
business’s or brand owner’s intellectual property rights
held in any underlying asset through the minting of unauthorized
NFTs. Copyright infringement arises when a
reproduction right is infringed (i.e. the restriction against
reproducing or copying copyright works) or communication right is
infringed. (i.e. the restriction against communicating copyright
works to a new public not originally envisaged by the copyright
owner). Trademark infringement may arise where an unauthorized
party mints an NFT linked to the underlying asset, without the
asset owner’s permission, and advertises, offers for sale,
and/or sells the NFT using the asset owner’s registered
trademarks.

The purchaser of an NFT does not obtain all of the
underlying intellectual property rights to the work
linked with the NFT. The buyer’s specific intellectual property
rights are determined by the terms of the license agreement linked
to the sale. Ownership of an NFT as a unique token must be
distinguished from ownership of the material to which that NFT may
be attached. When someone buys an NFT connected to a piece of
material, they don’t get the intellectual property rights to
that content automatically. Ownership is only transferred if the
author of the original work expressly provides for it and consents
to it, just as it is with copyright transfers. Without such an
express provision, the buyer of an NFT acquires an implied
non-exclusive license to display the associated media in its
electronic wallet solely for personal use, but does not own the
underlying copyrights in the content with which the NFT is
associated, nor does he or she have the right to display such media
on any third-party product, website, or platform.

Role of NFTs in the Fashion Industry

In recent years, the fashion and beauty sectors have made a
concerted effort to promote an accurate and fair understanding of
business changes in order to reinforce new phrases that are in line
with current business practices. Fashion’s only hope of getting
back on the fast-paced digital train was the development of NFTs,
as it had completely missed the boat with E-commerce. When
e-commerce initially appeared on the scene, a large percentage of
firms were entirely uninterested in pursuing the new channel. Since
then, the fashion industry has grown far more careful. Gucci has
offered new products as an NFT last year, including one-of-a-kind
sneakers. Even premium watch brands are promoting NFT auctions
through the many social media platforms accessible. NFT 2.0 is here
to stay, and there’s no end in sight. In March 2019, an
original thought arose from the buzz surrounding blockchain
technology as it spreads across key industries like the arts and
entertainment. The item was the idea of three brands: Dapper Labs,
a digital couture company, and Johanna Jaskowska, whose iridescence
is a digital outfit that was eventually sold on blockchain for the
US $9,500, and then top luxury brand LVMH Mot Hennessy in May of
the same year. Louis Vuitton, the owner of some of the world’s
most recognizable fashion labels including Fendi, Dior, and
Givenchy, was the first to use blockchain-based tokens to ensure an
item’s authenticity. The Aura platform was created by
partnering with Microsoft and Consensys (a blockchain software
business). It’s a blockchain-based system that lets customers
track the origins and lifespan of their purchases. After conducting
a study on the subject at the Fashion Institute of Technology, it
is possible to make a compelling case that this knowledge is the
most valuable to customers in today’s customer-centric
environment. The usage of NFTs by luxury brands to reach out to
high-net-worth individuals. These tokens may now be used by luxury
fashion firms like LVMH to interact with customers in a unique way,
communicate their experiences, and reflect their values. Customers
in this day and period are more inclined to patronize a company
that interacts with them through the use of a story behind the
product, according to research. When it comes to younger
millennials and Gen Z market segments, sustainable fashion and
beauty is major motivator. NFTs enables premium brands to provide
customers with one-of-a-kind, valuable experiences, which will
increase brand awareness, engagement, and sales. However, despite
the obvious benefits, fashion has yet to figure out the best method
to incorporate NFTs.

What are the possible positives and negatives of NFTs in the
Fashion Industry?

An NFT can create virtual fashion products as a designer and
distinct as actual products, addressing the issue of digital
clothing replication. NFT expands the range of unique items
available. It could be used by a fashion business to sell its own
show footage or personalized backstage images. When it comes to
digital copies, the NFT makes it easy to track down the original
copy that a collector would want to buy. NFT might have an impact
on the resell market not only by maintaining an accurate map of
changes in ownership of a specific item but also by paying
companies a royalty every time their product is sold in the
second-hand luxury market, for example. In brief, the notion that a
digital item can be as distinctive as a physical one is intriguing
for fashion since it allows brands to monetize their digital assets
and extends their control over the product beyond the sale.

On the other hand, despite their obvious benefits, NFTs are
still a relatively new asset class that may present buyers with
unforeseen obstacles. Some difficulties to be aware of and looked
into more before buying NFTs i.e., anyone might snap a photo of the
artwork, upload it to a blockchain, and sell it, therefore buyers
must verify that they are buying NFTs from the artist or that the
seller has the permission to sell the NFT. NFTs by themselves are
unable to link an NFT’s creation or ownership to a real person
in the physical world or to validate that the NFT’s creator
holds the underlying rights to associate that NFT with a specific
creative work. Despite the fact that NFTs can authenticate the work
and the chain of ownership, the problem remains that if the
original ledger record is fraudulent or has flaws from the start,
NFTs merely affirm and perpetuate that deception, therefore
counterfeiting will occur in the world of NFTs as well.
Furthermore, depending on how many times the artist sells that
item, the value of your purchase could be diluted. Therefore, it is
important to define the worth of what is being purchased per the
contract, and see if that varies whether you buy one of the first
ten in a series or the hundredth. Finally, if you buy something,
you must know its value so that you can include it in your tax
returns and insurance policy. As this new asset class develops,
laws, IRS guidelines, and insurance policies change, and they may
disagree with you on the value of your NFT.

Legal Battle: Hermès International, et al. v. Mason
Rothschild [1:22-cv-00384 (SDNY)].

Hermès, whose original physical Birkin bags range from
$9,000 to $500,000, recently filed a lawsuit against the individual
behind the collection of 100 MetaBirkins non-fungible tokens
(“NFTs”) that include images depicting furry renderings
of its famous Birkin bag, on January 14, 2022. Hermès
claims that MetaBirkins founder Mason Rothschild is a “digital
speculator who has infringed on the brand MetaBirkins for use in
creating, marketing, selling, and facilitating the exchange of
digital assets known as non-fungible tokens,” which simply
“rip off Hermès” famous BIRKIN trademark, by
adding the generic prefix “meta”, which refers to
“virtual worlds and economies” where digital assets such
as NFTs can be traded and sold.

The defendant, according to Hermes, has been infringing on its
trademark by utilizing @MetaBirkins on social media handles and
“the totality of the Birkin mark in hashtags, including
#MetaBirkins and #NotYourMothersBirkin,” which is commercial
in nature and contradicts Rothschild’s claims of fair use.
Hermes also claims that Rothschild’s use of its trademarks,
such as MetaBirkins NFTs, infringes on its trademarks, as such
unauthorized use is “likely to cause confusion and mistake in
the minds of the purchasing public, and, in particular, falsely
creates the impression that the goods sold by Rothschild are
authorized, sponsored, or approved by Hermès when, in fact,
they are not.” Rosthchild’s “willful and
purposeful” actions “dilute the distinctive quality of
the BIRKIN Mark and the goodwill connected with it,” according
to the lawsuit.

Under New York General Business Law, Hermès asserts
allegations of federal and common law trademark infringement, false
designation of origin, trademark dilution, cybersquatting, and
injury to business reputation and dilution. The company is seeking
monetary damages, including Rothschild’s profits, as well as
injunctive relief to prevent him from using its trademarks in any
way, including “using any reproduction, copy, counterfeit, or
colorable imitation of Hermès’ Federally Registered
Trademarks to identify any goods or the rendering of any services
not authorized by Hermès.”

While enforcing against the unauthorized use of protected
content in NFTs is largely the same as enforcing against any other
online infringement, and brand and content owners can seek relief
directly from the usual suspects, such as website operators, ISPs,
registrars, and so on, this case will inevitably raise some novel
and interesting questions, particularly in terms of remedies, given
that the infringing goods at issue are NFTs and thus are stored on
the blockchain. It is because blockchain transactions are connected
to every previous transaction record, records cannot be modified
after they have been entered; however, there is a procedure through
which an NFT can be transmitted to an unreachable address,
presumably erasing its value.

Furthermore, if the court orders Rothschild to block access to
the MetaBirkins NFTs, this will likely raise questions about the
individual proprietors of the allegedly infringing NFTs. Since the
decision has not yet been made, it is important to note that if
Rothschild continues to advertise and sell NFTs under the
MetaBirkins brand, and builds a company that offers a range of
virtual products and services under the MetaBirkins brand, it will
eventually preempt Hermès’ ability to offer products and
services in virtual marketplaces that are uniquely associated with
Hermès and meet “Hermès’ quality
standards.”

Legal Implications of NFTs in India

The Copyright Act of 1957 is India’s most important piece
of legislation on the issues of Copyright. The copyright will
exist in works such as original literary, dramatic, musical, and
creative works; cinematograph films; and sound recordings,
according to Section 13 of the aforementioned Act.

One of the concerns related to NFTs is whether NFT qualifies as
a work that can be copyrighted in India, based on the
above-mentioned category of works. A video clip or a sound
recording, for example, may qualify as a work that can be
copyrighted under this Act, but what about a GIF, or even a picture
or a tweet? A tweet or a GIF might not qualify as a work capable of
being copyrighted if we properly follow the Copyright Act. At the
moment, it appears that not all NFTs are eligible for copyright,
making it difficult for owners to claim copyright on NFTs. As a
result, there is a pressing need to broaden the scope of works that
can be copyrighted under Indian law.

Another issue is that it’s unclear whether NFTs constitute
“contracts” under the Indian Contract Act of 1872 or as
derivatives under the Securities Contract (Regulation) Act of 1956.
If NFTs are classified as the latter, they are prohibited from
being exchanged, traded, sold, or bought.

Another problem is that NFTs are digital collectibles with
limited rights, and they rarely transfer copyright ownership to a
holder unless contractually agreed upon. If a copyright license is
obtained from the copyright owner, an NFT holder can use the
copyrighted work. At most, an NFT holder can only display a
purchased work in a limited capacity or sell the NFT. The NFT
holder is not allowed to make more copies of the work. According to
Section 17 of the Indian Copyright Act of 1997, the creator of a
copyrighted work can transfer all of his rights in the work to the
buyer of the work if he so desires. It might be able to transfer
all copyrights to the NFT platform if it is required. For example,
WazirX, India’s first NFT marketplace, has given the founders
of NFT total ownership rights under its terms and conditions. But,
despite the future of NFTs, they are currently marketed through a
“smart contract” in India and overseas, which has raised
fresh unsolved problems about whether legislation governs the
operation of NFTs. It will take some time for these issues to be
resolved, whether through the courts or legislation. For the time
being, there isn’t much clarity about NFTs.

Conclusion:

non-fungible tokens provide IP owners with new ways to monetize
their holdings. To increase the value of their portfolio, IP owners
should understand the benefits and drawbacks of employing this new
technology. The application of NFT in the fashion industry is still
in its infancy. The problem is that new technologies never cease to
amaze us, and intellectual property rules were not written with
blockchain and NFTs’ future existence in mind. So, while
general legislative ideas may apply to specific works acquired by
NFTs, there are still numerous characteristics of NFT intellectual
property that need to be addressed under present legal rules. In
the race between law and technology, the latter never stops posing
challenges to the former, and it is necessary to assess whether the
current legal framework can respond to all of these challenges, or
whether intellectual property rights regulation needs to evolve or
adjust to cover and regulate all of the new technological variants
that are going to govern our day-to-day lives in future.

Role Of NFTs In The Fashion Industry: An
Overview

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