Legal Challenges of Digital Fashion, Virtual Goods, and NFTs Under Intellectual Property Law

Abstract

Digital fashion, virtual goods, and non-fungible tokens have created a multi-billion dollar economy in the metaverse, yet they challenge the territorial, tangible, and scarcity-based assumptions of intellectual property law. This paper examines whether copyright, trademark, and design laws in India and comparable jurisdictions can adequately protect these intangible assets. Using doctrinal analysis of statutes, case law, and policy documents, it finds that while existing IP regimes provide partial protection, they struggle with issues of exhaustion in digital contexts, infringement in virtual environments, and the legal status of NFTs. Key gaps include the absence of a digital exhaustion rule, ambiguity in the definition of “article” under design law, and unclear intermediary liability for NFT platforms. The paper concludes that targeted legislative amendments and judicial clarification are needed to balance creator rights with innovation in the metaverse.

Introduction

The metaverse has transformed fashion from fabric to code. Brands such as Gucci, Nike, and Louis Vuitton now sell digital sneakers, handbags, and apparel as in-game assets and NFTs, generating revenue without physical production. By 2026, virtual goods are projected to constitute a $200 billion market globally. These assets exist solely in digital environments, often tokenized as NFTs to create verifiable scarcity and transferable ownership. This shift raises urgent legal questions. Does minting an NFT of a designer dress infringe copyright or trademark rights? Can a digital-only handbag be protected under the Designs Act, 2000? Does the first sale doctrine apply when the “good” is a non-excludable digital file? Indian IP law, largely framed for physical goods and tangible markets, lacks direct answers.

Research Question: To what extent can Indian intellectual property law protect digital fashion, virtual goods, and NFTs, and what doctrinal or legislative gaps must be addressed to ensure effective protection without stifling innovation?

Structure:Part 4 establishes the conceptual and statutory framework. Part 5 analyzes the application of copyright, trademark, and design law to virtual goods. Part 6 discusses three key cases that illuminate the judicial approach. Part 7 provides critical analysis and identifies gaps. Part 8 concludes with recommendations for legal reform.

Background and Conceptual Framework

Digital Fashion and Virtual Goods: Digital fashion refers to 3D garments designed for avatars in virtual worlds. Virtual goods include skins, accessories, and virtual real estate. Unlike physical goods, they are intangible, infinitely reproducible, and dependent on platform ecosystems.

NFTs: Non-fungible tokens are blockchain-based tokens representing ownership of a unique digital item. An NFT is not the underlying work but a tokenized proof of ownership recorded on a distributed ledger. Legally, NFTs function as contracts, licenses, and quasi-property rights simultaneously.

Indian IP Framework:

 – Copyright Act, 1957: Section 2(c) protects “artistic works,” including works of artistic craftsmanship. Section 14 grants exclusive rights of reproduction, adaptation, and communication to the public.

– Trademarks Act, 1999: Section 29 protects against unauthorized use of identical or similar marks likely to cause confusion. Section 29(4) extends protection to well-known marks for dissimilar goods.

– Designs Act, 2000: Protects the shape, configuration, and ornamentation of “articles.” Section 2(a) defines article as any article manufactured and capable of being sold separately.

– Information Technology Act, 2000: Section 79 governs intermediary liability and notice-and-takedown obligations.

International Context: The TRIPS Agreement mandates minimum standards for copyright and trademark protection. The WIPO Copyright Treaty extends protection to digital transmissions. The EU’s Digital Single Market Directive and the US Digital Millennium Copyright Act shape global norms for digital IP enforcement.

Conceptual Gap: Traditional IP law assumes scarcity and physicality. Digital goods challenge both. Doctrines of exhaustion, substantial similarity, and likelihood of confusion require reinterpretation for virtual environments where copies are perfect and jurisdiction is fluid.

Legal Analysis

1. Under Section 2(c) of the Copyright Act, 1957, original digital fashion designs qualify as artistic works if they exhibit minimal creativity. Section 14(a)(i) grants the right of reproduction, while Section 14(a)(iii) covers communication to the public, which includes displaying NFTs on marketplaces. Two problems emerge. First, proving substantial similarity is complex in 3D, interactive environments. A virtual Gucci bag may infringe the copyright in a physical bag’s design if the essential aesthetic elements are copied. Second, the first sale doctrine is ambiguous for digital goods. Section 14(a)(ii) allows resale of copies, but Indian law does not explicitly recognize exhaustion for digital copies. In Easwaran v. State of Kerala, 2016 SCC OnLine Ker 13453, the Kerala High Court suggested that resale of digital copies may fall outside Section 52(1)(za). This creates uncertainty for secondary NFT markets, where resale is a core feature. An challenge lies in moral rights under Section 57 of the Copyright Act. Digital fashion often undergoes modification, re-texturing, and remixing by users within platforms. The right to integrity may be infringed when a designer’s work is altered in ways that damage reputation, but enforcement is complicated by the anonymous and decentralized nature of metaverse platforms. Indian courts have not yet addressed whether such modifications constitute actionable distortion in a virtual context.
2. Trademark Infringement in the Metaverse : S29 of the Trademarks Act, 1999, prohibits unauthorized use of marks that causes likelihood of confusion. The challenge is whether “use in the course of trade” includes use in virtual worlds. The US case Hermès Int’l v. Rothschild, No. 22-cv-00384, 2022 WL 1629926 (S.D.N.Y. May 24, 2022), held that “MetaBirkins” NFTs infringed Hermès’s BIRKIN mark because consumers were likely to be confused. Indian courts can apply Section 29(2) similarly. For well-known marks, Section 29(4) provides protection even for dissimilar goods if reputation is harmed. Intermediary liability is another issue. NFT platforms host infringing content. Section 79 of the IT Act provides safe harbor if platforms remove content expeditiously upon notice. However, the IT Rules, 2021, do not specify timelines for NFT takedowns, creating enforcement gaps. Moreover, the pseudonymous nature of blockchain transactions makes it difficult to identify infringers, shifting the burden disproportionately onto platforms and brand owners. Another emerging issue is the use of trademarks in metaverse advertising and virtual storefronts. Virtual stores that replicate real-world retail environments may create confusion about affiliation or sponsorship. Indian courts will need to assess whether such use constitutes “use as a mark” under Section 2(2)(b) of the Trademarks Act, especially when the virtual store does not sell physical goods.
3. Design and Patent Law Limitations : Designs Act, 2000, protects the visual design of “articles.” Section 2(a) defines article as a tangible, manufactured item. Digital-only items may not qualify, leaving design protection unavailable. Similarly, patent law requires industrial applicability under Section 2(1)(j) of the Patents Act, 1970. Virtual goods rarely meet this threshold unless tied to a technical process. This gap is significant because design protection is often the most relevant form of IP for fashion. The UK and EU allow registration of unregistered Community designs, which may extend to digital designs if they are disclosed in a way that makes them available to the public. India lacks a similar mechanism, leaving designers exposed to copying in virtual environments.
4. Licensing via Smart Contracts : NFT transactions rely on smart contracts that purport to license usage rights. Indian contract law under the Indian Contract Act, 1872, recognizes electronic agreements. However, enforcement is difficult when parties are pseudonymous and the contract is executed on a decentralized blockchain. The enforceability of on-chain licenses under Indian law remains untested. Smart contracts also raise questions about termination and breach. If a smart contract automatically transfers rights upon payment, traditional remedies such as injunction or specific performance may be inadequate. Indian courts may need to develop principles for the interpretation and enforcement of self-executing contracts in the context of IP licensing.
5. Licensing via Smart Contracts: NFT transactions rely on smart contracts that purport to license usage rights. Indian contract law under the Indian Contract Act, 1872, recognizes electronic agreements. However, enforcement is difficult when parties are pseudonymous and the contract is executed on a decentralized blockchain. The enforceability of on-chain licenses under Indian law remains untested.1 Copyright and Digital Fashion

Case Law Discussion

1. Hermès Int’l v. Rothschild, 2022 WL 1629926 (S.D.N.Y. 2022)

Facts: Mason Rothschild created 100 “MetaBirkins” NFTs depicting furry versions of Hermès’s BIRKIN handbag and sold them for profit.

Judgment: The US District Court granted Hermès a preliminary injunction, holding that Hermès was likely to succeed on trademark infringement and dilution claims. The court rejected the defendant’s First Amendment defense, finding the NFTs were commercial products, not pure art.

Principle: Trademark law applies to virtual goods when they create a likelihood of confusion with the underlying physical brand.

Relevance: Indian courts can apply Section 29(2) and 29(4) similarly. The case supports protecting well-known marks in the metaverse but highlights the need for Indian precedent.

2 .Yuga Labs, Inc. v. Ripps, No. 2:22-cv-04355, 2023 WL 3390424 (C.D. Cal. Apr. 21, 2023)

Facts: Ryder Ripps created “Ryder Ripps BAYC” NFTs using identical images from Bored Ape Yacht Club, claiming parody and commentary.

Judgment: The court granted summary judgment to Yuga Labs, holding the use was not transformative and caused consumer confusion.

Principle: Parody does not defeat trademark claims if commercial use and confusion exist.

Relevance: Under Section 30(2)(c) of the Trademarks Act, use for criticism is permitted. Indian courts must balance free expression with brand protection in NFT contexts.

3. Mironova v. Etsy, Inc., 521 F. Supp. 3d 904 (N.D. Cal. 2021)

Facts: The plaintiff alleged Etsy failed to remove infringing digital downloads after receiving notice.

Judgment: The court held that Section 230 of the US Communications Decency Act did not immunize Etsy from DMCA takedown obligations.

Principle: Marketplaces must comply with notice-and-takedown regimes for digital content.

Relevance: Section 79 of the IT Act imposes similar obligations. The case highlights the need for clear takedown protocols for NFT platforms operating in India.

Critical Analysis and Findings

Gaps in Indian Law:

1. Digital Exhaustion: Section 14(a)(ii) of the Copyright Act is silent on digital resale. Without statutory clarification, secondary NFT sales remain uncertain. The EU’s approach in UsedSoft GmbH v. Oracle Int’l Corp., Case C-128/11 (2012), recognizing exhaustion for downloaded software, offers a model India could adapt.
2. Definition of “Article”:The Designs Act excludes digital-only designs. A legislative amendment is needed to extend protection to virtual articles.
3. Intermediary Liability: Section 79 of the IT Act requires “expeditious” takedown but does not specify timelines for NFTs. The IT Rules, 2021, should be amended to include specific obligations for blockchain-based platforms.
4. Jurisdiction: NFTs are borderless. Indian courts must develop conflict-of-laws principles for virtual IP disputes, drawing on the EU’s Brussels I Regulation as a reference.
5. Judicial Trends: US and EU courts extend traditional IP doctrines to the metaverse, prioritizing consumer confusion and brand reputation. Indian courts have adapted IP law to digital contexts in Super Cassettes Industries Ltd. v. MySpace Inc., 2011 SCC OnLine Del 4784, but have not addressed NFTs.
6. Policy Implications: Overbroad protection risks stifling user-generated content and interoperability. Under-protection risks eroding brand value. A balanced approach requires a digital exhaustion rule, safe harbor guidelines for NFT marketplaces, and recognition of smart contract licenses under the Indian Contract Act

 Conclusion

Digital fashion and NFTs disrupt the foundational assumptions of IP law: scarcity, tangibility, and territoriality. Indian copyright and trademark regimes provide partial protection, but gaps in exhaustion, design protection, and intermediary liability create legal uncertainty. The research question is answered as follows: existing IP law is adaptable but insufficient without targeted reform. India should amend Section 14 of the Copyright Act to clarify exhaustion for digital copies, amend the Designs Act to include virtual articles, and issue guidelines under the IT Rules, 2021, mandating 72-hour takedown for proven IP-infringing NFTs. These reforms would protect creators while enabling innovation in the metaverse.

References and Bibliography

Statutes and Legislation

1. Copyright Act, 1957, No. 14 of 1957, India Code.
2. Trademarks Act, 1999, No. 47 of 1999, India Code.
3. Designs Act, 2000, No. 16 of 2000, India Code.
4. Information Technology Act, 2000, No. 21 of 2000, India Code.
5. Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 1869 U.N.T.S. 299.

Cases

6. Hermès Int’l v. Rothschild, No. 22-cv-00384, 2022 WL 1629926 (S.D.N.Y. May 24, 2022).
7. Yuga Labs, Inc. v. Ripps, No. 2:22-cv-04355, 2023 WL 3390424 (C.D. Cal. Apr. 21, 2023).
8. Mironova v. Etsy, Inc., 521 F. Supp. 3d 904 (N.D. Cal. 2021).
9. Easwaran v. State of Kerala, 2016 SCC OnLine Ker 13453.
10. Super Cassettes Industries Ltd. v. MySpace Inc., 2011 SCC OnLine Del 4784.
11. UsedSoft GmbH v. Oracle Int’l Corp., Case C-128/11 (2012) ECLI:EU:C:2012:407.

Secondary Sources

12. Rebecca Tushnet, Worth a Thousand Words: The Images of Copyright Law, 125 Harv. L. Rev. 683 (2012).
13. Irene Calboli & Maria Lillà Montagnani, Trademark Protection in the Metaverse, 24 Yale J.L. & Tech. 1 (2022).
14. WIPO, WIPO Technology Trends 2022: Metaverse (2022).
15. European Union, Directive (EU) 2019/790 on Copyright and Related Rights in the Digital Single Market, 2019 O.J. L 130/92.
16. Ministry of Electronics and Information Technology, Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, G.S.R. 139(E).