Diving into NFTs and IP

By Megan Zhang on December 4, 2023

I got intrigued by the intersection of NFTs and IP: what intellectual property rights in the underlying work are granted to an NFT owner? Do NFT transactions impose particular IP infringement risks? How could creators and IP owners better protect their IP rights in the NFT world?

 

 

What are NFTs?

NFTs (non-fungible tokens) are unique digital identifiers recorded on a blockchain to certify ownership and authenticity of a digital or real-world object. Given its nature of uniqueness, NFTs cannot be copied, substituted, or subdivided.

 

NFT owner = IP owner?

For an NFT owner, it might be tempting to assume you obtain the IP rights in the underlying work by owning the NFT. However, absent an agreement to grant rights (e.g., smart contracts constituting the NFT or the terms and conditions applying to the transaction), IP rights in the underlying work are not automatically conveyed to the NFT owner.

There are three models adopted by NFT projects to deal with IP rights:

  1. An NFT owner does not get any IP rights in the underlying work other than the right for personal or non-commercial use (e.g., NBA TopShot);
  2. An NFT owner obtains commercial rights to produce or sell products using the underlying artwork (e.g., Bored Apes). The scope of the commercial rights granted may be limited;
  3. The underlying artwork is in the public domain (e.g., NounsDAO).

 

IP infringement risks in the NFT world

NFTs are essentially associated with digital objects, meaning they can be easily copied and distributed without permission from the original creator or copyright owner. Additionally, if an NFT contains trademarked content, trademark infringement may arise if the NFT causes consumer confusion or dilutes a brand’s value.

 

 

Caselaw

We have covered the US case Hermès v. Rothschild in class. The case concerns trademark infringement in NFT creation and sales.

In 2021, artist Mason Rothschild created and sold NFTs named “MetaBirkins,” which depicted fur-covered Birkin bags. The NFT sales earned Rothschild US$1.1 million. Hermès filed a lawsuit against Rothchild asserting trademark infringement, trademark dilution, and unfair competition, given Rothchild was using the Birkin mark to promote commercial sale of the MetaBirkin NFTs.

Rothschild raised the freedom of artistic speech defence, but it did not work. The jury’s decision favoured Hermès and awarded US$133,000 in damages to Hermès.

Yuga Labs v Ripps is a more recent “copycat” NFT lawsuit.

Yuga Labs is the creator of the NFT project Bored Ape Yacht Club (BAYC). In 2022, artists Ryder Ripps and Jeremy Cahen created RR/BAYC NFT collections featuring duplicates of BAYC artwork and claimed their collections were satire against Yuga Lab’s work. Yuga Labs filed a lawsuit alleging causes of action including common-law trademark infringement and unfair competition.

The court’s judgement favoured Yuga Labs, awarding over $1.5 million in damages. Again, the court rejected the artistic expression defence. In the summary judgment, US District Judge John Walter noted, “Defendants’ sale of RR/BAYC is no more artistic than the sale of a counterfeit handbag.”

The court also looked at the terms of conditions of Yuga Lab, which specified that Yuga Labs only granted “each BAYC NFT holder a copyright license for both personal use and commercial use” but “not a trademark license to use the BAYC marks.” In addition, the court cited Hermès v. Rothschild, supporting the decision that intangible goods such as NFTs are protected under trademark laws.

Nike v StockX is another ongoing US case on trademark infringement. In February 2021, Nike filed a lawsuit against the online resale platform StockX for minting and selling NFTs using Nike trademarks. StockX raised an interesting defence arguing that each of its NFTs was tied to a specific Nike product, and the NFT sale was proper under the first-sale doctrine: one can resell goods bearing a trademark because the rights of the trademark owners do not extend beyond the initial sale. In other words, the NFTs are for authenticating physical products entitled to be resold by a marketplace under the first sale doctrine.

A potential decision may clarify how IP laws differentiate NFTs associated with a physical object and the physical object itself.

 

 

Takeaways

Given the limited number of precedents, applying IP laws to NFTs remains a largely uncharted territory. However, the NFT world is not a “Wild West.” For an NFT owner, it will be essential to look at relevant agreements or terms and conditions to understand their legal rights. As we have found in Yuga Labs, the court referred to those terms to determine IP ownership.

For creators or IP owners, it would be vital to guard against others selling your work as an NFT without permission. Thus, watching the NFT marketplaces to notice potential infringement would be helpful. If you sell your work as an NFT, it is advisable to attach terms and conditions to the sales or have the necessary licenses to clarify IP ownership.

Registering trademarks to cover virtual use and NFTs is also an approach for IP protection. Lots of companies, including Hermès, have started doing this.

 

Bonus: using NFTs to trade patents?

The content above primarily covers copyrights and trademarks, so what about patents?

Some patent users have started using NFTs to trade or license their patents. In 2021, IBM announced the plan to create a platform to transact and commercialize patents as NFTs. Some believe this practice can make patent transactions easier and more transparent, while some argue a lack of regulation may be a problem.

More innovations and uncertainty can be expected in the intersection of NFTs and IP.

 

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