by Ivan Lipshitz, Adv., JMB Davis Ben-David

It is a truism that a company’s intellectual capital and technical know – how are among its most valuable assets and provide its greatest competitive advantage. They are the principal drivers of its success and shareholder value. Yet, many companies lack adequate resources and management systems to properly manage and leverage their intellectual property assets. The impact of the metaverse, however, has led to a sea change in the strategic management thinking towards these valuable intangible assets, and has had a tremendous influence on the dynamics of the strategic planning process to convert them into profitable revenue streams and new opportunities.

As explained in my previous article, Through the Looking Glass: Towards a Clearer View of Trademark Rights in the Metaversethe metaverse is a fully realized digital world that exists beyond the one in which we live. It can be understood as a parallel virtual world where participants can interact with each other through their avatars & perform a range of different work-related, educational, recreational, entertainment  and social activities, in much the same way as they would do in the real world. Mark Zuckerberg has described the metaverse as “a composite universe melding online, virtual and augmented worlds that people can seamlessly traverse.” 

According to Gartner Inc., by 2026, 25% of all people will spend at least one hour a day in the metaverse for work, shopping, education, social purposes and/or entertainment. With an unlimited number of potential customers transitioning from a digital world to a metaverse world at a rapid pace and to multiple destinations, “Licensing” in the metaverse has been identified as the world`s largest untapped licensing market and has been hailed as the future of IP Licensing. Licensing International Organization has opined that the metaverse could represent as much as a 40% increase in licensing business in the near future.  Experts therefore predict that the next great expansion of the licensing industry will be in the metaverse, particularly for art, film, fashion, video gaming and music which will bring with it tremendous financial rewards and significant financial success to both licensors and licensees. 

As a result, companies of all sizes, which already have a metaverse presence, from startups to Fortune 500 companies, spanning the gamut of  industries, from fashion and cosmetics to video and gaming, sports and entertainment and the like, are realizing that in order to protect their market position as well as to continue to deliver and maintain their value proposition, they need to engage and pursue not only a metaverse presence and strategy, but also be able to harness and extract value from their intellectual property assets and leverage and monetize them into new revenue streams and market opportunities. This thinking is having a positive growth effect on the development of the licensing industry for metaverse based companies where we are witnessing partnering relationships and expansion strategies developing among businesses and other role players and channel partners in this burgeoning space to identify new markets and distribution channels by the establishment of joint ventures, brand collaborations, strategic alliance partnerships and similar business arrangements. 

In this latest article in my series on the interaction of IP and NFT`s and the metaverse, I examine the legal aspects of licensing IP in the metaverse, some of the different types of IP licensing contracts to be found there, and the legal concerns, challenges and risks associated therewith. My earlier articles in this series can be accessed here: NFT’s and their Interplay with IP ; Three Lessons to be Learnt from the Miramax – Tarantino Lawsuit Over Pulp Fiction NFT’s; Through the Looking Glass: Towards a Clearer View of Trademark Rights in the Metaverse.

The following are examples of some of the types of IP License Agreements that can be found in the metaverse:

  1. Smart Contracts and NFT Licensing. An NFT (Non -Fungible Token) is a unique digital asset that can be verified and traded on a blockchain platform (e.g. Ethereum). It is a unit of data stored on a digital ledger, or blockchain. It cannot be duplicated or manipulated and is not interchangeable. It draws its value from having a scarce, one-of- a kind nature, and the fact that it is verifiable. NFT’s can contain smart contracts. Smart contracts play a key role in NFT based blockchain technology. They can provide a workable mechanism to manage and enforce digital rights in the NFT. They can be coded to set out the rights that are assigned to an NFT participant as part of his NFT and his limitations and restrictions on use. In effect, the smart contract acts as a license to specific content governing the use of the NFT to which the virtual asset is linked. For example, it could provide that copyright in an artwork will not transfer to the NFT holder unless expressly provided. Likewise, it could provide that automatic royalty payments must be paid to the original digital content creator or limit the number of replicas that may be made of the digital work. These provisions should be well considered and addressed upfront to cover not only the specific terms relating to the first NFT sale but also pertaining to subsequent sales and use of the NFT, since once minted the NFT is permanent and may not be changed or amended. Smart contracts also ensure that the virtual assets purchased remain accessible. Due to the decentralized nature of blockchain technology, if the website where the virtual asset exists is corrupted or removed, the NFT holder may find himself having an NFT certifying an asset that is no longer accessible. The smart contract should therefore provide a term to the effect that the virtual asset will be legally and continuously hosted in accessible format and be available to the NFT holder at all times. Thus, the use and creation of an NFT License provides a practical solution for blockchain developers to cater for IP issues and offers them a secure path to monetization.

    In this framework, a non-exclusive, non-transferable limited license to display the digital work underlying the NFT can be granted to the purchaser for his personal use only, and the scope of the IP rights and limitations that come with the NFT purchase can be clearly defined and delineated, and a mechanism allowing potential payment of royalties agreed upon. This approach was taken for instance by CryptoKitties® (digital cats) and NBA Top Shot® (digital cards of NBA`s best moments), two of the most popular decentralized applications globally which account for $ 40m and $ 500m in sales, respectively. License agreements thus enable users to buy NFT`s subject to specific terms and conditions regulating ownership. These terms and conditions may include, inter alia,  grant of license to use, copy, or display the underlying object for personal use or qualified commercial use; and the imposition of restrictions upon modification of the underlying work without consent.

  2. Brand Licensing and Trademark Licensing. In a post -pandemic new economy where commerce has moved online, brand owners have realized that all types of consumer goods and services can be licensed. Trademark owners are therefore giving consideration as to how best to deal with the possibility of the use of their brand names in an NFT and in the metaverse. One option is to specifically license trademarks for use in NFT`s, or if this is not desirable, to provide a clause in a licensing agreement to expressly preclude the licensee from creating an NFT based on a licensed work embodying a registered trademark. Brand protection may be one of the major challenges and pitfalls facing brand owners in the metaverse. While NFT`s may protect brand owners in the virtual world by verifying ownership and allowing consumers to use NFT`s to trace the authenticity of their branded luxury goods, particular consideration will have to be given to the legal  aspects of the licensing of branded goods in the metaverse.  The scope of licensed rights granted may pose new legal questions and challenges due to the unique way in which the metaverse operates. Enforcement and monitoring trademarks for third party infringement and infringement of the trademarks of others may prove to be more challenging and harder to do in the metaverse than in the physical world. The metaverse will be an ever-increasing expansive place with many participants. It will not be limited to one platform but will be comprised of many different platforms on the basis of the principle of interoperability and decentralization of the metaverse. Consumers will have the ability to move virtual items such as clothes or cars from one platform to another. In this virtual landscape, an outfit, for example, could be purchased and worn by an avatar in more than one platform. Its decentralized nature will thus make it more difficult for trademark watch services to monitor the metaverse for infringements and fraudulent trademark use.

    For trademarks licensed in the real world, the license agreement must include terms governing quality control of the goods or services that are going to be distributed using the trademark, and there should be  provision in the license agreement stipulating for control and approval by the licensor of the manner in which the trademark is used. Failure to include these terms in the license agreement itself can result in in the loss of trademark rights, or at least, make it more difficult to enforce the trademark concerned. Other terms related specifically to trademarks that a license agreement in the physical world generally contain are restrictions on use of the trademarks and prohibition on combining the trademarks with any trademark of licensee or any other party. Terms related to approval of form of use may also require approval of labels, and marketing and promotional materials and activities for the purpose of consistency to protect the goodwill of the licensor in the marketplace. The license agreement should also require the licensee to properly use the ™ notice if the mark is unregistered or yet  to be registered, and the ® symbol if the mark is already registered.

    The metaverse also raises questions of  territoriality and jurisdiction  in regard to trademark licensing since in most cases a trademark license is limited to specific goods and services and sometimes it is limited to a specific geographical region or territory.  As trademarks are  limited to the country or territory in which they are registered, these issues can pose challenging hurdles for the metaverse and its commercial appeal.

    Given the unique characteristics of the metaverse – the lack of centralized regulation, the relative anonymity of users, the plurality of different platforms,  the decentralized nature and cross -jurisdictional platforms and the lack of territorial limitations, it is uncertain how these legal requirements, terms and provisions commonly used in license agreements in the physical world will transition over to and play out in the metaverse environment. For these and other cogent reasons innovative drafting language will have to be employed by the draftsman of the license agreement concerned to protect brand owners` trademark rights in licensing agreements for branded goods in the metaverse.

  3. Collaborations. Collaboration is a form of licensing with well-established mechanisms for brand commercialization and monetization.  They provide valuable ways for collaborators to boost their brand image and reach new audiences and distribution channels. The issue of combined trademark rights will have to be carefully considered in the collaboration agreement arising from the collaborators` collaborative efforts. Gucci recently collaborated with augmented reality company, Wanna, for the innovative exploitation of digital fashion products. Instead of merely selling an authentic pair of digital shoes using NFT`s and the blockchain, it sold the right to wear digital sneakers that can only be worn in digital environments under a collaboration license arrangement.
  4. Content Creation & Copyright Licenses. Content creators (for example, artists, writers,  film and television producers and video game creators, etc.) and rights holders who create and license content will want robust protection to ensure that they are broadly protected and fairly remunerated for each case of new use. The owner of a piece of content has certain exclusive rights to that content by way of copyright and other intellectual property laws. They may  grant licensees certain rights to use the content. Basic copyright law principles will generally apply regarding copying, reproducing and distributing content, and restrictions on use. Yet, the law remains unsettled and murky at best on many aspects of content licensing in the metaverse. This has befuddled many IP lawyers and has led to legal concerns around the shortcomings of NFT licensing and other crypto assets. For example, what rights are required to exploit content through NFTs ? Does the metaverse fall outside the exclusivity conditions of a “real world” license ? And, where licensing rights are tied to an NFT, what happens to a holder`s rights and sublicensing contracts if there is an encumbrance on the intellectual property concerned? Actor and producer Seth Green discovered the legal difficulties and challenges associated with these issues much to his chagrin when his  “Bored Ape” NFT token was recently stolen. In such case, the holder of the NFT  was the thief and not Seth Green, the owner of the NFT. These legal issues and concerns regarding metaverse -related content licensing will also need to be carefully addressed and determined.

  5. Patent Licensing. In light of the emerging nature of the metaverse, we can also expect the metaverse to give rise to new cutting- edge technologies and innovations and new enhanced devices to drive the metaverse and provide high quality graphics, improved image technology and video processing techniques designed to enable users to expend their time and enjoyment in the metaverse in various different ways. Forward thinking companies and inventors will look to patent these and other technologies and, in many cases, may wish to take commercial advantage of their inventions by licensing their patent rights to third party licensees.

  6. Celebrity Licensing & Rights of Publicity. In today`s world the likenesses of top models, actors, sportsmen, influencers and other celebrities are used, through their avatars, to promote fashion collections, sports events and concerts. Top brands are entering into Celebrity Licensing Agreements with such individuals to advertise, market, and promote their brands, products and events in the metaverse. Although the right of an individual to control and license the use of his likeness falls within the realm of the right of publicity and is not an intellectual property right per se, it has important implications for the metaverse where such likenesses may be used in an unauthorized manner to commercially promote products or services. It is wise where a celebrity’s name, likeness, photograph, physical appearance or other trait is intended to be used in the metaverse in this way to obtain the written permission of the celebrity concerned with appropriate releases, and for a Celebrity Licensing Agreement to be entered into.

The metaverse presents both unique opportunities and challenges, financial rewards and legal risks for brand owners, content creators, inventors and NFT “minters” alike who may wish to leverage and monetize their intellectual property in this virtual space by way of licensing arrangements. To profit in this way, you should obtain the advice of an experienced intellectual property attorney who can advise you not only on the intricacies and risks of licensing  contracts and the necessary terms and conditions required to adequately protect your intellectual property rights and minimize the adverse risks of your metaverse -related licensing model, but also one who has a keen understanding and sound appreciation of the unique way in which the metaverse works and operates.

As you consider your move to the metaverse, we at JMB Davis Ben-David stand ready to guide you through the legalities, legal challenges & obstacles associated with this new digital ecosystem. If you need any legal assistance with the metaverse, IP Licensing Agreements in the Metaverse, NFT`s and your intellectual property rights generally in regard to such virtual products and digital assets, please email Ivan Lipshitz at Ivan.Lipshitz@jmbdavis.com or JMBmail@jmbdavis.com.

 

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