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IPR limitations in using NFTs

October 1, 2022

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This article has been written by Sumbul Qureshi, pursuing a Diploma in Intellectual Property, Media and Entertainment Laws from LawSikho. It has been edited by Ojuswi (Associate, LawSikho).

It has been published by Rachit Garg.

Table of Contents

Introduction

The popularity of the non-fungible token (NFT), the newest craze in the world of distributed ledgers and cryptocurrencies, has grown, making it one of the most prominent technological stories of 2021. The tech and art worlds are ablaze with excitement over this revolutionary innovation.

A Non-fungible Token (NFT) is primarily a digital asset or cryptographic asset that differs from a fungible token by having a special identification code and metadata. They cannot be traded or exchanged for equivalent value, just like cryptocurrencies.

NFTs use blockchain technology to function. Every NFT has the potential for a number of applications because of its distinct design. For digitally representing tangible assets like real estate and artwork, a digital asset management platform is the best option. NFTs can act as identity management platforms, eliminate middlemen, and make transactions more efficient in addition to bringing artists and audiences together.

Given the nature of NFTs, intellectual property issues related to their creation, display, trading, sale, and storage must be thoroughly investigated.

IPR limitations in using NFTs

NFTs are distinctive in a variety of ways. The rights you trade when purchasing or selling an NFT may vary from platform to platform or even from NFT to NFT. Purchasing an NFT does not automatically grant you the right to do things with it, such as using it for personal or commercial gain. Even after giving the digital asset’s deed to the buyer, sellers may (and actually frequently do) retain some rights. In fact, smart contracts that might be included in an NFT could carry out specific tasks automatically, like paying royalties with each subsequent sale.

Ownership information is very obvious with NFTs. When a digital asset is purchased, the owner’s information is encoded into the token and permanently stored on the blockchain. NFTs thus offer unquestionable ownership of digital assets. However, things become a little murky when it comes to usage licences and intellectual property (IP) rights of the above-mentioned digital asset.

According to a report by Galaxy Digital, only one collection of the top 25 most valuable NFT projects makes an effort to give customers IP rights to the underlying works of art. The rest just confuse buyers and give them the freedom to always modify the NFT collections’ usage licence.

Do NFTs actually convey ownership

An NFT’s creation as a representation of an underlying work of art or other creation does not automatically confer ownership of the underlying intellectual property rights, such as the copyright, on its creator or any subsequent owner.

An NFT owner must be aware that in order to reproduce the underlying work itself, they would need to expressly obtain an assignment or licence of the underlying rights from the original creator or author of the work or any subsequent owner of those rights. The holder of the underlying IP rights may decide to grant a licence while placing additional restrictions on how the relevant work may be used in the NFT.

NFTs and Trademark

Although the IP implications of NFTs are not yet fully understood from the brand owner’s perspective, the existing legal framework and mechanisms do provide some protection for their trademark rights.

NFTs also raise fresh and intriguing issues for trademarks. Trademarks, which are intellectual property rights made up of words, phrases, symbols, or designs that identify goods and services, differ from copyrights, which protect original literary, musical, and artistic works. “Apple,” “Nike,” and “Amazon” are just a few examples of well-known trademarks.

Today, a lot of companies are using blockchain technology to build customer authentication systems. NFTs are used by high-end luxury brands to provide authentication for their products and issue serial numbers for them. NFTs enable brands to authenticate one-of-a-kind items or to spot counterfeit goods, which is a crucial quality control concern for owners of trademarks.

Additionally, a lot of businesses are releasing NFT packages with brand licences, opening up new revenue streams and raising consumer awareness of their brands. In order to release exclusive digital content for their fans, for instance, musicians are increasingly licensing the use of their trademarks. As trademark use expands and the NFT market expands, so do lawsuits.

In Nike, Inc. v. Stockx LLC (case 1:22-cv-00983)

Nike, Inc. filed a lawsuit against StockX LLC, alleging that the online sneaker retailer from Detroit had violated its trademarks by creating NFTs using Nike’s logos without authorization. According to Nike, StockX is charging exorbitant prices for the assets and selling them to uninformed customers who may mistakenly think that Nike has approved the digital asset.

Defending its NFTs as not “virtual products” or “digital sneakers,” StockX has responded. Each NFT is effectively a claim ticket, or a ‘key’ to access the underlying Stored Item, which is a particular physical good that has been authenticated by StockX and that buyers can either leave in StockX’s climate-controlled high-security vault or take possession of, after which the NFT is removed from the customer’s digital portfolio and permanently banned from circulation.

One of the issues to be resolved is whether or not the NFTs are brand-new, unique products that aim to profit from the trademark owners’ marks, or whether established trademark legal doctrines, such as the first-sale doctrine, protect sellers like StockX.

NFTs and Copyright

It goes without saying that the underlying copyright in a work that exists “off-chain” does not always pass to the buyer upon the sale of an NFT. It is up to the creator or most recent copyright owner to transfer the underlying copyright when selling a physical copy of nearly any kind of creative work.

The solutions to these questions have started to take shape, despite the fact that the recognition of NFTs has only recently skyrocketed. A copy or even a derivative of the original work may be considered when creating an NFT. In other words, the only person with the authority to convert the original work into an NFT under U.S. copyright law (absent a licence) is and should be the copyright holder.

It is possible for anyone to view NFTs on various NFT platforms. While this helps copyright owners to spot possible unauthorised copies or derivative works, it could also add more platforms to their growing list of places to keep an eye out for such unlicensed works. These problems highlight the value of using and relying on crucial enforcement strategies, from straightforward fixes like watermarks to the DMCA. It is likely that NFT platforms will also be required to comply with the Copyright Management Information (CMI) provisions of the DMCA (including 17 USC 1202).

On the plus side, the creation of an NFT by the creator of creative work may have wider favourable effects on the current state of artists’ resale rights internationally. The production and distribution of NFTs are largely unregulated but also very accessible to a global market.

NFTs and Patent

The representation of patent assets as NFTs may raise some issues. Chain of title, for instance, is crucial for assets covered by patents. How will these transactions be portrayed before different IP offices if patent assets are freely traded or encumbered via blockchain technology? In the US, a U.S. patent assignment, grant, or conveyance is void against any subsequent buyer or mortgagee if it is not recorded in the U.S. Patent and Trademark Office within three months of the conveyance date or before the date of a subsequent conveyance. As a result, patent asset conveyances made on a blockchain may not be valid if they are not also filed with the appropriate IP office.

NFT technology is still in its infancy, so there aren’t many laws or regulations governing it. Therefore, until the technology and law are further developed, there is a big risk with transferring patents as NFTs.

Another issue with using NFTs to manage patent assets is privacy. In patent transactions, the confidentiality of royalty streams, licensing conditions, and patent purchase agreements is frequently of the utmost importance. Since NFT technology is brand new and largely untested, it is unknown how blockchain platforms will handle confidentiality concerns.

Conclusion

Every NFT project has a unique usage licence, and only a small number of collections grant the NFT holder IP rights. Additionally, some projects have ambiguous terms of ownership and statements on their websites. Therefore, it is crucial to comprehend the terms of the agreement before investing money in a project. NFTs offer an exciting new opportunity to interact with and win over new fans in a foreign country while also potentially earning some money. One must be aware that, as an artist or brand owner, they are also endangering their intellectual property, with unknowable and unpredictable repercussions.

The expansion and development of new technologies and innovations always make it difficult for the law to keep up. NFTs don’t change this in any way. Protection is becoming increasingly important as NFTs expand. Despite the numerous business opportunities offered by NFTs, iNFT sellers must specify the smart contract; exactly what is and is not allowed in terms of intellectual property rights. Thus, NFT buyers and sellers will be able to safeguard their interests and maximise the value of these assets.