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

The internet has driven to prominence a powerful new digital phenomenon that is taking the world by storm and has recently exploded upon the tech scene and the blockchain space. They are called NFT`s (Non -Fungible Tokens). NFT`s have captured the attention of the public, investors and collectors of artworks and memorabilia alike in their popularity, scarcity, and for their sheer astronomically high price tag.

In March 2021, the famous auction house, Christie`s® sold on auction, as an NFT, the digital artwork collection entitled “Everydays: The First 5000 Days” created by the digital artist, Beeple, whose real name is Mike Winkelmann, for a staggering US$ 69.3 million. And consider that prior to October 2020, he had never sold a work for more than US $ 100! Later that same month, a digital artwork created by the humanoid robot Sofia in collaboration with 31-year-old Italian digital artist Andrea Bonaceto, was sold at auction for nearly $700,000 in the form of an NFT.

Not surprisingly, this phenomenon has a lot of people talking and asking a host of questions concerning NFT`s and their legal implications such as regards ownership rights and their interplay with intellectual property law. In this Article I endeavor to answer some of these questions.

What are NFT`s?

Simply put, an NFT is a unique one- of -a kind non-fungible method of tokenizing an asset. Because it is non-fungible it is not interchangeable. It is entirely unique in contradistinction to a bitcoin, which is interchangeable with other bitcoins. A token, however, is a digital unit of value recorded on a blockchain, a decentralized version of the peer -to -peer network that is maintained by thousands of computers around the world. An NFT can contain software code in the form of open sourced blockchain protocols that control the transfer of digital currency under certain terms and conditions (“smart contracts”).  Digital art or memorabilia is attached to an NFT with its embodied smart contract and is then created or “minted” online on a blockchain. NFT marketplaces exist on different blockchains which have different NFT standards, which are not interchangeable. Once the NFT is minted, it is permanent and cannot be modified or amended in any way. An NFT is then traded in a variety of online marketplaces.  Thus, an NFT is a unique immutable digital fingerprint-tracking-cryptographic asset linked to or associated with a physical digital work. The commercial value of an NFT and its digital signature saved on blockchain ledgers, is that it allows anyone to verify the ownership and authenticity of the work or asset linked to it which it represents. NFT`s should therefore be considered as digital certificates of ownership and authenticity of the work to which it is linked, being stored on the blockchain and digitally traceable.

The range of NFT`s is vast and eclectic. NFT`s can represent almost any real or intangible property including photos, artworks, music videos, collectibles, memorabilia, trading cards, gaming items, tickets and other types of digital files. NFT`s can also be applied to verify identification certificates, licenses, real estate, vehicles, title certificates and other documents. For example, luxury brands like Breitling® now issue digital passports utilizing NFT technology to certify the authenticity of their luxury goods.

 

Ownership Rights and Copyright

There is considerable uncertainty surrounding how NFT`s fit into existing legal frameworks & their interplay with IP law. Even though NFT`s are not IP rights, they do have a significant impact on IP rights. So, what are the IP rights associated with NFT`s?

When you buy an NFT, you hold the right to claim ownership of the NFT itself and that right is recorded on the blockchain. It includes the right to exclude others from claiming ownership of the NFT. But that right does not entitle you to ownership of the underlying artwork, the digital asset embedded in the NFT, unless there are contractual terms which provide otherwise. Nor do you have the right to reproduce or transform that work of art. The author of the work still owns the copyright which subsists in the underlying artwork embedded in the NFT itself. You will presumably receive together with your right of ownership of the NFT some implied right or license to make limited use of the underlying artwork embodied within the NFT in order to buy, own or sell the NFT. This will include the right to display the physical artwork but not the right to make additional copies, or modify the artwork in any way. 

These general principles of copyright law regarding NFT`s have not yet been tested in Court but there seems to be nothing inherent about NFT`s that would change these default rules of copyright law. Copyright therefore seems to be a real challenge to NFT`s. The law in this regard is murky and unclear. These complications are illustrated by Nathan Apodaca who had hopes of Tik Tok® stardom and instant fame and fortune by monetizing with an NFT a Tik Tok® video of himself drinking a bottle of cranberry juice while skateboarding and lip syncing to the Fleetwood Mac® song “Dreams”. His hopes of instant NFT fame and fortune were dashed when his above-described actions were alleged by Stevie Nicks, the song`s composer, to constitute copyright infringement and he was denied permission to include the song in the NFT. The distinction between an NFT and the underlying digital asset it certifies is therefore an important one. While the ownership of the NFT is reflected on the blockchain, and the purchaser can always access their NFT, the virtual asset itself usually exists elsewhere. This means that although a purchaser may own their NFT, they do not own the underlying virtual asset which will be beyond their reach.

Smart Contracts and NFT Licensing 

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, or that automatic royalty payments must be paid to the original digital content creator, or limiting the number of replicas that may be made of the 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 you are purchasing 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 with the seller 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.

A practical solution for blockchain developers to provide for IP issues and to offer them a secure path to monetization is by the use and creation of an NFT License. In this framework, a non-exclusive, non-transferable 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. In both platforms, license agreements enable users to buy NFT`s subject to specific terms and conditions regulating ownership; 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. 

Trademarks

The minter or creator of a NFT should avoid using any trademark of another person or company embodied within their NFT without the consent of the trademark registrant. If the underlying work or asset contains a trademark, there may be trademark infringement implications. It is therefore conceivable that the brand owners to whom the trademarked logo belonged appearing on the cranberry juice bottle held in the hand of and drunk by Nathan Apodaca in the Tik Tok® video he wished to mint as a NFT alluded to above, would likewise have a claim against him for unlawful trademark infringement for creating an unauthorized NFT which included their trademarked brand name.

Trademark owners should consider how to deal with the possibility of the use of their brand names in an NFT. 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.

If you are a brand owner, you may also want to consider how your brand can leverage this revolutionary new digital crypto-asset technology. LVMH® (the owner of Louis Vuitton®, Tiffany® and Dom Perignon®) reportedly is using the AURA blockchain to allow consumers to use NFT`s to trace the authenticity of their branded luxury goods.

Brand owners should also research and determine the classes of goods and services in which their goods and services are registered. If you have a trademark for one type of goods and services, it does not mean this will cover the use of your brand as an NFT on the blockchain, and you may have to file for additional classes to cover the use of your trademarks in the NFT space.

Patents

A patent is a unique original legal right that can be represented as a unique NFT.  In general, blockchain patents are showing accelerated growth potential. They are already on the rise especially in the US. Nike® recently obtained a patent for “generating cryptographic digital assets for footwear” which gives the buyer of Nike shoes an assurance of authenticity of the shoes purchased and also awards them a digital collectable version of the shoe in their wallet, known as Cryptokicks®.

Thousands of blockchain – related inventions are filed in the US every year. Clarity of ownership is a major benefit of blockchain- based patent transactions.

The drawback of course regarding implementation of NFT`s for patents is that ownership of an NFT does not automatically confer ownership of the patent asset. You are the owner of the NFT in the blockchain and not the patented asset itself. The solution to overcome this issue is to complete the proper transfer and assignment documentation to pass ownership and the rights associated with the patent to the NFT purchaser, and for the assignment of rights, title, and interest in the patent to be recorded at the USPTO.

In April 2021 IBM and IPwe announced that they are working together to “tokenize” intellectual property and store the information on a blockchain network. They are building the infrastructure to turn patents into non-fungible tokens and store the records on a blockchain network. This approach is intended to make it easier for patents to be sold, traded, and commercialized by investors and innovators. Clearly, it is too early to predict how this concept will catch on and whether companies will follow the hype and will be rushing off to turn their patent portfolios to NFT`s. However, since blockchain provides the open transparency needed to imbue trust and confidence in the accuracy and validity of transactions recorded on the blockchain, and brings other distinct advantages, like tracking ownership of transactions involving the patent and patent licenses on the blockchain represented as NFT`s, the idea of a patent NFT system will no doubt be a force to be reckoned with in the foreseeable future.

IP Enforcement of NFT’s

This is a fuzzy and undeveloped area of IP law. It is unclear to what extent traditional takedown mechanisms like the procedure under the Digital Millennium Copyright Act (DMCA) may apply to NFT platforms. Artists have reported finding that their artwork has been stolen and sold as NFT`s without their knowledge and consent, yet it is unclear how and to what extent different NFT platforms will respond to takedown requests to remove an allegedly infringing work and/or to formal infringement claims brought under the DMCA and other takedown procedures. The problem could be compounded by the limitations of IP complaints brought for actions taken on the blockchain which may be decentralized, across international borders and jurisdictions, and very often be taken by pseudonymous  bad actors.

A further problem that could arise if takedown procedures brought against infringing works on NFT platforms are indeed successful, is that NFT purchasers could find that their NFT`s to which the infringing artwork is linked is left with a digital token representing a work that is no longer hosted on the website that gives a purchaser the only access to its virtual asset.

There are indeed enormous profits to be made from leveraging the huge stockpile of digital content in the online world. NFT`s could, thus, unlock a vast market worth billions of dollars for digital artists, content creators, innovators, investors, companies and SME`s.

It is difficult to foresee whether or not the current NFT frenzy is sustainable and a permanent fixture in the technology landscape, or merely a pandemic fad. What is clear, however, is that the world of NFT`s is still emerging and new legal issues and complications are bound to arise. 

To date there is no law specifically governing NFT`s in most if not all common law and developed country jurisdictions. This puts IP lawyers at a distinct disadvantage in advising their clients, as the law traditionally lags behind innovation and disruptive technologies; NFT’s being no exception. When counselling clients who wish to create or purchase on an NFT marketplace such counsel must of necessity be based on fundamental principles of IP and contractual and commercial law generally, and verification that the minimum technical requirements of the NFT standard being used are satisfied. 

These digital commodities and technologies will no doubt present new hurdles and challenges for IP ownership and IP law as NFT technology & markets mature. IP lawyers will have to adapt and get ahead of their game to keep up with the exigencies of this exciting emerging technology.

As NFT`s are becoming increasingly important, we at JMB Davis Ben-David are equipping ourselves with the knowledge and expertise to guide you through the legalities, legal challenges & obstacles associated with these digital assets. If you need any legal assistance with NFT`s and your intellectual property rights in regard to such digital assets, please email Ivan Lipshitz at Ivan.Lipshitz@jmbdavis.com or JMBmail@jmbdavis.com.

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