In the Know | Properties in the Metaverse

By: Oluwasegun Joseph

What exactly is going on in the metaverse?

Virtual reality experiences continue to reach new heights as technologies advance. The word ‘metaverse’ has become a common word for the collection of computer-generated worlds. The largest social media company, Facebook, dove name-first into the metaverse by changing its name to Meta. In the metaverse, an avatar represents an individual in a boundless virtual world with endless possibilities. Individuals in the metaverse can play immersive games, create social groups, host parties, get married, and even purchase real estate. The novelty of the metaverse raises interesting legal questions, such as those regarding infringing on, mortgaging, renting, or leasing properties in the metaverse.

Real Estate in the Metaverse

Non-Fungible Tokens (NFTs) are used for buying and ascertaining ownership of goods and lands in the metaverse. Companies like Adidas, Atari, and Samsung have purchased real estate in the metaverse to give their customers immersive experiences. For example, Samsung launched its new flagship phones in its metaverse store, which was designed based on its New York City store. Samsung’s virtual store is strategically created to improve its customers’ experiences, but the land purchase of one accounting firm—PricewaterhouseCoopers— in the metaverse does not seem to have any apparent purpose. Perhaps, PricewaterhouseCoopers could rent or lease its virtual land to individuals or establishments until it finds a purpose for it. However, an interesting legal question is whether virtual lands can be leased. No case of leasing virtual real estate has emerged, but it would be unsurprising to hear about the lease of virtual properties. One issue that may arise is the question of the type of contract on which the rent or lease is based. Would the parties involved make a virtual or physical contract[1] with real-life implications? Cases have yet to arise from the renting or leasing of virtual lands. If one can rent or lease a virtual land, can it be adversely possessed? We can only wait patiently for what the metaverse holds.

Although NFTs are easily authenticated and proven, they can be stolen. If an owner rents or leases a virtual land, who bears the risk of loss during the rental period? Unlike physical real estate that cannot be moved, NFTs associated with a digital asset can be moved from one account to another. Recently, a New York based art collector, Todd Kramer, claimed to have lost more than $2.2 million of the famous Bored Ape collections to theft.

Intellectual Property in the Metaverse

A recently surfaced issue in the metaverse is trademark infringement. On February 3, 2022, Nike sued StockX, a Detroit-based sneaker exchange company, for misappropriating its famous check mark logo. StockX makes a significant part of its revenue by acting as a middleman between sellers of Nike’s shoes and buyers willing to pay above market for the shoes. StockX sees the metaverse as a platform to sell virtual images of shoes as NFTs continue to gain more popularity. Nike accuses StockX of minting NFTs of images of shoes with Nike’s logo on them and selling those virtual shoes at inflated prices without Nike’s consent. For example, StockX’s virtual versions of Nike Dunk Low Retro White Black sells for an average of $809 and has reached a price of $3500. However, the physical shoe sells for $100 in Nike stores. Indeed, StockX promises to hold a physical version of the same shoe in its warehouse that the owners of the NFTs can readily redeem should they chose to (or so it seems). Owners of the NFTs supposedly have the right to the physical shoes, but StockX’s redemption claim is misleading to unsuspecting consumers of its NFTs. In StockX’s fine print, it retains the right to unilaterally redeem a consumer’s NFT for an ‘experiential component’. StockX’s ‘experiential component’ provides its consumers with certain products, the benefits of unlocking prizes, or entry into an exclusive sale. This ‘experiential component,’ however, causes removal of the redeemed NFT from the consumers’ portfolio, thus depriving the NFT owners of possession of their physical shoes. A consumer may own a StockX Nike’s virtual shoe today and lose ownership the next day because StockX chose to unilaterally redeem it. Nike claims that in addition to its trademark infringement, StockX’s business model amounts to the siphoning of money off unsuspecting consumers, which smears Nike’s goodwill. The use of Nike’s logo coupled with the fact that the shoes are virtual makes it impossible for consumers to differentiate Nike’s original virtual shoes from other creators’ shoes using Nike’s logo.

Undoubtedly, these virtual shoes—which are just images of shoes–cannot be worn, thus they amount to nothing more than a receipt for their physical versions. StockX’s sale of virtual shoes with their physical versions in its warehouse is akin to selling a painting of a book for an exorbitant price even though the physical copy can be bought for less, read, and enjoyed by the buyer. As NFTs continue to grow, it is expected that more brands with longstanding trademarks would file infringement suits against businesses who attempt to make ‘quick’ money off these trademarks. Moreover, consumers who are deprived of the physical versions of their virtual items, like consumers who lose ownership of their shoes due to StockX’s decision to redeem their NFT for an ‘experiential component,’ may begin to file suits against NFT creators in the foreseeable future.

Takeways

More companies are likely to mark their presence in the metaverse through the creation of virtual goods and the purchase of virtual lands and artworks thanks to the expectation that doing so will draw in more customers and/or create future opportunity to reap enormous profits from metaverse investments, like those of PricewaterhouseCoopers. Like cryptocurrencies, many individuals and companies are taking initiatives to be part of a booming innovation. Meta’s plunge into the metaverse is likely to encourage more companies to invest in it, thus growing the metaverse further.

However, as NFTs continue to gain traction, lawsuits based on rightful ownership of artworks, contracts, properties, etc., will rise. The novelty of the metaverse is likely to give rise to new areas of law in the future—or at least the expansion of internet law, like the law surrounding cryptocurrency. Recently, reports of losses of millions of dollars in NFTs are surfacing. Buyers who’ve purchased certain NFTs without prior knowledge of their theft and the rightful owners of such stolen NFTs may end up settling their disputes in courts. Moreover, a plethora of lawsuits on intellectual property misappropriation should be expected.

 

 

[1] Physical contract here encompasses both electronic and paper versions of a contract in contrast to a virtual contract that is exclusively available in the metaverse.