Is It Time for a Test Drive in the Metaverse?

Consumers already shop online, and the lure of buying a car immersively from the comfort of your home is undeniable. Manufacturers are already venturing into the metaverse, including one metaverse hosted on Roblox that allows users to experience the latest advanced racing technologies and motorsports available via the company’s latest high-performance car. It’s never too early for dealers to start exploring the metaverse to connect with consumers.

Metaverse 101

The metaverse is a 3D immersive virtual environment that can support interactions between individuals and businesses using an avatar. Undoubtedly consumers will choose the virtual world where their friends play and hang out. The use of cryptocurrency transactions facilitated by blockchains allows a consumer in the metaverse to make virtual items exchangeable for real economic value beyond the virtual world. These secure transactions are digitally recorded on a distributed ledger. Users must have a digital or crypto wallet to play and do business in the metaverse. There are a variety of virtual worlds that users can select, including Decentraland, Somnium Space, and The Sandbox. To access these virtual platforms, a user may need a virtual reality (VR) headset, augmented reality (AR) goggles, or a smartphone. Decentraland is built on a web-based, 3D rendering software that allows for interactions on the blockchain. No VR headset or AR goggles are required. 

Before dealers journey into the metaverse, there are several key issues to consider. 

1. Cybersecurity. It’s no secret that cyber-attacks against corporate networks occur on a weekly basis, and there is no sign that these attacks are slowing down. As part of these cyber-attacks, it is safe to say that phishing attacks will increase exponentially. In the metaverse, these attacks include malicious schemes to dupe people in order to gain access to personal information and data or cryptocurrency wallets. The use of vulnerable AR/VR devices can become an entryway for malware invasions and data breaches.
2. No central authority. Since the metaverse is built using blockchain technology instead of centralized services, there is no designated administrator or authority; therefore, there is no possible way to retrieve stolen or illegally obtained assets. 
3. Privacy. Setting up a virtual dealership comes with privacy obligations, particularly depending on the residency of the customer (e.g., California, Colorado, Connecticut, Illinois, Texas, Utah, and Virginia). Privacy considerations are integral, not only due to the increased quantity of personal information collected in the metaverse, but also the additional categories of sensitive personal information implicated, such as biometric data, that can be collected through the use of AR/VR headsets. The metaverse will allow virtual dealerships to have the ability to track interactions between users, track eye movements, and body movements – types of personal information that dealerships may not have been able to track before. Careful notice and consent, security, and systems control requirements must be considered in the initial stages of setting up the dealership, as notice should be provided at the time of collection, and consent should be obtained before personal information is collected.    
4. Establish a dedicated legal entity. Dealers may want to consider setting up a new subsidiary or affiliate to hold future digital assets, shield other parts of their business from metaverse-related liability, and deal with the potential tax consequences. 
5. Taxes. The IRS treats “virtual currency,” including cryptocurrency, as property; therefore, general tax principles apply to property transactions using virtual currency. The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services could result in tax liability. The IRS is making cryptocurrency fraud a priority and aggressively pursuing taxpayers who fail to report crypto-related income. 
6. Regulatory compliance. Manufacturers and motor vehicle dealers must follow both the Federal Trade Commission Act and other regulations that address the sale, marketing, and advertising of motor vehicles. Section 5 of the Act allows the FTC to act in the interest of all consumers to prevent deceptive and unfair acts or practices. Moreover, the Act prohibits unfair or deceptive advertising in any medium. Historically, the FTC has been extremely aggressive in enforcement actions against dealers for deceptive price advertising. It is only a matter of time before the FTC and state attorney generals begin scrutinizing the metaverse to protect the automotive shopping public.

• Advertising in the metaverse must be truthful and not mislead consumers.  
• Claims about products or services must be substantiated, especially when they concern fuel economy, safety, or performance. 
• Dealers contemplating advertising offers in the metaverse must consider placement of disclosures that are clear and conspicuous. In 2013 the FTC updated its business guidance document “Dot.Com Disclosures” to counsel digital marketers on how to provide clear and conspicuous disclosures of information that consumers needed in order to make informed decisions about goods and services on the internet. On June 3, 2022, the FTC requested public input about potential updates to this guidance document. Since it has been almost a decade since the guide was last updated, it does not address much of the new technology that has emerged and the evolution in online advertising. With the request for comments, the FTC identified sixteen key questions on which it has a particular interest in obtaining the public’s view, including: “Should the guidance document address issues that have arisen with respect to advertising that appears in virtual reality or the metaverse, and, if so, how should those issues be addressed?” It is clear that the FTC is already concerned about advertising and marketing directed at consumers in the metaverse and making it a priority. 
• Virtual dealerships must comply with the Truth in Lending Act (TILA): Regulations M and Z. 
• Environmental claims. Electric and hybrid vehicles are here to stay. Claims about the environmental benefits of these vehicles must comply with the FTC’s Green Guides. It’s deceptive to misrepresent either directly or indirectly that a product offers a general environmental benefit. Ads should qualify broad environmental claims or avoid them altogether. 
• Vehicle demonstrations must show how the product will perform under normal use. As previously mentioned, regulators will be scrutinizing the metaverse, and product demonstrations could be at high risk if products are not demonstrated properly or performance and safety claims within the demonstration are exaggerated.
• Class actions. False and deceptive advertising in the metaverse can lead to the FTC joining other law enforcement agencies (e.g., state attorney generals), and dealers potentially can face enforcement actions or civil lawsuits with fines up to $46, 517 per violation should they occur.

7. Intellectual Property. Dealers should consider filing for trademark applications covering metaverse goods and services and secure any available blockchain domains to process metaverse payments.  See our previous Alert on Protecting and Enforcing IP Rights in the Metaverse  for more detail.
8. Location, location, location. What is the right metaverse for my virtual dealership?  Each platform has its own advantages and disadvantages including unique features such as gaming, creating your own avatars and building architecture, purchasing digital plots of land or access to unique NFT collections.

Dealers considering setting up shop in the metaverse must comply with advertising laws and regulations in creating their long-term strategy for a virtual dealership. Even though the metaverse is still evolving, opportunities include establishing a virtual dealership for customers to ask the dealer questions about their vehicles, take a test drive, or even just view vehicles. 

Ready To Drive Into the Metaverse?

As automobile manufacturers drive into the metaverse to reach consumers, it is only natural that dealers will also want a presence to connect directly with customers in the metaverse. As with all new evolving technology, there are legal and regulatory issues that need to be considered. The lawyers in ArentFox Schiff offer a cross-disciplinary perspective to help motor vehicle dealers develop creative and practical tactics to maximize the value of the opportunities created by the metaverse.