NFTs And Intellectual Property Issues: A Practical Primer
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Despite what some commentators have referred to as a “crypto crisis” and a slump in certain digital asset values, it is likely that NFTs (non-fungible tokens) are here to stay, and NFTs present a number of new IP challenges. For example, businesses need to have the necessary trademark protections before entering the world of NFTs and they should be monitoring and acting against infringements. Before buying or selling any NFTs, it is also critical that companies understand the legal and technical implications of NFT transactions because much depends on the technical aspects of each NFT.
What IP Issues Arise When We Create, Buy, and Sell NFTs?
Whilst an NFT always corresponds to an underlying asset, the owner of the NFT does not necessarily own any IP rights in that underlying asset. The purchaser of an NFT typically gets the right to have the NFT (i.e., the digital token itself) in its crypto-wallet and the right to sell that NFT. However, ownership of the IP within the underlying asset depends on a number of factors, including the smart contract within the NFT, the terms and conditions of the specific NFT project, the terms and conditions of the NFT marketplace, and national formality requirements for transferring IP.
Typically, for example, the purchaser of an NFT corresponding to an artistic work will only obtain a limited licence to display that artistic work for non-commercial purposes (e.g., on social media, or within the metaverse). NFT purchasers therefore need to understand exactly what rights they are receiving in the underlying asset.
What Should Brand Owners Do?
Brand owners should be reviewing their current trademark specifications to ensure that their registrations take into account NFTs and/or blockchain technologies. Owners may wish to extend their protection to NFT metadata files, and the Nice Classification now incorporates “downloadable digital files authenticated by NFTs” in class 9. The EUIPO and UKIPO have both issued detailed guidance on this issue. Registered designs may also help to protect NFTs because they are not restricted to particular goods or services.
What IP Infringement Issues Do NFTs Create?
Trademark issues will often arise—one does not need sophisticated counterfeiting skills to create an NFT incorporating a third party trademark without permission. NFTs are technically easy to create. Brand owners are starting to take action against NFT creators, alleging that the creators do not have the right to use the mark in the NFT itself, or infringe trademarks when advertising the sale of NFTs. Alleged infringers, on the other hand, are arguing that their use of the mark does not cause a likelihood of confusion (or take an unfair advantage of the reputation of a well-known mark).
One particular issue is whether trademarks covering physical goods, such as handbags or sneakers, can prevent the use of those marks in NFTs for virtual handbags or sneakers. As more cases reach the courts, we will hopefully get more guidance on how they will treat NFTs and virtual goods and related services. You can also read more about a recent case on NFTs in the U.S. in Emily Lipka’s blog, Imitation is not always flattery A US perspective on luxury brands and intellectual property in the metaverse.
There is a risk of copyright infringement if there is any reproduction of an underlying work or any communication to the public of the work without the copyright owner’s permission. This will depend on the particular circumstances and type of NFT. Relevant factors include whether a copy of the copyright work is uploaded onto the blockchain or a new server without permission or whether any link in the NFT introduces the underlying copyright work to a new public.
Other IP Infringement
Disputes will also arise over whether existing IP licences include the right to mint NFTs. It is therefore essential that parties consider addressing the use of IP in relation to NFTs in their license agreements. Image rights (in the US) or passing off (in the UK) could also become an issue if there is any misrepresentation that a famous person who is the subject of an NFT has endorsed or sponsored the NFT in any way.
What Key IP Issues Should Businesses Consider?
It is clear that brand protection strategies now need to cover potential NFT infringements. Brand owners should be monitoring the NFT marketplaces for unauthorized use of their IP and taking appropriate action to enforce their rights. These actions will necessarily involve some particular complications:
- Identification of infringers: This may be particularly difficult because NFTs can be sold anonymously, and the minter or seller can be located anywhere in world. Access is through a digital wallet, which is essentially just numbers or letters, and there is no WHOIS database or dispute resolution procedure.
- Jurisdiction: It will be difficult to determine which court should decide global NFT disputes. The “targeting analysis” used in relation to online infringements is difficult to replicate in the context of NFTs because the market is truly global and sellers do not necessarily target or take deliberate aim at consumers in a particular jurisdiction.
- Remedies: Existing remedies will need to adapt to deal with NFT complaints. For example, NFTs cannot actually be destroyed so courts may order that infringing NFTs are sent to inaccessible “burn addresses” or that the link between the NFT and the underlying digital asset is broken.
The authors discuss these issues in more detail in the A&O Podcast, NFTs and IP: Does your business have the necessary protection?