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Luxury retail in the metaverse may just be a no-go for consumers. Luxury fashion house Dolce and Gabbana (“D&G”) has found itself in the middle of a controversy over its Non-Fungible Token (“NFT”) digital asset project, DGFamily.[1]
In their quest to bring digital exclusivity to their customer base, D&G may have bit off more than they can chew. In a newly amended complaint filed on September 24, 2024, the plaintiff in Brown v. Dolce and Gabbana USA Inc. et al. [2] re-asserts his initial allegations that D&G engaged in “deliberate fraud, market manipulation, and deceptive practices…” and that the incident was a “premeditated scheme” to profit off their investors.[3]
The amended complaint goes on to explain that by using their investors to inflate the prices of DGFamily products, the market supply for their products were skewed and caused consumers to believe they would receive more benefits than was ultimately provided.[4] Brown notes that these intentional actions violate the Securities Exchange Act of 1934 and the Commodity Exchange Act and stresses that D&G should pay punitive damages to deter similar conduct.[5]
The initial class action complaint was filed on May 16, 2024, by Brown, on behalf of himself and others similarly situated against D&G, claiming that he invested $6,000.00 purchasing DGFamily products, which D&G failed to deliver––ultimately costing him a loss of $5,800.00.[6]
Purchasers of DGFamily products were purportedly told they would secure a “set of benefits” that were of significant value and would be delivered over a period of time.[7] The benefits in question included “(i) digital wearables (digital outfits available for use in a metaverse application called Decentraland), (ii) physical clothing from Dolce & Gabbana, and/or (iii) live events that purchasers of multiple boxes could attend.”[8]
Brown’s complaint asserts that the DGFamily products had not yet been accepted onto the UNXD marketplace (an NFT marketplace) when D&G made the products available for purchase.[9] The original complaint criticizes the stunt as a “rug pull,” a “term used to describe a scheme in which an NFT developer solicits funds from prospective NFT purchasers promising them certain benefits… while fraudulently retaining the purchaser’s funds.”[10]
What are NFTs? NFTs are “unique digital collectible asset[s] that exists in a blockchain that acts as an owner of a physical or virtual object.”[11] NFTs are sold and purchased in an NFT marketplace– a digital platform also based on blockchain technology. [12] The use of NFTs spans across industries and exist in a myriad of forms such as online collectibles of artwork, GIFs, videos, and photographs, clothing, shoes, and the like.[13] In the luxury fashion market, NFTs are leveraged to build brand loyalty and curate one-of-a-kind experiences for high-net-worth customers.[14] In particular, fashion houses can engage with their customers through virtual experiences or coveted loyalty programs which may include exclusive events. [15]
Is there a benefit to using NFT technology in luxury fashion? Nicole Zisman, fashion and digital designer, notes, “NFTs and interest in digital artwork is completely to the luxury fashion industry’s advantage.”[16] Steve Kaczynski, a crypto research partner, and Scott Kominers, a Harvard Business School professor, note, “This technology has the power to revolutionize multibillion-dollar industries” and “[NFTs] will usher in the next generation of customer loyalty programs, creating structures that benefit both businesses and consumers in new ways.”[17]
What role does regulatory intervention play in building institutional trust in the purchasing of NFTs? In general, the Federal Trade Commission (“FTC”) has jurisdiction over antitrust enforcement, unfair and deceptive acts, and consumer protection, so the FTC is likely to be the principal agency to oversee matters within the metaverse. [18] “How” the FTC will implement regulation of NFT in the metaverse is still in development; however, it is probable for federal regulators to utilize federal laws that govern unfair or deceptive practices in NFT advertising, selling, purchasing, and reselling process.[19] State UDAP statutes can also play an essential role in protecting consumers from potentially exploitive business practices and can be enforced by state attorneys.[20]
Juliet M. Moringiello of Widener University Commonwealth Law School and Christopher K. Odinet of the University of Iowa College of Law argue in favor of regulatory intervention “to protect consumers in the rapidly growing NFT market.”[21] They claim the FTC can “tackle these platforms’ tactics by issuing “enforcement and compliance bulletins” to inform minting companies of their illegal marketing practices.”[22]
Tech marketing writer, Kala Philo, contends the potential downsides of excess regulatory influence indicating, “Stringent regulations… might add complexity and compliance burdens for NFT platforms and investors, which could stifle innovation and hinder the market’s growth.”[23] Philo further explains “overly cautious regulations might drive NFT activity to less regulated regions, raising consumer protection and transparency concerns.”[24]
At present D&G has yet to provide a response to the amended complaint. The NFT lawsuit spotlights consumer concerns about the selling and purchasing of NFTs; however, the market for virtual luxury goods and trading in NFTs remains intact and is “expected to rise to USD 50 billion by 2030.”[25] In the meantime, regulation over the growing market remains a point of contention for sellers and purchasers alike.
[1] Luke Brown v. Dolce and Gabbana USA Inc., et al, No. 1:24-cv-03807 (S.D.N.Y May 16, 2024).
[2] Id.
[3] Dolce and Gabbana NFT Lawsuit Escalated with New Fraud Allegations, TFL (Oct 1, 2024), https://www.thefashionlaw.com/dolce-gabbana-nft-lawsuit-escalates-with-new-fraud-allegations/#:~:text=According%20to%20the%20newly%2Dfiled,the%20outset%20and%20designed%20to.
[4] Id.
[5] Id.
[6] Luke Brown., supra note 1 at 13; 15.
[7] Id. at 4.
[8] Id.
[9] Id. at 16.
[10] Id. at 6.
[11] Hugo Fostin Hokianto, Non-Fungible Tokens: A Literature Review, RESEARCH GATE (April 2023), https://www.researchgate.net/publication/376608573_Non-Fungible_Tokens_A_Literature_Review
[12] Nitul Garg, The Fundamentals of Building a Successful NFT Marketplace, BINMILE (Oct 01, 2024), https://binmile.com/blog/develop-nft-marketplace-platform/.
[13] Hokianto, supra note 11.
[14] Joseph DeAcetis, How the NFT Boom and Luxury Fashion Brands Are Aiming for Success, FORBES (Sept 24, 2021), https://www.forbes.com/sites/josephdeacetis/2021/09/20/how-the-nft-boom-and-luxury-fashion-brands-are-aiming-for-success/.
[15] Siddharth Verma, The Rise of NFTs in Luxury Fashion: What You Need to Know, BINMILE (May 15, 2024), https://binmile.com/blog/nfts-in-luxury-fashion/.
[16] Parul Aggarwal, Pathway to Digital Economy: How Jigen is Transforming the World of Fashion?, BITCOINIST (Dec 22, 2021), https://bitcoinist.com/pathway-to-digital-economy-how-jigen-is-transforming-the-world-of-fashion/.
[17] Scott Duke Kominers and Steve Kaczynski, The Everything Token: How NFTs and Web3 Will Transform the Way We Buy, Sell, and Create 17 (2024).
[18] Regulating the Metaverse, DELOITTE (2023) https://www2.deloitte.com/content/dam/Deloitte/us/Documents/consulting/us-regulating-the-metaverse.pdf
[19] Sumeet Chuganu et al., The Notorious NFT: Consumer Protection Issues Raised by Non-Fungible Tokens (NFTs), THOMAS REUTERS PRACTICAL LAW (April 15, 2021), https://content.next.westlaw.com/practical-law/document/I0d808b9b97b311ebbea4f0dc9fb69570/The-Notorious-NFT-Consumer-Protection-Issues-Raised-by-Non-Fungible-Tokens-NFTs?viewType=FullText&transitionType=Default&contextData=(sc.Default).
[20] Id.
[21] Elizabeth Yin, Decrypting Deception in the NFT Market, THE REGULATORY REVIEW (Sept 28, 2023), https://www.theregreview.org/2023/09/28/yin-decrypting-deception-in-the-nft-market/.
[22] Id.
[23] Kala Philo, Update on NFTs Regulation: Will it Kill the Market for NFTs?, ZENLEDGER(June 18, 2024), https://zenledger.io/blog/update-on-nfts-regulation-will-it-kill-the-market-for-nfts/.
[24] Id.
[25] Stèphane JG Girod, The Metaverse is Much More than a Cool New Channel for Luxury Brands, FORBES (March 29, 2023), https://www.forbes.com/sites/stephanegirod/2023/03/29/the-metaverse-is-much-more-than-a-cool-new-channel-for-luxury-brands/.