Over the last year, the fashion industry has turned to non-fungible tokens (NFTs) to enhance the consumer experience, through the sale of digital fashion goods. Issues around ownership, transferability and infringement of copyright in digital assets are progressing fast, and that will only increase as companies adapt to the metaverse.
WHAT ARE NFTs AND WHY IS THE FASHION INDUSTRY EMBRACING THEM?
NFTs are unique cryptographic assets - they cannot be replicated or exchanged for another good of equivalent value. NFTs are then verified on a blockchain, which functions as a digital certificate of authenticity. This year, NFTs have taken off in the fashion sector, partly owing to the accelerated online demand for fashion goods following Covid-19. Gucci is a trailblazer in this regard, releasing digital-only trainers that consumers can “wear” in photos, by way of augmented reality. Gucci commented that it is “only a matter of time” before major fashion houses move into the NFT sphere.
On one level, NFTs, operating as unique tokens of authenticity, appear to be well suited to high-end fashion. NFTs can transform digital garments from marketing tools into tradable assets, whilst offering a more intimate consumer experience and reaching a consumer base who may not be in the locality of, or be inclined to visit, physical shops. This provides an additional, and potentially high-growth, revenue stream for fashion houses. Yet NFT exchanges also offer limited barriers of entry, with start-up costs significantly lower than in the physical fashion world. Because of this, there is the potential for market saturation by high street or fast fashion retailers, which may damage the exclusivity that couture fashion embodies.
NFTs are not yet specifically addressed in UK legislation. However, there is no reason that copyright would not apply to a digital fashion piece underpinned by an NFT, which may be protected as an artistic work (provided that the key requirements, including originality, are satisfied).
Verification on a blockchain may enable designers to identify the ownership and authenticity of their digital goods. However, ownership of an NFT, as a unique token, is distinct from ownership of any rights attaching to the content to which the NFT is linked. Therefore, the buyer of an NFT does not automatically obtain the underlying copyright protecting the work itself; instead, it simply owns a unique record on the blockchain, along with a hyperlink to the file of the work. Rights are only transferred if the author of the original work grants a licence or provides an assignment. The right of the NFT purchaser to use the work may be implied by law, although the scope of an implied licence is typically limited and may be disputed.
Another potential issue, albeit not exclusive to the fashion industry, is “copyfraud”. NFTs are “signed” by the person who uploads the content (a process referred to as “minting”). Yet attempts to falsely identify as the owner of the copyright in the underlying work are already occurring. This problem is exacerbated by the decentralised nature of blockchain, with the encryption and anonymity features preventing the identification of the genuine owner.
Moreover, digital fashion pieces can be reproduced and shared online at speed and without technical limitation, for example by screenshotting and redistributing the digital work. Controlling third party copying of the original digital content may present a challenge for fashion houses using NFTs, given that copies can be produced even more rapidly than in the ‘physical’ fashion market.
Whilst fashion houses will, understandably, be keen to tap into this new market, the potential for infringement should not be underestimated - as is the case in the physical market, the value of digital high-end fashion works may diminish upon the entry of replicas into the market. This undermines one of the key premises behind NFTs: exclusivity.
- The fashion house and purchaser of the NFT can achieve certainty by setting out the terms of an intellectual property licence (in a smart contract or traditional agreement), which may address the parties’ respective rights of enforcement in instances of copying of the NFT.
- Robust online monitoring strategies, including submitting takedown notices to NFT exchanges, should also be implemented in order to assist with keeping copying at bay.
- Given the unregistered nature of copyright protection (in the UK), it is always important that fashion houses collate evidence of the creative and design process to help establish their rights to the work in the event of a dispute.
Whilst NFTs present exciting opportunities to transform goods into digital tradable assets in the age of the metaverse, fashion houses cannot solely rely on NFTs to enforce their rights in the underlying works against copycats. Companies and designers will likely continue to face copyright infringement issues - potentially on a more immediate and extreme scale than in the ‘physical’ market. Investing in robust online enforcement strategies will be important for fashion houses choosing to invest in NFTs. Fashion houses should also consider licensing their copyright to the purchaser of an NFT, as well as addressing enforcement rights, pursuant to a contract.
This article was originally published by the Luxury Law Alliance.