This post explores intellectual property considerations, misconceptions and issues that we have seen arise in the NFT space over the last year. My firm has a complete guide on the topic available here.
Non-fungible tokens (NFTs) are the hottest topic of 2021/2022, and this new asset class has rapidly exploded across sectors. NFTs have demonstrated themselves as a powerful tool in the new digital era but, at the same time, they remain poorly understood, giving rise to a number of potential intellectual property (IP) issues.
What are NFTs?
NFTs are uniquely identifiable tokens, "minted" (created) using blockchain technology. When an NFT is created on the blockchain, the token is added as a 'block' of digital data to the chain. Because these blocks are linked together, the data in each block is immutable (that is, it cannot be changed without affecting the whole chain).
The NFT itself is a collection of data that provides information about the token, such as its contract address, token ID and name, and the 'identity' of the original creator. While NFTs are commonly associated with a digital asset, such as an image or movie, this asset does not form part of the NFT's metadata. Instead, the NFT metadata will link to the location where the digital asset is stored (such as a website address). In a parallel to the traditional fine art world, an NFT could be thought of as the certificate of authenticity for a print or painting (and not the print or painting itself). In this sense, an NFT can function as a digital certificate of ownership over a digital asset, but it is not the digital asset itself.
One NFT collection illustrates this distinction between an NFT and the underlying digital asset. In March 2021, an artist known as @neitherconfirm created an NFT series called 'atlas III' with each NFT in the series linking to a JPEG image file, showing an abstract portrait at the time of the sale of the NFT (image above, top row). However, once the NFTs were purchased, the artist swapped the JPEGs to images of rugs (image above, bottom row). This was possible because the NFTs linked to image files that were stored at a website address which the artist had access to. There are solutions to prevent this from happening, such as minting the NFT using the InterPlanetary File System (IPFS), which effectively preserves the image file and prevents tampering, but this 'atlas III' collection highlights how an NFT is not the same as the digital asset that it links to.
The quintessential use case for NFTs, to date, has been the sale and trade of digital assets like art, design and digital fashion. NFTs create scarcity for a digital asset that otherwise, because of their digital nature, would be capable of infinite dissemination.
The ability of NFTs to provide provenance over digital assets has also transferred into the real-world, and it is now common to see NFTs that are associated with physical products. For example, brands can now sell an NFT which is redeemable for a physical product (such as fine wine or sneakers), which creates a convenient market for the trade of those goods. The NFT also functions as an anti-counterfeiting tool to disrupt unlawful activities and tackle infringing copying of goods.
IP issues with NFTs – what is actually being purchased?
One common misconception with IP rights generally is illustrated by the case of Spice DAO, the Decentralised Autonomous Organisation (DAO) which was set up to fund the purchase of a book, director Alejandro Jodorowsky's adaptation of Frank Herbert's science fiction story 'Dune'. The DAO ended up winning the auction for €2.7 million, almost 100 times more than the book was estimated to sell for. After the purchase, Spice DAO said that its mission was to "Produce an original animated limited series inspired by the book and sell it to a streaming service". However, as was subsequently pointed out to the DAO, purchasing the physical book does not necessarily include an assignment of the copyright underlying the book. As such, Spice DAO had no rights to create derivative works simply because they owned the book.
The same is true of NFTs. Because the NFT is just a 'certificate of authenticity' for the digital asset, it does not give any IP rights to the digital asset itself (aside from some limited implied rights, for example to display the purchased work). This has parallels to fine art, where the acquisition of a painting does not give the purchaser any rights to the underlying copyright in the painting itself (unless there is an agreement with the copyright holder that specifies otherwise, or in some cases where the painting is a commission).
Accordingly, as the default case, the purchase of an NFT does not assign copyright or other IP rights to the purchaser. However, this default position can be amended by contract in a number of ways.
For example, the terms and conditions of the online marketplace where the NFT is sold (such as OpenSea, Nifty Gateway and Rarible) may specify that the NFT sale is accompanied by an assignment or license of IP rights in the digital asset associated with the NFT. However, in practice, these marketplaces do not generally contain IP-related terms and conditions upon sale – although this could change in the future.
Alternatively, the 'smart contract' by which the NFT is minted may contain provisions related to IP rights. A 'smart contract' is a computer program that is stored on the blockchain, which facilitates the creation and transfer of NFTs. Different smart contracts can exist on the same blockchain, and NFTs can be created using these different contracts. The smart contract that is currently most commonly used for NFTs on the Etherium blockchain is known as the ERC-721 standard, which does not contain any special rules in relation to IP. Conversely, a different smart contract, known as EIP-721, specifies that "Copyright and related rights waived via CC0", with the reference to CC0 meaning that 'creative commons' is intended to apply to the NFT and the underlying digital asset, and IP rights are waived on minting.
Finally, the creators of the NFT may attempt to define the IP rights in relation to the NFT, before or after the sale of the NFT. Yuga Labs LLC, the creators of the Bored Ape Yacht Club NFT franchise, have stated on their website (although this has since been removed) that holders of its NFTs have "a worldwide, royalty-free license to use, copy, and display the purchased Art … for your own personal, non-commercial use" and "an unlimited, worldwide license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art (“Commercial Use”).”
However, there are various issues if an NFT purchaser seeks to rely on such a statement. For example, depending on the jurisdiction and the rights being assigned and/or licensed, a statement on a website may be insufficient to meet the formality requirements for an IP assignment and/or licence, rendering the transfer invalid. Furthermore, because of the imprecise and often incomplete nature of such statements, the rights being transferred are often unclear and capable of misunderstanding. In the Yuga Labs LLC case, the statement draws a distinction between 'personal, non-commercial use', which is 'royalty-free', and 'commercial use', which is not expressed to be royalty free, but it does not then explain if there is intended to be a royalty (and what this royalty may be). A holder of a Bored Ape Yacht Club NFT may think that they are free to use the NFT for commercial purposes, whereas, in reality, Yuga Labs LLC may subsequently seek royalties from the holder.
IP issues with minting NFTs – ownership and infringement
Creating an NFT also gives rise to IP issues.
The first important consideration is understanding who actually holds the right to create NFTs based on a work. In this context, it is crucial to assess the underlying contract (if any) regulating the work to understand who has the right to mint an NFT. Minting an NFT without the right to do so could constitute copyright infringement of the economic rights of reproduction and communication to the public in the work, as well as other possible claims (trade mark infringement, passing off, misleading and deceptive conduct etc). In some jurisdictions, it could also give rise to a violation of the author's moral rights if the NFT creation was seen as a distortion of the original work that could be detrimental to the artist's honour or reputation.
An example of this issue is the case of Miramax v Quentin Tarantino, which is currently being heard before the US Federal Court. In late 2021, Tarantino minted and sold 'Tarantino NFTs' relating to the Pulp Fiction movie, which he directed. Miramax alleges that these NFTs were sold in breach of contract, and infringed trade marks and copyright owned by Miramax. Tarantino, conversely, asserts that his contract with Miramax from 1993 reserved him certain limited rights, including the right to engage in acts such as the sale of these NFTs. This case highlights the importance of clarifying contractual rights and limitations to ensure that the person wanting to mint an NFT based on copyrighted material indeed holds the right to do so. Parties may also seek to enter into a subsequent agreement which clarifies the position in relation to the creation and sale of NFTs, in cases where the earlier agreement does not expressly address this (which seems likely for any contracts pre-2021).
A further consideration before minting an NFT is whether the sale of the NFT may infringe the trade mark/s of third parties. This may involve obvious cases of possible infringement, where the NFT uses or parodies IP owned by other people.
For example, Hermès, the creator of the Birkin handbag, is currently engaged in trade mark litigation against an artist who minted and sold NFTs depicting the Birkin handbag, rendered in colourful faux fur (called the 'MetaBirkins' collection). This case will explore whether the conduct of the artist constitutes trade mark infringement, trade mark dilution and cyber-squatting (if the consumers would be misled and perceive the MetaBirkin NFT as coming from Hermès), or if the NFT collection is actually a tribute to the iconic handbag and represents artistic expression protected as fair use (such as the Campbell's Soup cans by Andy Warhol).
The minting and sale of an NFT may also give rise to unintended IP issues. As discussed in the introduction, NFTs can function as a digital certificate over physical goods, which may enable consumers of those physical goods to conveniently sell, store and buy the goods. However, this raises the question about whether or not a trader is allowed to mint and sell an NFT that contains the trade mark/s of a third party, with the intention of describing the goods that the NFT is associated with.
This question is currently being considered in the case of Nike v StockX. StockX, an online reseller of sneakers and other street wear, introduced a series of NFTs called 'Vault NFTs', which feature the image of sneakers (including Nike-branded shoes). The NFTs entitle the holder to redeem the NFT in exchange for the shoes depicted by the image, but StockX will keep the shoes safely stored until they are redeemed. This promotes an active market in shoe reselling, without the need to physically transfer the shoes between seller and purchaser. However, Nike has argued that the use of its trade marks in the image associated with the NFTs constitutes trade mark infringement, as StockX is trying to imply that these NFTs are endorsed by Nike. StockX says that it is merely using the marks in a descriptive manner, to inform the NFT holders what shoes the NFT relates to.
Accordingly, if you're intending to mint and sell NFTs, care must be taken to ensure that you have the necessary IP rights covering the NFT metadata and underlying digital asset, and that these elements do not infringe on the IP rights of third parties.
What can be done to protect the rights of brand owners?
Even if you do not intend, at this time, to mint your own NFTs, and you are the owner of a brand, the examples above demonstrate how you must remain vigilant in monitoring the marketplaces to ensure that third parties are not creating NFTs that infringe your IP rights.
In terms of trade marks, companies may consider filing new trade mark applications in additional Nice classes to protect virtual products (as classes 9, 35 or 41), in order to prevent third parties trying to obtain protection in such classes and to potentially strengthen any trade mark infringement claims in the future. Kanye West's Yeezus brand, for example, recently filed trade mark applications explicitly covering "blockchain-based non-fungible collectibles, assets, currencies and tokens".
There remains an open question if trade mark offices and IP courts may extend the definition of products in a specific class in order to also include the virtual version of the same physical item, creating a parallel between the real world and the virtual world. However, in the meantime, it is vital for industries to make a proper assessment of their trade mark portfolio in relation to the specific territorial coverage in order to be ready to protect themselves against infringements in the digital world.
If you'd like to discuss NFTs and the metaverse from an IP perspective, just send me an email. Also nothing in this note should be taken as legal advice.
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