The Beatles once famously said "all you need is love." My neighbor, an admitted blockchain enthusiast, disagrees; as he announced to us recently, all humanity needs is "love and blockchain." Although the jury is most definitely out on the accuracy of this statement, it cannot be denied that blockchain—and non-fungible tokens (or NFTs) in particular—are not only here to stay; they are transforming the future of how we buy, sell, and advertise products. The NFTs are also destined to have profound implications for intellectual property and marketing law.
What Is an NFT? Hint: Not Just a Toy for the Rich Art Collectors
An NFT is a ledger of ownership to an asset recorded on the blockchain. Think of it as a digital trading card or a deed to a house, with the ledger decentralized. Copies of the underlying work may be reproduced, viewed, and displayed (usually subject to the terms of a "smart contract" and/or a license), but only one person is the original owner (i.e., the token is "non-fungible"). Initially, media headlines about NFTs were dominated by price tags that would make your eyes pop out: Beeple's NFT digital art collection "Everydays" resold for $69 million1; Jack Dorsey auctioned his first Tweet as an NFT for $2.9 million2; an NFT version of the popular Nyan Cat meme sold for $590,0002. Cool. But what application to the "real" world does it have, you say? Setting aside the flashy headlines, NFTs are proving to be more than just extravaganza for the ultra-rich. Brands and celebrities are starting to tap into the NFT mass-market. The NBA Top Shot, which offers basketball highlights and memorable moments packaged as NFTs, has already generated $500 million in transactions. Tom Brady is reportedly launching a platform called Autograph that will bring the hottest brands and names in sports, entertainment, and pop culture to create NFT collectibles. And the likes of Nike and Louis Vuitton are looking to NFTs as ways to ensure and trace authenticity of physical products and enhance customer experience (for example, by allowing consumers to showcase their shoe or jewelry collections in NFT form online). The market potential for NFTs is thus enormous ranging from very rare, luxury items to affordable pieces with a mass appeal.
Today, most of the NFTs are using Ethereum (ERC-721 standard) but other platforms are emerging quickly. For example, Dapper Labs, the unicorn company behind the NBA Top Shot NFT store, launched its own blockchain Flow, developed to handle extensive scaling, required for transactions involving NFT collectibles and crypto games.4 Dapper Labs turned to developing Flow in 2017, after its CryptoKitties (one of the first NFT products to explode in popularity) infamously clogged Ethereum. As the NFT market expands, we should expect alternatives to Ethereum and Flow to multiply.
Who Owns Intellectual Property Rights in the Underlying Asset?
Now, here is the tricky part that often gets misunderstood: owning an NFT generally does not mean owning the underlying asset or intellectual property in the underlying asset. Unless copyright or trademark rights are specifically assigned with the NFT transfer, the intellectual property rights continue to vest with the owner of the underlying work. Think of it as buying a Picasso: you own the original painting, but the artist still owns the copyright in the work.
NFT creators who own the underlying intellectual property in the work or the rights of publicity (e.g., for NFTs featuring famous athletes) thus need to put appropriate guardrails into place to ensure NFT buyers do not commercialize the underlying intellectual property without permission. NFT buyers thus often need to agree, as part of the sale, to license terms that allow only non-commercial, personal use of the NFT (or very limited commercial uses) but prohibit the buyer from commercializing the underlying intellectual property (e.g., by launching a line of merchandize with the NFT) or from registering any trademarks or copyrights for the underlying work. Unlike resale or transfer of the NFT, these unauthorized uses would generally take place outside of the blockchain and would not be reflected or recorded on the ledger. As such, they require traditional forms of intellectual property enforcement and policing of the marketplace for violations.
"Smart Contracts": Are They "Smart" Enough to Foresee Everything?
The NFTs' main appeal is not only its decentralized ledger but that it comes packaged with a "smart contract." Imagine that you are evaluating your next CryptoPunks artwork purchase on OpenSea (one of the most prominent NFT markets today). Utilizing the OpenSea website and a platform like Etherscan, you can usually view not only the full history of the NFT (when it was created, how many times someone bid on it, and when and for how much it was resold), but the terms of the underlying "smart contract." Notably, a "smart contract" can incorporate various terms that are built into the code and are automatically triggered, including, for example a percentage of the resale price to revert to the original creator every time an NFT is resold. This allows NFT creators to continue to profit from the work if the work grows in value over time.
"Smart contracts" are a big step toward eliminating the middleman between creators and consumers, and they can preempt many legal disputes down the road. They, however, cannot (yet) foresee every future scenario. For example, recently, an NFT, which was marketed as the "world's first" NFT digital "Mars House," sold for a hefty sum of around $500,000 (talk about transforming the modern-day understanding of a "roof over one's head"). Not long after, the alleged NFT creator found herself embroiled in a copyright dispute with a 3-D modeler who she hired to assist with the project and who claimed to be the true author and owner of the underlying designs.5 In copyright law, absent a work-for-hire agreement and meeting specific statutory requirements, a third-party contractor hired to create content may be deemed its sole author (or at least a co-author and co-owner). If anything, the dispute involving the "Mars House" reveals that "smart contracts" governing compensation, resale conditions, and other terms regarding an NFT may not contemplate all future disputes and scenarios.
The New Generation of Warriors Against Counterfeiters
Beyond collectibles, art, memorabilia, and music, the NFTs are the future inextricable link between physical goods and the digital world. This connection is particularly relevant for the fashion industry and has the potential to revolutionize the way brands fight counterfeits. In the not-so-distant future, we can expect most luxury items to come with an NFT/blockchain component, allowing consumers to confirm the product's authenticity and trace the full cycle of the product (from where it is made to every time it changes ownership).
Recently, Louis Vuitton, Prada, and Cartier (owned by Richemont) announced the Aura Blockchain Consortium6, designed to address the counterfeiting challenges in the luxury industry and enhance customer experience. Aura allows member brands to create unique digital IDs tied to physical products, which in turn enable consumers to obtain proof of authenticity and access full product history—from sourcing (including raw materials and factory information) to sales on second-hand markets. Aura is an example of cooperation between competitors in the luxury industry, with all participating brands taking part in the blockchain governance. Because Aura is a private blockchain, however, it has raised questions about transparency and lack of decentralization that come with closed control.
Arianee, another blockchain alliance, backed by Breitling, ba&sh, and others, creates NFT passports for luxury items (or, as it puts it, "digital twins" for luxury goods), but uses an open-source, public platform.7 More fashion-focused blockchain platforms will, no doubt, launch soon, and it remains to be seen whether and how these databases will interact with each other and share information.
Evidentiary Matters and Litigation in the Age of Blockchain
Because an NFT ledger is stored on the blockchain, it, at least in theory, cannot be manipulated, corrupted, or reversed. Once recorded on the ledger, the information is infinitely there for the world to see and rely on. With blockchain (and NFTs) going mainstream, will certain evidentiary rules become obsolete in the face of this new technology, based on the promise of inherent reliability? For example, in a hypothetical legal dispute, records of bids, resale, or change of ownership on an NFT ledger would most likely be considered hearsay (i.e., out of court statements offered for the truth of the matter asserted in the statements). But do they have to fall within the traditional hearsay exceptions to be deemed reliable and thus admissible? Or will the rules eventually evolve to recognize that blockchain technology (and the records reflected on decentralized ledgers) are inherently reliable and thus admissible without the need to jump through additional evidentiary hoops?
Or consider this scenario: an artwork is tokenized unbeknownst to its author; the copyright author then attempts to enforce her rights by enjoining distribution of the unauthorized NFT or attaching a judgment to an NFT. The NFT, however, has already been resold and is owned by an anonymous wallet. Unless crypto-forensics are able to shed light on the identity of the person behind the initial unauthorized tokenization and/or the current owner, prevailing plaintiffs may face insurmountable difficulties in enforcing or collecting on any successful judgments. Just these several examples show that our laws and processes are likely outdated and ill-equipped to deal with modern-day opportunities and challenges presented by the blockchain technology. And with the NFTs taking markets by the storm, the marketing and legal landscape will be evolving quickly.
Footnotes
1.https://www.nytimes.com/2021/03/11/arts/design/nft-auction-christies-beeple.html.
2.https://www.cnbc.com/2021/03/22/jack-dorsey-sells-his-first-tweet-ever-as-an-nft-for-over-2point9-million.html.
3.https://www.coindesk.com/nyan-cat-nft-ethereum-meme.
5.https://www.surfacemag.com/articles/crypto-nft-house-fraud/.
6.https://auraluxuryblockchain.com/.
Originally published by Intellectual Property Magazine
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