The colors of the metaverse

November 28, 2022by Ami Bhatt, Aleksandra Gruszka, Jen Lee, Ilona Logvinova, Stephanie Spangler

“Color is the place where our brain and the universe meet,” said Paul Cézanne, whose impressionistic strokes are the stuff of legends and iterate on beauty in a myriad of ways. Cézanne’s genius was in articulating expression through color, and in reflecting on color he seemed to understand it to be the place where we cognitively connect with the beauty, essence, and vibrancy of our broader world.

But what if it doesn’t stop there? What if there are multitudes of places where the brain and the universe can meet? And if we tailor the thinking to our tech-enabled modern day, what if one of those places is the metaverse, with its many expressions and iterations? If you ask for a definition of “what the metaverse is,” you’ll see a spectrum of enunciations and embroidered articulations (and Google search responses), but it’s tough to find exactitude (or falsifiability, really), in its defined term.

And there’s good reason for that: the metaverse is very much in its ideation and build state.

We, as lawyers, have a real opportunity to shape it, iterate on it, and also determine not only its look and feel but also the values and ethics of a new kind of immersive experience that we’ll all likely be a close part of soon enough.

We have a meaningful opportunity to get in at the ground level as legal professionals but also as data scientists, philosophers, engineers, teachers, parents, doctors, gamers, and—more broadly, as thinkers and doers—to think critically about the kind of world that we’re living in now in three dimensions, some of the systemic bugs that we see in it, and how we can work toward an enriched, improved, and augmented version in an interactive digital space to make it that much better and brighter.

Keeping these broader questions top of mind, in this article we touch on some of the legal themes and ideas permeating the development of the metaverse; including artificial intelligence (AI), non-fungible tokens (NFTs), and intellectual property (IP). We raise questions, offer perspectives, suggest approaches to uncovering answers, and offer how to be a part of the evolving conversation as lawyers, and thoughtfully go forward with building the metaverse from here.

Building the metaverse

Unlike the development of Web 1.0 (the internet, access to static web pages) and Web 2.0 (mobile internet-based social media networks that people interacted with), the next generation of the internet (whether that is Web 3.0’s semantic web, Web3’s decentralized web, or a combination of the two), we have a real opportunity to build, design, and structure the metaverse as an enriched, immersive convergence of the physical and digital worlds that prioritizes inclusivity, diversity, responsibility, and ethics by design. If Web 1.0 and 2.0 were happening to us in a way that we could only receive and interact with, the next generation of the internet is being developed right now, which will directly inform how the metaverse will be built along with us, and return to the ethos of creating and governing by the community, where the value will be generated by the users and contributors.

AI and the metaverse

AI both powers and empowers the metaverse—AI’s power and reach in this digital space is foundational, operational, iterative, and creative. From a foundational sense, machine learning operations (MLOps) and automation govern the base infrastructure layer of the metaverse to allow it to operate quickly and seamlessly, and the rise of supercomputing and quantum computing will enable the faster processing of larger sets of data for greater simultaneity in processing. This means, in very real terms, that any number of people across the world, all speaking different languages, may be able to communicate at the same time and with AI-enabled real-time translation. The reach of that seems colossal because it truly bridges the inclusivity gap across cultures and geographies, to allow people from everywhere to communicate anywhere.

But in the words of Spiderman, “with great strength comes great responsibility,” and the responsibility here is to align with ethical and responsible AI principles to enable fair, transparent, ethical, explainable, and accountable AI translating across languages and dialects, and mitigate for bias and lack of representation. We’re seeing AI regulation and leading industry best practices and standards surfacing across use cases and industries, but new use cases brought forward by the metaverse will benefit from a heightened delineation of risks and risk factors to account for emerging AI risks.

Another key consideration is the applicability of current privacy regulation and updates that may be needed for new categories of personal data surfacing in the metaverse (for example, “inferred” data, biometric data from movement of a retina, identification of a person by their gait (that is, their pattern of walking) and movement, or voluntary and involuntary health data readable from interaction with metaverse-friendly devices that track pulse, heart rate, or other biometric factors). How do we monitor, protect and safeguard both the collection and use of this type of data, and mitigate the risks of threat actors getting ahold of it?

But even without malintent, how do we think about industries such as advertising, which will inevitably have greater access to influence in the metaverse, and mask their influence in a way that they haven’t been able to in 3-D? More specifically, with Web 1.0, we received advertising just like everyone else—through our TVs, through the internet, through commercials or pop-up ads online. With Web 2.0, there was a rise in targeted and algorithm-driven marketing—we’re getting ads targeted to us, based on the data collected about us from various sources. In Web 3.0, there’s now an opportunity for entirely immersive marketing, in which avatars that exist in the same immersive digital space as your avatar may be wearing something with a specific brand, holding a specifically branded handbag, listening to certain music, and riding around in a certain type of car—all because it’s an ad bot potentially placed there to specifically influence you and your consumer behavior. AI in the metaverse may be able to assess the physiological reactions and biometric data of users, allowing for a whole new realm of targeted advertising, especially when we consider the recent rise of data brokers and the data that they collect, package, and sell.

An additional layer of consideration is around avatars and legal liability. How do you assign liability to an avatar whose actions are powered by a human but are also in part actualized by AI? Avatars in the metaverse are essentially digital humans, and they’re 3-D versions of chatbots that exist to replicate us. And in a realm where we’re moving from narrow intelligence (AI made to carry out a specific act/purpose) toward general AI (developed to self-learn and carry out a broader set of actions), legally we need a way to distinguish liability between man and machine or be able to trace liability back to a human agent, especially when we are dealing with potentially self-learning machines. Do we assign a legal personality to robots, or will we find ourselves in a scheme similar to what we see in the corporate context, with some form of limited liability for avatar actors? And how do we parse through liability for the human agent versus those responsible for the AI development and build?

Last, on the topic of responsible AI. One of the benefits of building this next-gen tech is that we have the benefit of informed and thoughtful skepticism. When the internet (Web 1.0) was being built, we weren’t asking questions about privacy, fairness, “explainability,” sustainability—largely because we didn’t know what to ask. But now we’re seasoned digital natives, and we’ve experienced both the pitfalls and the potential for good. And we have an opportunity to build in these considerations from the ground up.

With an understanding that any tech debt or ethical/regulatory debt for component parts of the metaverse will likely only compound as the tech continues to be built out, how do we thoughtfully consider what it means to design and build responsibly? Two considerations emerge here.

First, we should focus closely on the collection of training data for voice-activated AI and translation, because studies show that people are generally more abrupt and less polite when they talk to a voice-powered AI device. And if we want to empower and enable meaningful connections in the metaverse, with authentic (rather than literal, impersonal) translation, then AI will need to mimic the meaningful and authentic aspects of our communications. AI learns from us and mimics us. The way we communicate in the metaverse will ultimately dictate how we coexist in the space and form communities, which is a crucial base layer.

Second, there’s also a real opportunity to be intentional about our use of training data and to employ creativity and inclusivity when assembling data sets for use of AI in the metaverse. In other words, whereas today, training data inherently has bias because the real world that the data is being drawn from unfortunately has historical bias embedded into it, with the metaverse we have an opportunity to intentionally construct a more inclusive world by supplementing and assembling data in a way that may mitigate bias and enrich inclusivity, so that the metaverse AI-powered avatars and programming can act in a way that is foundationally more inclusive and, in effect, create a more beautiful, diverse, and immersive world.

IP and the metaverse

The metaverse will also present new ways to think about use and protection of intellectual property, as creative content and immersive experiences will play a critical role.

Copyright

Copyright protection extends to “original works of authorship fixed in any tangible medium of expression.” Many works used in the metaverse are copyrightable, including software, pictures, graphical works, and sound recordings (music). For example, you can listen to Ariana Grande tour on Fortnite, or attend a fashion week in the metaverse (Decentraland’s Vogue metaverse fashion week was held in March 2022), or watch artwork by various artists. Some of the key questions we as lawyers may ask ourselves, then, is how may real-world copyright play in the metaverse and how may copyright created in the metaverse play in the real world?

When metaverse stakeholders import or incorporate music, photographs, names, or likenesses of people into a virtual experience, the traditional laws of copyright and right of publicity apply. This means that this type of use may need permission from the owners of those rights. Whether permission is required depends on the nature of the use and the stakeholders involved. Use of certain copyrighted material in the metaverse is likely to generate vigorous discussions on fair use.

When it comes to the creation of content in the real world, whoever creates content owns it, unless certain narrow exceptions apply or ownership is changed by contract. However, the default ownership is not so clear in the metaverse, where users direct creation but the underlying code enabling the creation of images or other content was created or otherwise is controlled by the platform. Thus, as between the user and the platform, ownership may be disputed and will largely be addressed in the platform’s terms of use or end-user license agreement.

Another key consideration is how we will be tracking down copyright infringements in the metaverse. One thing is certain: it will likely be increasingly complex in the metaverse. IP rights holders will be looking for cooperation with platform providers and traditional methods of policing of IP, such as takedown procedures, are likely to continue, but also there would be a need for innovative protection of IP rights. This could involve due diligence by way of investigations, market surveys, trap purchases, takedowns, collection of evidence, etcetera. This topic also raises content moderation issues. There would be a need for metaverse copyright-infringement-monitoring services, so reputable vendors offering infringement monitoring/detection services on metaverse (for example, detecting copyright infringers) would soon get plenty of work to do.

If we want to think about solutions to warn off infringers, we could consider contractual ones: agreements that protect against unintended distribution of copyrighted works; prompt registration of copyrights in metaverse assets and software (in jurisdictions where this is possible, for example, the United States); properly marking copyrighted works (©) and adding prominent statements making it clear which activities are not permitted; and implementing technological measures to protect against unauthorized distribution of the works.

Branding and trademarks in the metaverse

Many brand owners are already thinking about their place in the metaverse. Brands ranging from restaurant chains to fashion brands to professional athletes and sports teams to retail chains and lifestyle brands have filed for trademark protection for goods and services related to the metaverse.

There are many reasons for seeking metaverse-related trademark protection. Brand owners may anticipate that the metaverse will provide them with additional avenues to promote their products and services or provide new methods for customers to experience and engage with their brand. In fact, while a fully realized metaverse may still be years away, brands have already been engaging and experimenting with the metaverse in its current iterations, whether it’s a partnership between Nike and Fortnite for a character in that game to wear Nike-branded shoes, or Walmart creating virtual game worlds in Roblox called Walmart Land and Walmart’s Universe of Play, or organizers of Burning Man holding a virtual festival in Second Life.

Additionally, while some brand owners might be able to rely on their existing trademark registrations, metaverse-specific filings could provide a proactive way for brand owners to protect against infringement.

So how are brand owners approaching trademark applications for the metaverse? These applications are usually filed in a handful of relevant trademark classes: Classes 9 (downloadable goods), 35 (online retail services featuring virtual goods/services) 36 (financial services, including digital tokens), and 41 (online/non-downloadable goods; online or virtual entertainment services). In addition, brands generally appear to be filing for their existing marks. However, brand owners may file for metaverse-specific names, as the NBA’s Brooklyn Nets did in filing for the “Netaverse” or with the restaurant chain Panera’s filing for the “Paneraverse.”

Shifting brand strategy to the metaverse isn’t without potential challenges, though. For jurisdictions such as the United States—where use of a trademark is a necessary to secure trademark rights—brand owners may face challenges in showing that use in a virtual medium satisfies the standard of “real-world” use or that the mark as displayed in the metaverse matches the filed-for trademark.

As brand owners think about building and protecting their brand though, another important consideration will be thinking about “where.” Trademark rights are territorial (meaning a trademark registration in, e.g., the United States doesn’t generally provide protection in another jurisdiction) but the metaverse is meant to be without boundaries. Brand owners will need to decide where to file for protection. In addition, geography and jurisdiction are likely to play a role in enforcement as brand owners consider which country’s rules apply in an infringement matter. Or will it be a platform’s terms or protocol’s standards that ultimately govern trademark rights and enforcement?  These are among the complex questions brand owners will need to consider as they build a presence in the metaverse. 

Patents

Patents protect novel and nonobvious inventions, and in the world of AI and the metaverse, these patents typically range from hardware, such as the physical headset device, to software, such as the platform for accessing the metaverse. In a way, patent applications, which are generally filed at the early stages of innovation, provide a glimpse into our potential future where our brain will meet the universe.

But receiving a patent is not always an easy feat. It was once said “everything that can be invented has been invented” (an infamous 1899 quote attributed to Charles H. Duell, the commissioner of the US Patent Office). Indeed, in an increasingly crowded space, inventors may face challenges in demonstrating novelty and nonobviousness. For metaverse-based inventions in particular (for instance, software, processes, non-hardware inventions), inventors will also need to consider how their invention is distinguishable from similar inventions that are already found outside of the metaverse. Put another way, simply existing in the metaverse may not be enough to receive a patent.

Despite what Duell may have believed, we’re still seeing an increasing trend in metaverse and AI patent applications by players big and small—truly a testament to the momentum, excitement, and innovation around AI and the metaverse! To put this in perspective, a study conducted by the US Patent and Trademark Office (USPTO) found notable growth in AI patent applications, from 30,000 patent applications in 2002 to 60,000 applications in 2018. While the USPTO acknowledged that all patent applications increased during that time, it found the share of AI patent applications grew from 9 percent in 2002 to 16 percent by 2018.

Continued innovation within the metaverse and AI will also present opportunities to test our traditional thinking around use and protection. As just one example, the DABUS (Device for the Autonomous Bootstrapping of Unified Sentience) patent cases filed in several jurisdictions around the world challenged our traditional thinking around inventorship. Specifically, can an invention created by an AI, without human intervention, receive a patent? Taking this thinking a bit further, if human intervention is required, is it because inventorship requires sentient decision making? And if so, what happens if (or when) AI becomes sentient?

We will undoubtedly see more ways our traditional thinking will be tested, making our role as lawyers important (and fun!) in navigating and shaping these waters.

NFTs and the metaverse

NFTs, which are built on blockchains, can exist separately from the metaverse. However, NFTs can enable the development of the metaverse. This section focuses on defining characteristics of NFTs, provides notable aspects of NFTs that enable it as a gateway into the metaverse, and provides trending litigation that will lay the foundation for intellectual property claims in the metaverse as well as a potential use case for how NFTs could be used as part of litigation in the metaverse.

What are NFTs?

NFTs are cryptographic, digital assets on a blockchain with unique identifiers and metadata that distinguish them from one another. There are three primary characteristics of NFTs:

1. NFTs are unique. They cannot be traded or exchanged at equivalency, as distinguished from cryptocurrency, which, by definition, are fungible.
2. NFTs are scarce. There are a limited, predefined number of NFTs that are minted (or created) for collection.
3. Ownership of NFTs is verifiable. The blockchain technology upon which NFTs are built tracks and verifies the ownership and transfer of NFTs.

NFTs defining who we are, how we make a living, how we build community, and how we transact in the metaverse

The use cases for NFTs are vast and untapped, but there are aspects in how NFTs could be optimized for applications in the metaverse. To be clear, NFTs are not the gateway into the metaverse, but they are one of the many inbound channels to connect our experience in the physical and digital worlds. These aspects will inform and enable how we form our individual and communal identities, own assets, and make money in the metaverse. The topics listed below are not siloed verticals. An NFT will lend itself to many, if not all, of these aspects.

1. Identity ownership: Identity is part of what makes each of us uniquely situated as humans. In the metaverse, a participant can present themselves as a digital twin (a true digital copy of one's physical identity) or one could reinvent themselves and be a completely different person (or other animate or inanimate object). The breakthrough that NFTs offer is identity ownership, in which NFTs could be potentially owned by a participant (assuming that ownership is transferred along with the NFT). The avatar, art, digital accessories, and object (such as clothing, headgear, shoes, bags, cars, boats) are digital assets owned by the participant, subject to any withheld rights. The unlock, then, is that the aspects that make up a participant’s identity or brand can also be sold/transferred and monetized.
2. Financialization: Enabled by blockchain technology, the use of cryptocurrency to purchase NFTs helps to financialize the asset without a trusted third party. Buyers can purchase NFTs at online marketplaces (for example, OpenSea, FTX, Magic Eden) to directly purchase a high-value NFT without an intermediary to verify the financial transaction. The “financialization” of NFTs as art is just the beginning. Now that we have the proof of concept, other NFT developers and creators are experimenting with ways to further “financialize” NFTs, whether that be through NFT collections (such as Bored Ape Yacht Club’s limited NFT collection of 10,000 NFTs), buying virtual real estate on metaverse-esque platforms, or using NFTs as collateral for loans. As the metaverse develops, the use of NFTs will be a tokenized method by which participants can fully engage in financial activities.
3. Utility: Aside from being a valuable art asset, what can an NFT do? What is their utility? Currently, there are use cases highlighting the utility of NFTs, both offline and online, showcasing the ease at which NFTs can enable participants to use their assets in both physical and digital worlds. Whether online or offline, the utility of NFTs includes tickets, memberships, access to physical goods/merchandise, and discounts. Offline, NFTs can serve as tickets to “IRL” (that is, live) events and conferences, memberships to clubs or VIP-type areas of retailers. Online, NFT holders can receive “airdropped” assets, access to online software or media such as movies and music, memberships in decentralized autonomous organizations (DAOs), and tickets to online events. NFTs also merge and move through both the physical and digital worlds. For example, an NFT purchaser could have VIP access to certain physical and digital areas limited only to those who own NFTs in a particular NFT collection. The NFT can serve as a membership card or could be a digital version of a ticket stub, providing access to events in and out of the metaverse.
4. Community: NFTs can also enable the growth of like-minded people and build community. Ownership of NFTs, which are often part of a larger collection, result in a group of people who have invested in a digital asset that provide a membership into an online community with aligned interests, namely those who want the group of owners to succeed because they have a vested interest in that asset. NFTs can serve as access to a DAO, which reinforces the notion of community with an underlying governance structure, and one that is decentralized and borderless. But the size and access to the community relies on the number of NFTs minted and the cost of those NFTs. At the moment, access to these communities remains relatively small: limited to developers, decentralized finance/Web3 thought leaders, early adopters, and investors. There is a contradiction in the community that NFTs have built. While Web3 offers a decentralized and often community-based approach to that technology, the scarcity of NFTs inherently make the community built around an NFT collection exclusive in some way. The exclusivity helps drive the value of the NFT and helps to support the financialization of it. Even still, as the utility of NFTs grows, the buyers and sellers of NFTs will also grow, developers will continue to create more NFTs, and economies of scale will help to drive the financial barriers to entry down.

NFT intellectual property litigation shaping legal review and process in the metaverse

Where you have use cases, you will find disputes arising from those use cases. These disputes sometimes escalate into litigation, and here is where you will find an illuminating grappling by the courts with established legal doctrines and emerging technology. The current state of litigation shows not only what the courts are thinking about when it comes to rights and liability with NFTs but also where their outcomes are trending, which will help to inform legal risks as the metaverse develops. The following intellectual property cases and procedural cases reveal how NFT disputes are being handling by the courts now, but also show the tip of the iceberg, as these types of disputes will only increase as the metaverse becomes more prevalent.

Trademark litigation

• Hermes v. Rothschild: In May 2022, the court issued an order denying Rothschild’s motion to dismiss permitting Hermes’ trademark infringement and related claims to proceed. The order confirmed that the Rogers test applied, but whether the defendant’s use of “MetaBirkins” misled consumers is a fact-intensive inquiry. Rothschild has since filed a motion for summary judgment. Assuming the parties do not settle over the course of this litigation, a decision in this case, as well as the Yuga Labs v. Ripps case below, will be foundational for any trademark litigation arising from conduct in the metaverse where an NFT creator or artist uses another’s trademark as part of the artwork.
• Yuga Labs v. Ripps: Plaintiff (creator of Bored Ape Yacht Club NFTs) sued Ryder Ripps (a conceptual artist) for trademark infringement alleging that Ripps scammed consumers into purchasing a copycat collection entitled RR/BAYC NFTs by misusing the plaintiff’s trademarks. In August 2022, Ripps filed an anti-SLAPP motion (or, in the alternative, a motion to dismiss) asserting that his RR/BAYC NFTs were protected speech by the First Amendment and under the Rogers test.
• Nike v. StockX: Nike alleges that the defendant StockX, an online retailer, infringes its trademarks for selling unauthorized images of Nike’s shoes as part of StockX’s NFT collection entitled The Vault. StockX asserts it is not infringing because the NFTs serve as a “claim ticket” to actual sneakers that are authenticated and stored in its warehouse facilities. Here, NFTs are not positioned as art but instead serve a utilitarian purpose directly linking the NFT to a physical product. This is likely the most metaverse-esque litigation to date, as it deals with the convergence of the physical product (the Nike shoes) and the digital asset (the NFTs). The outcome of this case will showcase how courts are handling disputes that exist in both physical and digital worlds.

Copyright litigation

• Miramax v. Tarantino: Miramax sued Quentin Tarantino for selling NFTs that depict parts (including pages, handwritten notes, and doodles) of the Pulp Fiction screenplay. Tarantino asserted that while he assigned certain rights to the film, he reserved rights in the screenplay and, therefore, as the copyright owner of the screenplay can make derivative works of the screenplay, including NFTs. The parties settled in September. This case highlights the type of copyright ownership disputes that can arise from NFTs created as derivative works. Here, Tarantino asserted that the NFTs were derivative works of the screenplay, while Miramax asserted that the NFTs were derivative works of the film for which it was the copyright owner.
• Roc-A-Fella Records v. Damon Dash: The court ordered a temporary restraining order against Roc-A-Fella Records cofounder Damon Dash to restrict him from auctioning Jay-Z’s album Reasonable Doubt as an NFT. Dash countersued and the parties have since settled. Dash later asserted that he was not trying to sell the copyright in the album, but rather his interest in the record company. While the facts may never be adjudicated in court, this case highlights the challenges and misconceptions of copyright ownership when a new technology, such as NFTs, provide a mechanism for the transfer of ownership.
• In Europe, one of the (so far) few court cases related to NFTs began in Germany over the launch of August Sander’s photographs. August Sander’s great-grandson Julian wanted to bring August’s iconic photos (a total archive that had 10,700 photographs) onto the blockchain via OpenSea. These NFTs would be given away for free, with users only needing to pay gas fees. Julian’s goal was to “secure the legacy of August Sander on the blockchain.” Soon after, the collection vanished. This was because of the copyright claim brought by SK Stiftung Kultur, a Cologne-based not-for-profit cultural foundation. SK Stiftung Kultur maintains copyright rights to the collection from 1992—when Julian’s father and August’s grandson Gerd Sander sold August Sander’s archive to SK Stiftung Kultur, with whom he had worked closely throughout his career—until 2034. The outcome of this case will hopefully shed some light on how the copyright law translates to NFTs and blockchain technology.

NFTs as service of process

• LCX v. John Doe Nos. 1-25: A New York State court judge issued an order permitting the plaintiff’s counsel Holland & Knight to serve a copy of the order to show cause and related papers via a service token or service NFT (Ethereum-based token). The token contains a hyperlink to a website created by Holland & Knight. Assuming that an NFT service token is effective (note that whether the defendant[s] actually receive notice or appear in the litigation is dubious), this case hints at a future in which NFTs could be used to facilitate service of process (or other similarly significant documents such as subpoenas) in the metaverse.
• UK court has recently ruled that individuals and entities can now be served legal documents via NFTs. In July, the High Court of England and Wales allowed Fabrizio D’Aloia, founder of Italy-based online gambling company Microgame, to file a lawsuit against anonymous people by airdropping NFTs into wallets originally held by D’Aloia but stolen by unnamed individuals. This decision will allow D’Aloia to serve legal documents to people who are not known but are connected to two digital wallets. This is significant in the crypto sector, where scams and hacks can often only be tied to wallet addresses. It shows the court’s willingness to adapt to new technologies, embrace the blockchain, and actually step in to help consumers.

Conclusion

“It is our choices, Harry, that show what we truly are, far more than our abilities” - Albus Dumbledore, Harry Potter

In the sections above, we aimed to structure a number of questions pointing toward answers and share our perspectives on rising legal themes that might characterize the metaverse as it is architected across use cases and industries. If you remember just one thing from this article, we hope that it’s distilled in the form of a thoughtful call to action, to think critically about the evolution in this space, to question and reevaluate first principles, and to “design-think” about legal premises, protections, and privileges. The path forward isn’t obvious, but we’re in the distinguished position of paving the road for it to be properly thoughtful. The metaverse feels colorful and, in effect, the future seems bright. Let’s indulge the beauty and optimism and help it be the best version of itself that it can be.

Comments and opinions expressed by authors are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company.