Arbitration in the Metaverse: Disputes over Web3

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Metaverse - TheFashionLaw

As Meta Platforms CEO Mark Zuckerberg has said, the metaverse is “the next generation of the internet,” a virtual environment you can enter – instead of just observing on a screen – where you can (or soon will be able to) work, play, socialize, shop designer brands, buy virtual land, and a lot more. Part of what makes the metaverse special now – as compared to existing videogame universes or social media platforms – is the ability to buy, own, and resell digital assets, a feature that has been enabled by the development of the blockchain technology. More than that, the metaverse allows people to escape the individual, geographic and social limitations that bind them. 

Although it still is at an early developmental stage, the global metaverse market is expected to reach $758 billion by 2026, and as with any groundbreaking technological development, the metaverse will give rise to complex legal issues. In fact, legal disputes are already surfacing in the courts, particularly when it comes to the right to create and sell non-fungible tokens (“NFTs”), i.e., digital assets stored on a blockchain that represent digital – or real-world – objects like art, music, or videos. In January 2022, Hermès filed a trademark lawsuit against digital artist Mason Rothschild for creating and selling 100 MetaBirkins NFTs that depict the company’s iconic Birkin bag. 

In response to Hermès’ trademark infringement and dilution complaint, counsel for Rothschild has compared his use of the Birkin trademark to Andy Warhol’s famed use of the Campbell’s soup cans in the early 1960s, arguing that he is selling art that is shielded from trademark liability by the First Amendment. 

Another one of the high-profile intellectual property battles related to the metaverse involves Nike, which filed a trademark infringement lawsuit against StockX in early February 2022, claiming that the reseller was offering up NFTs that display Nike’s trademarks without authorization

Several lawsuits will also arise in relation to contracts entered into before the metaverse era. For all intellectual property contracts drafted before the metaverse was even contemplated, a major source of contention will be to determine who owns the said rights in the metaverse and whether they include the right to mint a corresponding NFT. This issue was at the core of the lawsuit that production company Miramax filed against director Quentin Tarantino following the announcement of his plans to auction off NFTs of seven exclusive scenes from his handwritten Pulp Fiction script. Miramax argues that Tarantino’s NFT project violates their contract – although the contract was entered into long before the invention of NFTs. 

The Hermès, Nike, and Miramax-Tarantino lawsuits are far from being the only type of Web 3.0 dispute. There will inevitably be numerous claims lodged by users against metaverse platforms or among metaverse users, themselves. Although there will certainly be new types of disputes, the rise of metaverse will also give rise to disputes of the same nature we encounter today in the “real” world. 

Disputes Among Users

As for disputes among metaverse users, in addition to the trademark disputes already underway, and any potential criminal and tort disputes that inevitably carry over to the metaverse from the physical world (such as theft of digital assets, sexual harassment practiced by one avatar against another, housing disputes between neighbors, etc.), a large part of disputes will arise from transactions between users.

In the metaverse, users can: offer services to other users (e.g. gaming experience, concert, real estate agency services, coaching); create digital assets (e.g. wearable, accessories, art) and sell them to other users; and rent or resell parcels of virtual land to other users. Against this background, there are questions over what terms and conditions apply to these transactions? 

When it comes to NFTs, for instance, transactions are completed through smart contracts, which automatically transfer (permanently or temporarily) the ownership of the digital asset (i.e. virtual land, virtual objects, or virtual vouchers giving access to a virtual service) from one user to another upon reception of the crypto payment. However, these smart contracts are currently limited to monetary obligations and term limitations; they do not allow users to provide for more complex rights and obligations to govern these transactions. In some specific circumstances, it might therefore be advisable to also enter into a “classic” contract specifying in particular the real identity of the avatars and the applicable law and dispute resolution mechanism chosen by them. The applicable law would address all the issues that could not be anticipated upon coding the smart contract or drafting the “classic” contract.

Alternatively, NFT and/or metaverse platforms could also start providing fair, transparent, and impartial dispute resolution mechanisms for disputes between users. They could, for example, allow disputes between users to be decided by a third party through a decentralized justice system, similar to the one used by eBay in the early 2000s. They could also provide for automatic enforcement of these decisions, which would be particularly important given the avatars’ anonymity. The success of metaverse platforms will undoubtedly depend on their ability to address these dispute resolution issues.

The dispute resolution framework will likely have to be reinvented to account for the technical settings of the new environment we are moving into. Our legal system is based on geography because it is the world we currently live in, but in the metaverse – where anonymous avatars from all around the world are interacting and transacting with each other – time, location, and identity are fluid perceptions. The legal concepts of habitual residence, place of business of the parties, or real estate property location, which are traditionally at the core of private international law rules, become meaningless. Therefore, before investing in NFT ventures or the metaverse market, more generally, companies and investors, alike, would be well advised to carefully check the applicable terms of use, if any, and in certain circumstances, enter into a contract better suited to the particular needs of the transaction.

In case of disputes, contracts should allow for arbitration (after a potential mandatory mediation) rather than court litigation. These alternative dispute resolution mechanisms offer valuable advantages for digital transactions, provided they adapt to meet the challenges of technology and time sensitivity: the ability to agree in advance on the applicable law or the language of the proceedings, flexibility of the process, arbitrators’ expertise in the technologies at hand, ease of enforcement of arbitral awards under the New York Convention, etc.

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