FICPI | Interface Between NFTs and Intellectual Property Law

[1]“Non-Fungible Tokens” (“NFTs”) came on to the scene in 2014 and are a public digital record maintained on a blockchain (digital ledger that stores data) typically associated with a digital file.  Previously, blockchains were typically used in connection with cryptocurrency transactions, but they are now being used for NFTs; the new kid on the block in the cryptocurrency world.  However, NFTs are more like original paintings because they are unique and irreplaceable making NFTs non-fungible,[2] such that an NFT cannot be exchanged for another NFT.[3]  Nevertheless, the value of the NFT does not reside in the uniqueness of the NFT per se, but rather as is that it is a digital certificate of authenticity or proof of ownership, permitting the owner to claim the prestige of  owning the “original” underlying item or work associated with the NFT.

Indeed, a purchaser of an NFT typically does not acquire intellectual property rights in the underlying work, but instead, most NFTs are subject to a non-exclusive, non-transferrable license to use, copy and display the underlying work for personal use.  The creator may retain the intellectual property rights in the underlying work, like a painter or photographer who typically retain any rights to reproduce and sell copies of the “original” work.

Given the escalating interest in and relative simplicity of creating NFTs, many people are asking “what exactly is an NFT?”  People are also inquiring as to how NFTs are similar to other intangible items, e.g., patents, trademarks and copyrights, and how/if NFTs may be protected under the intellectual property laws. The authors here seek to provide an overview of NFTs and their intersection with traditional notions of intellectual property rights. [4]

NFTs are “minted” on a platform

There are several platforms available to create or “mint” NFTs,[5] including OpenSea, Rarible, Binance NFT and SuperRare, which require the NFT creator to link an Ethereum (or other cryptocurrency, such as Polygon) wallet to the NFT to pay fees associated with the “minting” and validating the transaction.  “Minting” is the process where the creator writes and associates a “smart contract code” characterizing the NFT with the corresponding blockchain where it is maintained; this “smart contract” either links the NFT to the underlying work or indicates the work is maintained “off chain.”  This process allows NFT purchasers to obtain a digital receipt establishing their ownership[6] of certain rights associated with the underlying work.

Purchasing an NFT

After “minting,” the NFT may be purchased on the corresponding platform.[7]  The “smart contract” governs the sale of the corresponding NFT, and is deemed automatically executed upon completion of all associated prerequisites, i.e., when an acquisition of the rights associated with the underlying work vis-à-vis the NFT is perfected.

NFTs and Intellectual Property Rights

As noted above, it is critical to differentiate between an NFT itself and the underlying work because typically the intellectual property rights in the underlying work are retained, while the NFT is intended to provide proof of authenticity of the work.

Where the underlying work or item is a creative work that is or maybe patented, trademarked[8] or copyrighted, the smart contract will specify whether the NFT alone is being acquired, or whether the acquisition also transfers rights in the underlying patent, trademark, copyright and/or any other rights to exploit the underlying item or work, and the seller may also reserve rights under the smart contract to royalties from subsequent sales.

To the extent that any rights in a patent, trademark or copyright are conveyed, it is critical that these conveyances comport with applicable intellectual property law(s) and transfers the necessary rights.  For example, any conveyance of U.S. patent rights with an NFT should take into account and address rights associated with enforcing the patent and recovery of damages in the event of infringement.  Further, any conveyance/license of partial trademark rights also should include provisions where the owner retains rights to “police” the trademark, while any transfer of the trademark should include all “goodwill” (inherent value) associated therewith.

In a potentially significant paradigm shift, Dapper Labs, who operates NBA Top Shots, has suggested modifying the typical NFT license (i.e., non-exclusive, non-transferrable license to display the underlying item or work for personal use) to permit purchasers to also exploit the underlying work for personal profit up to a prescribed annual limit.  However, it remains to be seen whether others will engage in this approach, and if so, it could lead to myriad of intellectual property issues, e.g., how to police the rights and goodwill in an underlying trademark.

Notwithstanding the variety of intellectual property being conveyed, any transfer of intellectual property in the underlying work should also be recorded in the appropriate office, e.g., the United States Patent and Trademark Office (“USPTO”) for patents and trademarks and the United States Copyright Office for copyrights in order to protect against a subsequent bona fide purchaser.  As discussed, the NFT while evidence of ownership does not itself convey rights in the underlying intellectual property, nor protect against a subsequent bona fide purchaser thereof.

Protecting NFTs

Because NFTs typically do not convey intellectual property rights and are simple, easy and relatively inexpensive to create, there has been an increase of fraudulent activity.  Minting same work is possible with multiple blockchains, and currently, there is no method of detecting such copied NFTs.  Further, with the escalating interest in bitcoin, NFTs and metaverse, NFT platforms are being launched on a daily basis without robust safeguards against theft of NFTs as well as sale of fraudulent NFTs. As such, some platforms limit the individuals that may use the platform, and only work with known creators. Additionally, platforms are also conducting high-value transactions via offline contracts in order to ensure the authenticity of the parties.

Recently, Playboy Enterprises alleged unfair competition (both Lanham Act and New York common law) as well as trademark infringement against www.playboyrabbitars.app, and was a granted preliminary injunction prohibiting operations of the counterfeit websites worldwide.  Playboy Enters. Int’l v. www.playboyrabbitars.app, 2021 U.S. Dist. LEXIS 222422 (S.D.N.Y. 2021).  While this was the only case located in a LEXIS^® search, NFT owners will no doubt continue to explore all avenues to protect the value of the underlying work.

NFT Platforms may not be deemed intermediaries entitled to the protections of the Safe Harbor provisions

Unlike Amazon or other traditional online retailers that are “intermediaries” who are protected under the Safe Harbor provisions of the Information Technology Act, 2000 as well as the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, NFTs are digital products that are being traded on an online platform by the creator/owner of the NFT.  As such, NFT platforms, unlike Amazon or other such intermediary platforms, is the platform where creation of the digital product is overseen by and governed by the rules of the platform leading to an argument that the platform is complicit (even if unintentionally) in the creation of fraudulent or copied/stolen NFTs. Thus, the courts will look to whether the platform is an active or passive in conducting its business in analyzing whether Safe Harbor provisions may protect these NFT platforms or whether the liability for intellectual property infringement will be shared by these platforms.

NFT legislation in the EU

In the EU, like the United States, there are currently no specific laws governing cryptocurrency or NFTs.  However, the EU Economic and Monetary Affairs Committee adopted the draft rules of the “Markets in Crypto-Assets Regulation” on March 14, 2022, which is expected to lead to specific rules governing various facets of NFTs as the rulemaking process continues.  We will continue monitoring the progress and discuss the same in future articles.

Conclusion

Given the nature of NFTs, the best option for the owner of the underlying item or work to protect such work as verified by an NFT is to ensure that the smart contract is robust and tightly drafted, and to ensure that all rights, including intellectual property, in the underlying work has been properly protected and recorded.  It is also critical to the extent that the NFT conveys intellectual property rights in the underlying work, the purchaser perfect all such rights.  There are also potential remedies under unfair competition laws in the U.S., but these also require the intellectual property rights in the underlying work be perfected, and players in the market will no doubt continue to explore additional legal theories to protect those rights.

Authors:

• P. Branko Pejic, Secretary of the U.S. Section, FICPI
• Danielle C. Pfifferling, FICPI

Compliments of International Federation of Intellectual Property Attorneys (FICPI) – a member of the EACCNY.

[1] P. Branko Pejic is a shareholder and co-chair of the litigation group of Greenblum & Bernstein, P.L.C., and Secretary of the U.S. Section of FICPI.  Danielle C. Pfifferling is a senior associate at Greenblum & Bernstein, P.L.C. who practices intellectual property litigation in the patent and trade secret space before federal district courts.  Any opinions expressed in this article are those of the authors, and are not necessarily the views of Greenblum & Bernstein, P.L.C.

[2] Although NFTs are typically unique, an NFT creator may mint bulk NFTs on same item or work.

[3] While NFTs may be minted for tangible items or works, including books, NFTs are more typically employed with intangible items, e.g., a tweet or art.

[4] While many countries’ intellectual property laws will interface with NFTs, the authors of this article focus on U.S. intellectual property law.

[5] Minting is akin to recording information on a physical medium such as a paper, painting canvas, vinyl record or CD/DVD.  Prior to such recoding procedure, the medium is a generic commodity, which gains uniqueness by virtue of the information recoded thereon.

[6] NFT ownership is addressed using a unique ID and metadata that no other NFT can replicate.

[7] Although most think of NFTs as representing a way of proving ownership of an underlying item, NFTs have distinct advantages over other methods of proof because once an NFT is purchased from a verified seller, the smart contract makes it easier for the initial purchaser (and any subsequent purchaser) to confirm the seller’s identity and that the seller holds all necessary rights in the underlying work or item.

[8] Since NFT is a good being sold on the open market, the NFT itself may be trademarked, and in fact, several names and logos of NFTs have been trademarked to protect the brand of the NFT.  According to USPTO records, trademark applications in the U.S. have risen from the single digits annually in 2020 into the thousands today.