The metaverse is widely seen as the next frontier in digital commerce, with companies across industries spending millions of dollars buying digital real estate and investing in platforms to be market leaders. Alcohol brands are also leading the way, with companies like José Cuervo and Heineken announcing forays into the metaverse. But what opportunities does the metaverse offer for the alcoholic beverage industry, which ultimately relies on sales of “real world” products? And what legal challenges do alcohol companies face in the metaverse in light of the regulatory scrutiny they face in the physical world?
In essence, the metaverse is a three-dimensional version of the Internet that allows people to transition between physical and virtual spaces. Imagine, for example, a consumer looking for wines in a virtual wine store: she picks up bottles, inspects labels, flips the bottle to read provenance or tasting notes, and then buys a bottle to have it delivered to her home. . For the spirits industry, the metaverse offers vendors and retailers the opportunity to transform the e-commerce experience while providing extensive new marketing opportunities. While some elements remain aspirational, many tech companies are already working on next-generation consumer electronics, such as smart glasses aimed at making three-dimensional e-commerce more accessible and preferable than the two-dimensional experience of browsing on a smartphone or desktop
But the metaverse will also pose challenges for an industry governed by a 50-state patchwork of Prohibition-era regulations. Even more so than the Internet today, the metaverse is a borderless digital network with no defined physical presence or central authority (such as a social media network or web host). With many of their most popular platforms based on blockchain technology, these platforms do not operate on a single web server. Instead, the content is distributed across numerous computer servers over a peer-to-peer network, raising a number of questions about applicable law, such as licensing requirements, linking and business practice issues, and the location of e-commerce sales for tax purposes. and regulatory purposes.
There are several ways that alcohol companies can use the metaverse to create value, including:
a. Electronic commerce. As noted above, the metaverse has the potential to transform the eCommerce experience for brands. While it has improved a lot in recent years, today’s e-commerce experience can’t compete with the experience of browsing a wine or liquor store. The drawback of online shopping is especially acute for luxury, limited-supply, or craft beverages that rely on attractive labels, branding, or shelf placement to grab consumers’ attention. By creating a virtual 3D experience in the metaverse, spirits brands can create the platform and virtual space that will power their next-generation e-commerce experience.
b. Consumer sales and NFT. In addition to providing a more robust and immersive e-commerce experience, metaverse and blockchain technology provide the opportunity to market products in new ways. Unlike most consumer products, each vintage or batch of fine wine or distilled spirits can offer subtle differences in flavor profile. Collectors often look for products from specific vintages or from specific vineyards or distilleries. While best known for certifying ownership of digital assets such as artwork or video, NFTs can also be used as a secure and verifiable digital receipt for the purchase of a physical asset. Imagine, for example, a Scottish distillery selling an NFT redeemable for a future bottle of single-cask aged Scotch whisky, or a French vineyard selling an NFT redeemable for a particular year’s product. Collectors could sell the NFT, and thus the future right to own the physical product, on the secondary market before the product leaves the distillery or vineyard, with each transfer recorded securely on a blockchain. After bottling, high-value collectibles could be auctioned off or sold while the product remains secure in a climate-controlled warehouse or warehouse, with the NFT verifying current ownership. NFT-encoded smart contracts could require payment of a royalty to the producer each time the product is resold. In fact, spirits brands like Glenfiddich and LVMH have already started experimenting with NFTs redeemable for real bottles.
c. marketing and sponsorship opportunities. Virtual events in the metaverse present a new platform of sponsorship opportunities for spirits companies. Concerts, games, and other events in the metaverse provide venues for alcoholic beverage companies to market their wares. Popular online video game Fortnite, for example, hosted a digital concert with rapper Travis Scott that drew more than 45 million viewers over five performances, while Roblox hosted a virtual concert experience with Lil Nas X that drew more than 30 million viewers.
The marketing and sale of alcoholic beverages and related products in the metaverse raises a number of legal considerations, including:
a. License. In all 50 states and the District of Columbia, the sale of alcoholic beverages without a license is prohibited. Sales of alcoholic beverages in the metaverse will almost certainly be subject to the same licensing requirements. But it is uncertain whether federal, state and local alcohol regulators will treat the sale of NFTs that entitle the bearer to redeem the NFT for an alcoholic beverage as a retail sale of an alcoholic beverage that requires a license. Consequently, unless and until there is a uniform response across states, alcoholic beverage companies issuing NFTs in the metaverse will need to assess the licensing requirements in each state in which NFTs are sold.
b. Linked House Compliance. In the United States, federal and state laws generally divide the production, marketing, and sale of alcoholic beverages into three levels: producers/importers, distributors/wholesalers, and retailers. Federal and state laws generally prohibit individuals and entities that have an interest in one level of the alcoholic beverage industry from having an interest in another level. These rules generally prohibit producers/importers of alcoholic beverages from selling their products directly to consumers, with some limited exceptions (e.g, on-premises sales by wineries, breweries, and distilleries are permitted in some jurisdictions). Jurisdictions are still working out how these bans will apply to sales of alcoholic beverage NFTs that entitle holders to redeem NFTs for physical bottles of alcohol. However, brands considering offering NFTs for sale in the metaverse (or anywhere else) should carefully assess whether these sales, or post-redemption fulfillment, would comply with linked house rules in the jurisdictions in which they are sold. Do you sell.
c. Advertising Specialties. Linked house laws also generally prohibit producers/importers from giving anything of value to retailers. An exception is point-of-sale advertising materials and promotional items intended for consumer take-away. For example, in many states, producers may provide retailers with branded glassware, bottle openers, corkscrews, coasters, etc., that are designed for consumers to take away, as well as point-of-sale signs advertising the brands. from producers for display within the retail location. However, states differ in how they treat these permitted “advertising specialties.” A small number of states ban them outright, while others impose a variety of limitations on the dollar value or type of item. Brands looking to provide virtual items such as NFTs or signs in a virtual bar will need to carefully assess the application of ad specialty rules across jurisdictions.
d. Sponsorship agreements. Many states regulate sponsorship agreements between vendors and retailers. These limitations frequently arise in the context of sponsorship agreements between vendors and professional sports teams or their venue operators, as most venues have retail licenses to sell alcoholic beverages. In states like New York, vendors must ensure that sponsorship revenue does not flow between the vendor and the entity that holds the retail license, even indirectly. The metaverse may provide more flexibility for providers to sponsor virtual events hosted by retail licensees, including professional sports teams, but providers will need to work diligently to understand the jurisdictions involved by their sponsorship activities.
me. Labeling compliance. Physical bottles of alcoholic beverages must comply with applicable labeling standards (e.g, obtain a Label Approval Certificate required by the TTB). Until there is more guidance on whether and how these regulations apply to virtual representations of alcoholic beverages in the metaverse, companies should strive to mirror compliant labels included on physical bottles in virtual representations of alcoholic beverage products in the metaverse. the metaverse.
F. advertising for minors. For decades, brands have carefully selected their ad placements and wording to ensure compliance with regulations that limit advertising to underage consumers. In the metaverse, compliance can be more complicated as there is typically no central authority (like a tech company) that publishes reliable demographics or bans users under a certain age. Brands, distributors, and retailers will need to look to other sources to confidently determine that the metaverse platforms or events they advertise at are not primarily appealing to an underage audience.
gram. Protection and enforcement of intellectual property. In making products available in the metaverse, alcohol brands will need to take steps to protect their intellectual property.
The metaverse poses a huge opportunity for alcohol companies to connect directly with consumers in an interactive way that was considered science fiction just a few years ago. But like every new frontier, technological or otherwise, there are legal and regulatory hurdles to consider and overcome. Some are familiar, while others are novel. The attorneys in the Food and Beverage practice of ArentFox Schiff offer an interdisciplinary perspective to help producers, distributors, retailers and their partners in the alcoholic beverage industry devise practical strategies to maximize the value of the opportunities created by the metaverse. .