Want Collateral to Ensure a Judgment Can Be Collected, Your Honor? No Problem—Use My NFT!

Judge Jed Rakoff (S.D.N.Y.), in today's Hermes Int'l v. Rothschild, isn't having it. First, the backstory from an earlier (May 2022) decision in the case:

Around December 2021, defendant Mason Rothschild created digital images of faux-fur-covered versions of the luxury Birkin handbags of plaintiffs Hermes International and Hermès of Paris, Inc. …. Rothschild titled these images "MetaBirkins" and sold them using so-called "NFTs" (non-fungible tokens), explained further below….

NFTs, or "non-fungible tokens," are units of data stored on a blockchain that are created to transfer ownership of either physical things or digital media. When NFTs are created, or "minted," they are listed on an NFT marketplace where NFTs can be sold, traded, etc., in accordance with "smart contracts" that govern the transfers. Because NFTs can be easily sold and resold with a transaction history securely stored on the blockchain, NFTs can function as investments that can store value and increase value over time.

When an NFT is linked to digital media, the NFT and corresponding smart contract are stored on the blockchain and are linked to digital media files (e.g., JPEG images, .mp4 video files, or .mp3 music files) to create a uniquely identifiable digital media file. The NFTs and smart contracts are stored on the blockchain (so that they can be traced), but the digital media files to which the NFTs point are stored separately, usually on either a single central server or a decentralized network.

Fashion brands are beginning to create and offer digital replicas of their real-life products to put in digital fashion shows or otherwise use in the metaverse. NFTs can link to any kind of digital media, including virtual fashion items that can be worn in virtual worlds online. Brands sometimes partner with collaborators in offering co-branded virtual fashion products.

Defendant Mason Rothschild is a "marketing strategist" and "Entrepreneur" who "come[s] from the fashion industry." In or around May 2021, Rothschild created a digital image entitled "Baby Birkin," which depicted a 40-week-old fetus gestating inside of a transparent Birkin handbag. Rothschild sold the NFT linked to the "Baby Birkin" digital image for $23,500; it later resold for $47,000.

In or around December 2021, Rothschild created a collection of digital images titled "MetaBirkins," each of which depicted an image of a blurry faux-fur-covered Birkin handbag. Rothschild used NFTs to sell these "MetaBirkins" digital images. Each NFT in the "MetaBirkins" collection is titled with a number from 0 to 99 and not the "MetaBirkins" name. The NFTs have sold for prices comparable to real-world Birkin handbags.

When Rothschild initially sold the NFTs of the "MetaBirkins" digital images, Rothschild described them as "a tribute to Herm[è]s' most famous handbag, the Birkin, one of the most exclusive, well-made luxury accessories. Its mysterious waitlist, intimidating price tags, and extreme scarcity have made it a highly covetable `holy grail' handbag that doubles as an investment or store of value." In an interview with Yahoo Finance about the "MetaBirkins" collection, Rothschild stated that "for me, there's nothing more iconic than the Herm[è]s Birkin bag. And I wanted to see as an experiment if I could create that same kind of illusion that it has in real life as a digital commodity." He went on to state that "there's not much difference" between owning a MetaBirkin and "having the crazy car or the crazy handbag in real life because it's kind of just that, that showing of like wealth or that kind of explanation of success"; that "now you're able to bring that into the metaverse with these iconic NFTs"; and that "I feel like the difference between the two is like getting a little bit blurred now because we have this new outlet, which is the metaverse, to showcase, showcase them in our virtual worlds, and even just show them online."

Rothschild has sold his "MetaBirkins" NFTs on four different NFT platforms. He has created social media and marketing channels: @METABIRKINS on Twitter and Instagram, MetaBirkins.com, and a "MetaBirkins" community on the Discord social platform. Rothschild's advertising for the "MetaBirkins" NFTs has included slogans such as "NOT YOUR MOTHER'S Birkin" and the hashtags "#MetaBirkins GONNA MAKE IT" and "#MINT A METABIRKIN HOLD A METABIRKIN." Rothschild has complained that he has seen his "MetaBirkin" NFTs being "counterfeited," and that he saw "more and more fake MetaBirkins sold every hour."

Consumers posting on the "MetaBirkins" Instagram page have expressed actual confusion, believing that there is an Hermès affiliation with Rothschild's "MetaBirkins" collection. Similar confusion exists in the media. For example, the magazines Elle and L'Officiel and the New York Post have all mistakenly reported that the "MetaBirkins" NFTs were unveiled by Hermès in partnership with Rothschild.

Now today's decision rejecting NFTs as security:

After a nine-day trial, a jury returned a unanimous verdict against the defendant, "Mason Rothschild" (real name: Sonny Estival), finding him liable for trademark infringement, trademark dilution, and cybersquatting, and awarding the plaintiffs -- Hermes International and Hermes of Paris, Inc. (collectively, "Hermes") $133,000 in damages.

Rothschild has appealed the adverse judgment, and briefing is underway before the Second Circuit. On December 12, 2023, Rothschild filed, with leave of Court, a letter motion asking this Court to stay collection of the money judgment against him, and waive the requirement to post a bond, during the pendency of the appeal….

[Federal Rule of Civil Procedure] 62(b) … provides that "[a]t any time after judgment is entered, a party may obtain a stay by providing a bond or other security" …. As applied in the context of a pending appeal, "[t]he purpose of [the Rule] is to ensure that the prevailing party will recover in full, if the decision should be affirmed, while protecting the other side against the risk that payment cannot be recouped if the decision should be reversed." "A district court therefore may, in its discretion, waive the bond requirement if the appellant provides an acceptable alternative means of securing the judgment."

Rothschild has not provided "an acceptable alternative means of securing the judgment" that would justify a stay of collection of the damages award. He proposes placing "in escrow both the MetaBirkins smart contract and the MetaBirkins NFT artwork owned by Mr. Rothschild as collateral to secure the judgment in lieu of a bond." But, in virtually the same breath, Rothschild concedes that he "is unaware of a way to place a monetary value on the MetaBirkins smart contract" and that "the NFT art market is virtually non-existent at the moment." Setting aside the irony that the MetaBirkins products are the very items that Rothschild used to infringe and dilute Hermes's trademark, there is no conceivable basis for concluding that valueless items are "an acceptable alternative means of securing" a $133,000 judgment….

Oren J. Warshavsky (Baker & Hostetler LLP) represents plaintiffs.