Whether you are currently involved in the NFT market or possibly considering NFTs as a potential investment opportunity, understanding the intellectual property implications of NFTs is important...

Non-fungible tokens, or NFTs, will remain a hot topic in 2023. Whether you are currently involved in the NFT market or possibly considering NFTs as a potential investment opportunity, understanding the intellectual property implications of NFTs is important. At the same time, it is important to understand that NFTs represent a new and rapidly evolving area of law with significant "grey areas" still remaining.

The Basics of NFTs

An NFT is defined as ''a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership (as of a specific digital asset and specific rights relating to it)." Similar to cryptocurrencies such as Bitcoin and Ether, NFTs are created (known as "minted") and then stored in blockchains. Once created, NFTs are listed on an NFT marketplace where they can be sold or traded in accordance with "smart contracts" that govern the transfers. NFTs are non-distributable and cannot be shared by multiple owners.

Due to their unique characteristics, NFTs have a wide range of uses and enable owners to access specific digital content associated with the NFT. In recent years, NFTs have become popular among collectors of art and memorabilia. There are now numerous online marketplaces selling NFTs, with Open Sea, Foundation, and Nifty Gateway among the most popular. In light of the popularity of NFTs, major auction houses and galleries have also started selling NFT in the form of art. In June 2021, for example, Sotheby's sold Larva Labs' rare CryptoPunk #7523 for $11.8 million.

While the NFT market cooled significantly in 2022, NFT sales still totaled $3.4 billion in the third quarter. The NFT market is expected to reach a value of nearly $232 billion by 2030, according to consulting firm Verified Market Research.

IP Rights and NFTs

As NFTs have surged in popularity, the law has struggled to keep pace with the rapidly evolving landscape. To date, there are few laws and regulations that directly govern the creation, transfer, or use of NFTs.

As for intellectual property (IP) rights, the underlying content of NFTs, such as art, music, and videos, is generally protected by existing IP rights. For instance, absent a license, the copyright holder of a musical composition or artwork is generally the only one authorized to transform the original work into an NFT.

Without the express transfer of rights, an NFT is essentially a "certificate of authenticity" for the digital asset and does not automatically transfer any IP rights to the underlying digital asset to the NFT purchaser. However, during the minting process, IP owners can specify via a smart contract what IP rights (if any) are granted to the purchaser. For example, most NFTs grant the purchaser a license to use, copy, and display the NFT. Other NFT smart contracts include royalty provisions that allow creators to collect compensation each time their NFT is sold.

In most cases, an NFT project (or NFT series) is also entitled to trademark protection. Over the past few years, many brand owners have also taken steps to protect the digital use of their trademarks. For instance, apparel and footwear companies ranging from Louis Vuitton to Nike have filed trademarks for making and selling virtual goods.

IP Lawsuits Involving NFTs

Not surprisingly, NFTs have spurred IP litigation and related disputes. One of the most contested issues is who has the right to create NFTs from content that already has associated IP rights. In 2021, Miramax LLC filed a copyright and trademark infringement lawsuit against director Quentin Tarantino for selling uncut scenes from his film "Pulp Fiction" in the form of NFTs in violation of the parties' licensing agreement. The two sides later reached an out-of-court settlement, highlighting the legal risks of litigating in untested waters.

More recently, luxury handbag maker Hermès filed a trademark infringement lawsuit alleging that artist Mason Rothschild's MetaBurkin NFTs infringe on its lucrative trademark, charactering the NFTs as "digital knockoffs." In defense of the suit, Rothschild maintains that his MetaBirkinsare artworks protected by the First Amendment.

Based on the arguments raised by both sides, the deciding factor in the dispute may hinge on whether the NFTs are considered art or simply a digital commodity. Regardless of whether the court finds the NFTs qualify as an artistic expression, Hermès could still prevail if the court finds that Rothschild's use of its trademark was explicitly misleading to consumers.

USPTO and Copyright Office Studying NFTs

The United States Patent and Trademark Office (USPTO) and the United States Copyright Office (Copyright Office) recently launched a joint study regarding issues of IP law and policy associated with NFTs. The Senate's intellectual property subcommittee initially called on the USPTO and Copyright Office to conduct the study, citing the need for clarity regarding the unique interplay between NFTs and intellectual property rights. "NFTs can be found in nearly all spheres — from academia to entertainment to medicine, art and beyond," the Senate's letter stated. "Thus, it is imperative that we understand how NFTs fit into the world of intellectual property rights — as said rights stand today and as they may evolve as we move into the future."

In their Notice of Inquiry, the Copyright Office and USPTO solicited public comment on several important questions, including to what extent NFTs present challenges for IP rights holders and whether current IP laws are adequate to address the protection and enforcement of IP in the context of NFTs. Comments may be submitted on Regulations.gov through February 3, 2023.

The agencies also plan to conduct a series of roundtable discussions during the month of January. The three public roundtables will occur as follows and will be made available to the public:

  • Trademarks: Tuesday, January 24, 2023
  • Patents: Thursday, January 26, 2023
  • Copyright: Tuesday, January 31, 2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.