Wearing Prada in the Metaverse: Legal considerations in the metaverse marketplace
As part of the metaverse, Zara specifically designed 9 avatars to be the face of the Valentine’s Tale campaign. However, the company was not the first to create an exclusive metaverse collection, with Meta being the first to collaborate with designer brands such as Prada, Gucci and Balenciaga justifying it on the basis that people express themselves through what they wear and fashion, and that you should be able to do the same through your metaverse avatar.
It has been reported that high-end brands, such as Gucci, have sold fashion items for metaverse avatars for record-breaking amounts which are higher than the price tag of the physical counterpart. With that in mind, what are the legal considerations that apply to those who purchase retail goods on the metaverse?
From a South African law perspective, the Consumer Protection Act, 2008, (“CPA”) provides consumers with certain rights to return goods within a specific period after the goods have been delivered to the consumer, including a 5-day cooling-off period during which a consumer may return goods for a full refund. However, the purchase of goods using an online platform is considered an electronic transaction, and therefore the CPA cooling-off period does not apply to the procurement of such goods, and the provisions of the Electronic Communications and Transactions Act, 2002, (“ECTA”) will apply. In terms of ECTA, consumers who purchase goods or services under an electronic transaction (unless otherwise excluded in terms of section 44) are provided with a 7-day cooling-off period within which to return the goods for a full refund.
Unlike the CPA, which has a broad definition of “goods” and includes any intangible product written or encoded on any medium, or a licence to use any such intangible product, ECTA does not include a definition for “goods” and so the ordinary dictionary meaning of the word will apply. Consumers purchasing virtual goods should be afforded the same protection as consumers purchasing tangible retail goods, and it appears that our legislation is broad enough to extend protection to consumers of digital assets.
From a platform perspective, platforms such as Zepeto provide e-commerce space for third parties to sell or consume digital goods and/or services. Regardless of the type of goods or services sold, platform providers generally apply similar risk models which ensure that any goods or services purchased using the platform will be subject to the terms and conditions of the third-party selling the goods or services using the platform. For example, the terms and conditions of Zepeto do not make provision for the return or refund of any digital assets, and the assumption is therefore that a consumer of digital assets will need to refer to the terms and conditions of the third-party seller to determine its rights in respect of the goods or services purchased on the Zepeto platform.
The onus rests on companies looking to enter the metaverse and sell digital assets through e-commerce platforms to ensure that their terms and conditions of purchase are updated to make provision for consumers’ rights in respect of intangible products. These terms and conditions should be synonymous with the rights granted to consumers in terms of the CPA and/or ECTA. In addition, companies must ensure that their terms and conditions incorporate the minimum prescribed disclosures required under the ECTA and that they afford consumers an opportunity to review their transaction, correct any mistakes and withdraw from the transaction before the consumer finally places an order.
The commercial value that a digital asset has to its owner and/or authorised licensors is not diminished by the asset being available for consumption through a digital platform (for instance, where a user buys a high-end fashion item for their metaverse avatar to adorn). Intellectual property (“IP”) remains a key business asset in the metaverse just as it does in the ‘real world’. It is therefore commercially prudent and necessary for a company making its, or a third party’s, goods available for purchase on a metaverse platform to protect the IP in such goods. This is best achieved through robust terms and conditions that, amongst other things:
- consider registered IP rights (such as trade marks, or patents where applicable);
- reserve the IP ownership in such goods;
- provide a limited license to the user (for example, in the context of a digital wearable, this is often phrased as a right to use the wearables only in permitted areas of the relevant metaverse platform);
- impose acceptable use restrictions to mitigate the key risks when it comes to misuse of a company’s IP, namely third-party claims for IP infringements, and damage to the company’s brand, reputation, and goodwill associated with such IP; and
- provide remedies in favour of the company for infringement of IP including compensation for losses suffered by the company due to such infringement, and suspension or termination of the user’s access to the platform.
As a digital platform, the metaverse is rich with data including personal information relating to users and other third parties on the platform (remember that under South African privacy law, personal information is any information that can identify a living individual or an existing juristic person). Whilst there is a lot of debate around what exactly constitutes personal information in the metaverse (for example: if my avatar looks nothing like me, is it still personal information?), companies that use a metaverse platform to make goods or services available to users must take meaningful steps to ensure that the use of personal information obtained from interacting with users and other third parties on the platform complies with applicable privacy laws. This involves, but is not limited to:
- understanding what personal information the company requires to interact and do business with a user or any third parties on the platform;
- conducting privacy impact assessments to understand and assess all touchpoints of personal information processed by the company or on its behalf through the platform;
- incorporating ‘privacy by design’ principles, as far as this is under the company’s control, in the setup of the company’s virtual space in the metaverse platform. Where the design is not under the company’s control (ie, where this is managed directly by the metaverse platform provider), then the company should ensure that it understands the privacy and security commitments given by the metaverse platform provider and identify any gaps which may expose the company to privacy or security risks;
- concluding appropriate written contracts with the platform provider and any other third parties that process personal information on the company’s behalf, or with whom the company shares personal information as a result of interacting with users on the platform; and
- making privacy notices visible and easily accessible on the platform, which can be done in many ways including through a link to the pop-up terms and conditions when a user enters the company’s virtual space on the platform.
As the metaverse continues to gain momentum and digital assets become more prevalent in online retail, it is crucial to address the legal considerations surrounding these transactions. Ensuring consumer rights are protected, safeguarding intellectual property, and complying with privacy laws are essential aspects that companies must navigate in the metaverse. By implementing robust terms and conditions, incorporating "privacy by design" principles, and seeking specialised legal guidance, businesses can successfully navigate the evolving metaverse landscape while protecting their interests and respecting the rights of consumers. Proactive legal measures are key to fostering a trustworthy and secure environment for transactions within the metaverse.
Our team of specialists have advised several clients on their metaverse strategy, including the drafting of appropriate terms and conditions and other contractual documents. If you have any questions or would like to know more, please reach out to us.
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