Are Virtual Goods Still Goods for Trademark Purposes?

Written by Bryse K. Thornwell

In Yuga Labs, Inc. v. Ripps, et al, No. 2:22-CV-04355  (C. D. Cal. Apr. 21, 2023), Judge John F. Walter explored the use of trademarks in the world of non-fungible tokens (“NFTs”), which are tokenized assets that have been recorded on a blockchain. As intellectual property disputes continue to arise in the world of NFTs, the key issues that the court in Yuga Labs considered involved the scope of trademark protection for NFTs – including whether NFTs are “goods” for purposes of the Lanham Act; to what extent the sale of an NFT transfers ownership rights in its associated trademarks; and whether and to what extent the First Amendment and the test set forth in Rogers v. Grimaldi is a defense to the use of trademarks for NFTs.

Plaintiff Yuga Labs, Inc. (“Yuga”) is the creator of the world renowned NFT collection known as the Bored Ape Yacht Club (“BAYC”), which depicts cartoon-style illustrations of a particular monkey in various colors, facial poses, and accessories. In its complaint, Yuga alleged that BAYC NFTs have earned significant media attention and often resell for “thousands if not millions of dollars.” Yuga also claimed that it owns several unregistered trademarks for this collection (the “BAYC Marks”) that have been in use since April 2021.

Defendant Ryder Ripps (“Ripps”) is a visual artist who describes his work as “creat[ing] artwork that comments on the boundaries between art, the internet, and commerce.” In November 2021, Ripps began condemning the BAYC NFTs, claiming that Yuga “deliberately embedded racist, neo-Nazi, and alt-right dog whistles” in Yuga’s NFTs. In May 2022, Ripps, along with co-defendant Jeremy Cahen (“Cahen”), created their own NFT collection titled “Ryder Ripps Bored Ape Yacht Club” (“RR/BAYC”), which “point[ed] to the same online digital images as the BAYC [NFT] collection but use[d] verifiably unique entries on the Ethereum blockchain.”  Ripps and Cahen allegedly created their RR/BAYC NFT collection as a form of “appropriation art” aimed at bringing attention to Yuga’s offensive material and demanding that Yuga take responsibility for its actions.

In July 2022, Yuga filed a complaint alleging several causes of action related to various violations of the Lanham Act, intentional misrepresentation, cybersquatting, unfair competition, unjust enrichment, conversion, and interference with an economic advantage. Yuga claimed that the defendants were “seek[ing] to devalue the Bored Ape NFTs by flooding the NFT market with [their] own copycat NFT collection using the original Bored Ape Yacht Club images and calling [their] NFTs ‘RR/BAYC’ NFTs.” The defendant filed an answer that raised several affirmative defenses and counterclaims, ultimately claiming that Yuga’s lawsuit was an “attempt to silence creators who used their craft to call out a multi-billion-dollar company built on racist and neo-Nazi whistles.”

Yuga moved for partial summary judgment on its false designation of origin and cybersquatting claims; defendants’ affirmative defenses under the First Amendment/Rogers test, fair use, and unclean hands; and defendants’ counterclaim for a knowing misrepresentation of an infringing activity. Yuga also sought summary judgment on damages. The court granted Yuga’s motion for summary judgment on each claim raised in the motion, but denied its motion as to damages.

The court first granted Yuga’s motion for summary judgment as to its false designation of origin claim. To satisfy a false designation of origin claim under the Lanham Act, 15 U.S.C. § 1125(a), a plaintiff must show that it has “(1) a protectable ownership interest in the mark; and (2) the defendants’ use of the mark is likely to cause consumer confusion.” Defendants argued that the BAYC Marks were ineligible for protection because the BAYC NFTs were intangible; because plaintiff had not used the mark in commerce; and because Yuga had either transferred all trademark rights to NFT purchasers or abandoned the rights through naked licensing and failure to police.

The district court rejected these arguments, determining that although the marks were unregistered they could still be enforced. The court also held that the “use in commerce” element had been satisfied because Yuga had sold 10,000 BAYC NFTs, and such sales included exclusive access to membership perks, were associated with marketing partnerships and collaborations with various brands, and the BAYC NFTs were featured in various media articles.

The court also held that the marks were valid and protectable because “although NFTs are virtual goods, they are, in fact, goods for purposes of the Lanham Act.” The court noted that NFTs have “specific uses and values that are dependent on the consumer.” Moreover, the source of NFTs are reliably recorded, and the sales of NFTs arise from the goodwill that a brand has built. NFTs are also individually transferable between owners and purchasers, storable for an indefinite period of time, owned exclusively by a single owner, and are distinguishable based on their source.

Finally, the court determined that Yuga had not transferred or abandoned its trademark rights, because under Yuga’s terms and conditions, Yuga only granted NFT purchasers a copyright license with respect to the images (and not a trademark license to use the BAYC Marks). The court further found that abandonment only occurs by nonuse or if the marks become generic, neither of which occurred in this case.

The court then analyzed the factors set forth in AMF Inc. v. Sleekcraft Boats, 599 F.2d 341, 348-49 (9th Cir. 1979) to determine if the defendants’ use of the RR/BAYC marks was likely to cause consumer confusion. After determining that the BAYC Marks are both conceptually and commercially strong, the court examined the three most important factors for trademark infringement on the internet according to Internet Specialties West v. Milon-DiGorgio Enterprises, 559 F.3d 985, 989 (9th Cir. 2009), including: (1) similarity of the marks, (2) relatedness of the goods and services, and (3) simultaneous use of the internet as a marketing channel. After finding that all three relevant factors governing infringement on the internet were present in light of Ripps’ use of the same product with the same BAYC ID number, the court granted Yuga’s motion as to the false designation of origin claim.

The court then turned to the affirmative defenses. The defendants first argued that their use of the BAYC Marks was permitted under the test set forth in Rogers v. Grimaldi, 875 F.2d 94, 999 (2d Cir. 1989), as adopted by the Ninth Circuit in numerous cases, including Twentieth Century Fox Television v. Empire Distribution, Inc., 875 F.3d 1192, 1196-97 (9th Cir. 2017). Under the Rogers test, which presently is being reviewed by the Supreme Court of the United States, “[a]n artistic work’s use of a trademark that otherwise would violate the Lanham Act is not actionable ‘unless the use of the mark has no artistic relevance to the underlying work whatsoever, or, if it has some artistic relevance, unless it explicitly misleads as to the source or the content of the work.’” Although the defendants argued that the RR/BAYC NFT collection is an expressive work such that Rogers should have applied in this case, the court concluded that because only the sale of the NFT collection was at issue (and not the work itself), the Rogers test did not apply. The court also found the Rogers test inapplicable because the defendants’ marketplace and website contained no artistic expression or critical commentary, were instead “commercial activities designed to sell infringing products,” and were explicitly misleading by using the same images as Yuga’s NFTs. The court also rejected defendants’ affirmative defenses of nominative fair use and unclean hands.

The district court’s opinion is another in a growing line of cases defining the legal protections and limitations surrounding NFTs. Along with a recent ruling out of New York regarding “meta-Birkin” handbag NFTs, the courts are demonstrating that the decentralized nature of the blockchain is not yet impacting the application of intellectual property law to digital goods.

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