Digital Twins and Virtual Infringement: Analyzing Trademark Dilution and Aesthetic Functionality in Metaverse Luxury Fashion

1. ABSTRACT

This article examines the legal friction at the intersection of luxury fashion and Intellectual Property Rights (IPR) within digital ecosystems. Focusing on the emergence of “digital twins”, virtual replicas of physical luxury goods, this research addresses the core legal question of whether traditional real-world trademark protections and trade dress doctrines can organically extend to intangible, virtual assets. Employing a qualitative and comparative legal methodology, the study analyzes the tension between commercial trademark dilution and digital artistic expression under the Rogers test, while scrutinizing the defense of aesthetic functionality in virtual spaces. A critical evaluation of landmark disputes, including Hermès v. Rothschild and Nike v. StockX, reveals significant statutory gaps in current international trademark classifications. Ultimately, this article proposes forward-looking frameworks for WIPO and regional IP bodies to adapt existing doctrines, ensuring balanced protection for luxury brands without stifling digital innovation.

Keywords: Trademark Dilution; Digital Twins; Metaverse Commerce; Aesthetic Functionality; Trade Dress; NFT Licensing; Virtual Luxury Goods

2. INTRODUCTION

The concept of a shared, immersive virtual world produced by combining blockchain, augmented reality, virtual reality, and the internet is known as the metaverse, and it is no longer just a sci-fi vision. The metaverse is an increasingly popular virtual environment where individuals can engage with one another and digital assets within a common space. Large digital companies like Roblox, Microsoft, and Meta have invested millions of dollars in creating and expanding metaverse platforms, which will be regarded as the cutting edge of innovation, economic expansion, and social change.

As this emerging domain continues to attract interest for business, entertainment, and social activities, it also introduces distinct legal issues, especially concerning trademarks. The central question is how established trademark laws would be applied within the metaverse. When a user utilizes a trademark in the metaverse, it raises the issue of whether current trademark laws are adequate to safeguard users’ ownership rights against potential infringements by others.

Further, the rise of “digital twins,” which refer to hyper-realistic, three-dimensional virtual replicas of real luxury items transferred onto the blockchain as Non-Fungible Tokens (NFT’s), is crucial to this legal landscape. In the fashion sector, international brands employ digital replicas to verify physical products and profit from virtual clothing for consumer avatars, effectively establishing a connected link between physical and digital commercial sectors. Nonetheless, legal complications grow when unauthorized independent creators reproduce pixel-for-pixel digital duplicates of protected trade dress and luxury designs without permission from brand owners. Since these virtual items replicate the precise aesthetic features of physical source identifiers, they exploit a distinctive gap in intellectual property: they do not imitate the physical function of the product but instead misappropriate its commercial reputation and brand value. As a result, these unapproved digital twins engage in virtual trademark infringement by creating consumer confusion about market endorsement and brand origin, circumventing the conventional cross elasticity limits of global trademark categories.

This article addresses three related legal questions. First, does the trademark doctrine of trademark dilution extend to digital twins of luxury goods in decentralized virtual platforms? Second, the aesthetic functionality doctrine an idea that came about to stop the possibility of a trademark monopoly over design elements that are essential to competition still has doctrinal significance in a virtual world where there is no physical utility. Thirdly, does the Rogers test for artistic expression meet the constitutional requirements of NFT projects that make use of luxury brand aesthetics? The article relies on an analysis of the trademark law in India, the USA and the EU as well as relevant WIPO guidelines and international IP instruments.

3. BACKGROUND AND CONCEPTUAL FRAMEWORK

On a commercial level, a digital twin is a virtual copy of any physical product, authenticated by blockchain, that has its own economic value and can be owned, transferred and used in a digital space. Unlike a digital image or a promotional simulation, a digital twin is connected to proof of its origin via NFT infrastructure, and is therefore technically unique and rare. For eg. A digital twin of a Chanel jacket or a Bottega Veneta bag could be displayed by an avatar in a virtual environment, sold to a second market, or licensed for virtual applications.

In the retail sector, luxury brands utilize digital twins as decentralized proof of authenticity to fight against physical counterfeiting, or as independent virtual clothing for user avatars. Legally, this converts a conventional clothing design into digital assets, creating distinct revenue sources while introducing complex boundary disputes over the limits of physical design ownership versus software code.

3.1 The Nice Classification System and the Class 9 Loophole

The global trademark registration functions under the Nice Agreement (1957),[1] which organizes products and services into 45 specific classes to avoid market confusion. Traditionally, fashion brands safeguarded their key intellectual property by registering source-identifiers in traditional “silos”: mainly Class 25 (Clothing, footwear, headware) and Class 18 (leather goods, handbags, accessories).[2]

However, the metaverse takes advantage of a structural gap in this system. When an unauthorized creator produces a digital twin of a luxury handbag, they are essentially distributing downloadable software, digital tokens, and virtual items, all of which clearly belong to Class 9. Since a genuine registration in Class 25 does not inherently provide exclusive rights to Class 9 digital code, a legal conflict emerges. Courts must look past these rigid silos, increasingly depending on the Doctrine of Natural Expansion to assess if consumers genuinely anticipate a heritage brand’s physical trademark rights to cover virtual assets.

3.2 The Indian Legal Framework for Trademark

The Trade Marks Act of India, 1999,[3] managed by the CGPDTM,[4] offers strong safeguards for luxury brands in digital realms by incorporating the Nice Classification system, which now explicitly includes NFT-verified digital products (Class 9) and clothing for virtual avatars (Class 41). Section 29(4) provides a legal anti-dilution protection for famous trademarks,[5] safeguarding them against usage on unrelated or non-competing digital assets. The Indian judiciary reinforces this via principles of transborder reputation and internet passing off, rendering the framework flexible for new digital and decentralized environments.

Internationally, the doctrine of trademark dilution is codified under Section 43(c) of the Lanham Act as amended by the Trademark Dilution Revision Act 2006,[6] and Article 9(2)(c) of the EU Trade Mark Regulation 2017/1001.[7]

3.3 The Economic Nature of Luxury v. Open Source Virtual Spaces

The financial worth of luxury fashion is fundamentally based on Veblenian economics, wherein the desire of consumers is influenced by deliberately sustained scarcity, rigid exclusivity, barriers to entry, and elite social signalling.[8] IP law acts as the legal shield that defends this artificial scarcity against violations and market overcrowding.

On the other hand, the core structure of the metaverse and Web3 relies on open-source software, decentralization, content created by users, and seamless digital duplication. In a digital environment where replicating intricate code takes little effort and sharing happens instantly, the fundamental principle of luxury exclusivity is significantly undermined. When virtual environments make it possible for anyone to create luxury silhouettes, they also make prestige accessible to all. As a result, the absence of strict IPR enforcement methods allows unauthorized digital twins to risk market saturation, undermining the unique and desirable “goodwill” that luxury brands have meticulously built over centuries in the physical realm.[9]

4. LEGAL ANALYSIS

4.1 The Doctrine of Natural Expansion vs. The Class 9 Loophole

Digital twin litigation reveals an inherent conflict in the international Nice Classification system, as luxury brands file trademarks in physical categories such as Class 18 and 25, while unapproved virtual replicas function as digital assets categorized under Class 9.[10] This administrative mismatch produces a significant legal fiction, designating an unapproved copy of a safeguarded design outline as standalone software code instead of an infringing wearable consumer product.

To avoid this classification discrepancy from protecting infringers, courts need to increasingly transcend strict class limits by leveraging the Doctrine of Natural Expansion. This principle claims that the rights of a trademark owner reach beyond their current market to products or services that consumers would reasonably anticipate the brand to offer as it develops. In contemporary trade, this expectation has fundamentally changed. Global luxury brands such as Gucci, Balenciaga, and Nike are actively creating a lasting presence in Web3 environments via virtual shops and cooperative gaming experiences. Since consumers now inherently anticipate that a heritage fashion brand will have a digital presence, the complete distinction between Class 25 tangible goods and Class 9 digital replicas is legally obsolete. When an unauthorized creator produces a duplicate digital twin, they take advantage of a formal administrative classification to circumvent the consumer-source relationship, resulting in an immediate potential for confusion about sponsorship, affiliation, or official licensing.

4.2 Trademark Dilution: Blurring and Tarnishment of Virtual Prestige

In situations where a court finds that a consumer has sufficient digital literacy to differentiate a third-party virtual pixel from a genuine physical luxury item, thus negating a typical claim of direct source confusion, unauthorized digital twins continue to be significantly actionable under the principle of Trademark Dilution. Luxury brands function within Veblenian market dynamics, where a product’s economic worth is primarily influenced by its exclusivity, scarcity, and carefully curated prestige.

Two threshold questions must be addressed when considering whether dilution is possible within a metaverse platform: (1) whether the virtual consumers constitute a relevant public for purposes of distinctiveness; and (2) whether there is a cognisable market within the platform where the commercial activity takes place for the purposes of the relevant trademark statutes.

Further, when independent creators flood decentralized metaverses with exact replicas of well-known designs, they commit trademark dilution via two separate legal channels: blurring and tarnishment.

Dilution by blurring occurs when a well-known trade dress is continuously copied by unauthorised parties without any restriction. If there are thousands of unvetted user-created “digital twins” of a particular luxury fashion house bag silhouette in the digital marketplace, the unique and immediate link between the design and the fashion house is greatly reduced.

At the same time, these assets have the potential of being diluted through tarnishment. Digital assets can be embedded into low quality, adult-oriented, or even hugely controversial virtual environments without the watch of the brand owner in open-source, user-generated environments such as Roblox or Decentraland. For instance, placing a hyper-realistic digital twin of a heritage brand’s signature pattern will damage the brand’s hard-earned goodwill and elite reputation if the avatar is involved in illicit or low-aesthetic gameplay. However, under legislation, such as under Section 29(4) of the Indian Trade Marks Act, 1999, or the US Federal Trademark Dilution Act, famous marks have a specific and strong protection against commercial harm, with the preservation of the brand’s prestige taking precedence over the formal prerequisites of competing in the same physical product market.

4.3 The Defense of Aesthetic Functionality in Pixels

One of the most intricate legal loopholes arising in virtual fashion lawsuits is the possible exploitation of the Doctrine of Aesthetic Functionality by digital creators. Historically, functionality acts as a barrier to trademark and trade dress protection; if a design feature is necessary for the article’s use or purpose, or if it influences the cost or quality, it cannot be exclusively owned as a trademark. While utilitarian functionality pertains to mechanical processes, aesthetic functionality stipulates that a design element is considered functional if its sole use by a single manufacturer disadvantages competitors significantly in a non-reputational manner, as the feature is motivated entirely by consumer aesthetic preferences.

In the physical realm, a luxury coat has two roles: it denotes social status (the aesthetic trade dress) and it provides warmth to the wearer (the utilitarian function). Nonetheless, in a fully digital metaverse, physical usefulness no longer exists. A virtual replica of a luxury jacket cannot protect an avatar from weather, nor can a digital twin purse carry actual keys.

Since virtual fashion does not have physical use, its complete market value is limited to conveying visual status. Digital infringers take advantage of this gap by promoting an extreme aesthetic functionality defense, claiming that controlling digital silhouettes hampers competition in the market. Nonetheless, this defense will not hold if a design has gained secondary meaning as a unique source identifier.

Courts must critically distinguish between generic aesthetic features and established source-identifying designs. If a specific silhouette or pattern has acquired secondary meaning i.e. meaning consumers instantly recognize it as a symbol of a specific luxury house, it transcends pure aesthetics and operates as a protectable legal asset, blocking creators from using “artistic freedom” as a shield for systematic corporate copy-pasting.

There is no rational connection from physical doctrine which prohibits monopolization to maintain vital colour or design choices, to a virtual framework that denies all fashion protection under the pretence of pure aesthetics. The functionality doctrine cannot protect copy-pasting if particular combinations of elements, such as the Hermès Birkin flap and saddle stitching, are uniquely distinctive rather than inherently required for avatar involvement. Virtual aesthetic functionality should be invoked only if the asserted trade dress protection covers a broad category of design choices that are crucial to entering a competitive market.

5. CASE LAW DISCUSSION

5.1 Hermès International v. Rothschild (2023)

In late 2021, digital artist Mason Rothschild developed and promoted a series of 100 digital artworks named “MetaBirkins.” These assets consisted of digital images illustrating faux-fur variants of the renowned, trademark protected Hermès Birkin handbag design and were marketed as Non-Fungible Tokens (NFTs) on online platforms. Rothschild promoted the initiative directly with the “MetaBirkins” brand name and website domains, generating over $1.1 million in trading volume.

Hermès International initiated a lawsuit claiming trademark infringement, trademark dilution, and cybersquatting. Hermès claimed that Rothschild was taking advantage of their valuable brand reputation and trade dress to mislead consumers into thinking the luxury brand had officially endorsed or licensed the Web3 initiative. Rothschild sought to dismiss the lawsuit, asserting that his work constituted artistic commentary on luxury consumerism, protected from legal action under the First Amendment.[11]

The court rejected the motion to dismiss and permitted the case to go to a jury, establishing that digital assets associated with NFTs fall under standard trademark regulations. The court applied the two-pronged Rogers Test (originating from Rogers v. Grimaldi[12]) to weigh Hermès’ intellectual property rights against Rothschild’s freedom of speech. According to this standard, an artistic creation is protected from trademark assertions unless:

• The use of the trademark has no artistic relevance to the underlying work whatsoever, or

• It has artistic relevance but explicitly misleads consumers as to the source or content of the work.

In February 2023, a federal jury decided unanimously in favor of Hermès on every count, granting the luxury brand $133,000 in damages. The jury determined that although the project had nominal artistic significance, Rothschild had deliberately crafted the digital campaign to clearly deceive consumers into thinking there was an official corporate connection.

The ruling legally determined that the commercial use of a digital twin, particularly utilizing a luxury brand’s name and trade dress to promote digital goods, supersedes an artist’s free speech rights. This significant ruling clearly indicates that the First Amendment cannot be exploited as an unconditional defense for unauthorized commercial digital adaptations of tangible luxury assets.

5.2 Nike, Inc. v. StockX LLC (2025)

In January 2022, the online resale platform StockX introduced its “Vault NFT” initiative, creating and selling non-fungible tokens that showcased Nike trademarks. StockX promoted these Vault NFTs as “digital twins” or claim tickets directly linked to physical, verified sneakers securely held in its vaults. The program enabled users to quickly trade the tokens on the blockchain without incurring shipping costs or repeated physical verification, except if they opted to “redeem” the token for the actual sneaker.

Nike initiated a lawsuit alleging trademark infringement, dilution, and unfair competition.[13] Nike claimed that these Vault NFTs were distinct, unauthorized digital items that took advantage of its reputation, emphasizing a significant price difference where the digital versions sold for much more than the physical sneakers. StockX defended the program by referencing the First Sale Doctrine and nominative fair use, contending that since the original shoes were genuine items lawfully acquired in the secondary market, Nike’s authority over further distribution was depleted, making the digital twin simply a virtual proof to track legitimate ownership.

The legal dispute in the above case focuses on the limits of the First Sale Doctrine as it relates to the shift from tangible products to digital code. When regarded simply as a digital receipt for a validly acquired physical product, the doctrine protects the reseller from liability; however, if the digital twin is seen as a separate commercial asset with its own economic worth, the doctrine does not hold, resulting in sole control remaining with the brand. The lawsuit changed significantly when Nike included counterfeiting allegations after discovering StockX had erroneously authenticated counterfeit sneakers. In March 2025, the court issued a partial summary judgment favoring Nike, ruling that StockX was responsible for selling counterfeit shoes, which significantly weakened StockX’s claim that its digital twins were flawless evidence of authenticity.

Although there isn’t a conclusive jury decision as the parties reached a settlement, it serves as a significant alert to the fashion sector. It asserts that resale platforms cannot effectively use the First Sale Doctrine to connect the physical and digital realms, showing that creating unauthorized digital replicas of branded assets poses significant risks of trademark violation and counterfeit responsibility.

6. CRITICAL ANALYSIS AND FINDINGS

The intersection of high-end fashion and Web3 reveals fundamental flaws in current intellectual property framework. Current jurisprudence depends significantly on judicial discretion to adapt twentieth-century legislative frameworks to decentralized blockchain assets. Compelling courts to adjust analogue metrics like adapting the 1989 Rogers test for dynamic pixel assets results in significant international commercial unpredictability, causing both fashion brands and digital creators to lack a reliable global benchmark.

This regulatory delay is automatically highlighted by the international Nice Classification system. Although downloadable virtual items and non-fungible tokens (NFTs) were included in Class 9, the classification still remains structurally inadequate. Class 9 exclusively focuses on downloadable, localized formats. It does not inherently record assets that exist solely in immersive, lasting virtual environments where objects are actively streamed from decentralized servers. This creates an immediate enforcement gap; unauthorized digital twins functioning in interactive systems often evade the downloadable limit of Class 9, compelling brands to defensively partition registrations among service-related categories such as Class 41 and Class 42.

Moreover, this disjointed legal structure creates a significant socio-economic disparity. Heritage luxury groups have the substantial financial resources necessary for intense, extended legal battles to protect their designs, as shown in the lengthy Hermès and Nike disputes. On the other hand, independent designers and new digital artists encounter total legal invisibility. For these independent creators, the expenses of proactively registering worldwide trademarks in Classes 9, 35, 41, and 42, along with the exorbitant costs of metaverse legal disputes, are excessively burdensome.

As a result, the conventional, isolated IPR tests can no longer adequately regulate immersive realities. The legal system needs to progress beyond its strict focus on physical formats and local downloads. Jurisprudences globally must clearly acknowledge that a virtual asset’s market worth is directly linked to the actual goodwill and reputation of the physical design outline.

7. CONCLUSION

In conclusion, the transition of luxury fashion into immersive Web3 spaces has made traditional, analogue intellectual property systems insufficient. The conflicts involving Hermès and Nike reveal that unapproved digital twins take advantage of classification loopholes in Nice System’s Class 9, endangering the fundamental economic foundations of luxury: artificial scarcity and brand reputation. Due to the dependence of current legal remedies on past judicial adjustments, they create commercial instability and social-economic disparities that disadvantage independent creators. Ultimately, international trademark law must progress beyond strict physical boundaries to acknowledge that virtual asset worth is directly connected to real-world brand goodwill.

REFERENCE(S):

Legislation and Statutes

1. Trade Marks Act, 1999 (India)

2. Trademark Dilution Revision Act 2006, Pub. L. 109-312, amending 15 U.S.C. 1125(c) (United States)

3. Regulation (EU) 2017/1001 of the European Parliament and of the Council of 14 June 2017 on the European Union Trade Mark

International Instruments

4. Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks, 1957 (11th Edition, as revised 2023)

Court Judgments and Case Law

5. Hermès International S.A. v. Mason Rothschild, Case No. 1:22-cv-00384-JSR, United States District Court, Southern District of New York, 2023

6. Nike, Inc. v. StockX LLC, Case No. 1:22-cv-00983-VEC, United States District Court, Southern District of New York, 2022 (Partial Summary Judgment, March 2025)

7. Rogers v. Grimaldi, 875 F.2d 994, 2nd Circuit, 1989

Official Publications and Reports

8. Andres Guadamuz, ‘Non-Fungible Tokens (NFTs) and Copyright’ [2021] (4) WIPO Magazine <https://www.wipo.int/en/web/wipo-magazine/articles/non-fungible-tokens-nfts-and-copyright-42365> accessed 8 June 2026

9. World Intellectual Property Organization, ‘Nice Classification: 11th Edition, Version 2023 Goods and Services for the Purposes of the Registration of Marks’, WIPO Publication, 2022 <wipo.int>

Other Sources

10. Veblen, T., The Theory of the Leisure Class: An Economic Study of Institutions, Macmillan, 1899

[1] Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks (adopted 15 June 1957)  CRS 1957/3

[2] Nice Classification (12th ed., Version 2024) Classes 18 and 25

[3] Trade Marks Act, 1999, (Act No. 47 of 1999).

[4] CGPDTM, ‘Trade Marks’ (Government of India, Department for Promotion of Industry and Internal Trade) https://cgpdmtm.gov.in accessed 8 June 2026

[5] Trade Marks Act, 1999, (Act No. 47 of 1999), s 29(4).

[6] Trademark Dilution Revision Act 2006, Pub L 109-312, 120 Stat 1730, amending Lanham Act 1946, 15 USC § 1125(c).

[7]  EU Trade Mark Regulation 2017/1001 [2017] OJ L 154/1, Art 9(2)(c).

[8] Veblen, T., The Theory of the Leisure Class: An Economic Study of Institutions, Macmillan, 1899

[9] Andres Guadamuz, ‘Non-Fungible Tokens (NFTs) and Copyright’ [2021] (4) WIPO Magazine <https://www.wipo.int/en/web/wipo-magazine/articles/non-fungible-tokens-nfts-and-copyright-42365> accessed 8 June 2026

[10] World Intellectual Property Organization, ‘Nice Classification: 11th Edition, Version 2023—Goods and Services for the Purposes of the Registration of Marks’ (WIPO Publication, 2022) <www.wipo.int>

[11] Hermès International v Rothschild, 1:22-cv-384-JSR (S.D.N.Y. 8 February 2023).

[12] Rogers v Grimaldi, 875 F.2d 994 (2d Cir. 1989).

[13] Nike Inc v StockX LLC, 1:22-cv-00983 (S.D.N.Y. 2022).