May 2, 2022 – NFTs are getting a lot of hype today, but many people do not know what they are or understand how they function.
An NFT, or non-fungible token, is a digital asset based on blockchain technology, similar to cryptocurrency, such as Bitcoin, Matic, Dogecoin and Ethereum. Unlike cryptocurrencies, NFTs are unique. They are not interchangeable or replaceable. They are comprised of separate and distinct units, “tokens,” with unique software code linking them to underlying assets. The software code is called a “smart contract,” and it spells out the details associated with the particular NFT. The smart contract will include the intellectual property rights associated with that NFT.
Once they are created, NFTs are permanently etched on a blockchain’s public ledger for all to see. Most NFTs are currently built upon the Ethereum blockchain, one of the largest blockchain systems in the world.
Register now for FREE unlimited access to Reuters.com
NFTs are mostly used to verify ownership of digital goods. An easy way to understand NFTs is to think of them as unalterable certificates of authenticity for digital goods. For example, if someone purchases a piece of digital art, the NFT acts to validate and verify ownership and authenticity of the artwork. In the “real world,” the closest analogy is an autographed original painting that is authenticated by the artist’s signature or a certificate of authenticity issued by a reputable source.
In addition to the digital art world, where they are used to verify and validate art, NFTs are becoming commonly used in connection with many applications and in other industries. For example, high-end fashion houses are entering the NFT market, some selling only “digital fashion,” with others also selling physical versions of the digital items. Another industry, events and ticketing, which is an industry replete with forgeries and fraud, is using NFTs to address black markets, scalpers and ticket fraud.
One common question asked by clients is whether, when they purchase NFTs, they also obtain the copyright associated with it. The answer is: Not necessarily. It is important to understand what is included in the smart contract that confers the purchaser’s rights to the digital asset. Similar to the purchase of a physical painting in our analogy above, although the purchaser has acquired the right to display the work, and to resell it, ownership of the copyright is not automatically conveyed.
The artist owns the copyright unless the author assigns it to the purchaser. In other words, although the buyer now owns the NFT, the buyer does not necessarily have the right to sell copies of the artwork associated with the NFT, or to display images of the artwork on T-shirts, hats or the like.
Therefore, if a buyer purchases an NFT based on a copyrighted work, he or she may still need to obtain permission from the copyright owner for certain activities. Copyright law grants the author of an artistic work the right to reproduce, create derivatives, distribute copies, publicly perform, and publicly display the work. In that regard, the author retains the copyright even if the original or a copy of the work is sold.
Although NFTs rarely transfer intellectual property ownership rights, it is common for NFT sellers (assuming they own the copyright in the underlying digital asset) to license such rights for specific limited purposes to buyers. Of course, NFT sellers also can decide to sell the intellectual property rights to buyers; however, unless the smart contract or other sales documents license or assign such rights to buyers, they will remain with the sellers.
NFTs present interesting and novel questions for trademarks as well. Unlike copyrights, which protect original literary, musical and artistic works, trademarks are intellectual property rights consisting of words, phrases, symbols or designs that identify goods and services. Examples of some famous trademarks include “Apple,” “Nike” and “Amazon.”
Many brands are now leveraging blockchain technology to create an authentication system for their customers. High-end luxury brands that issue serial numbers for their products are using NFTs to provide authentication for their goods. NFTs give the brands the ability to authenticate one-of-a-kind pieces, or to identify counterfeit goods, which is an important quality control issue for trademark owners.
Also, many companies are venturing into the release of NFT packages that include brand licenses, generating new streams of revenue and increasing brand awareness. For example, musicians are increasingly licensing their trademarks in connection with the release of exclusive digital content for their fans.
With the expansion of trademark use and the growth of the NFT market, so too come lawsuits. In an ongoing lawsuit, Nike, Inc. sued a company called StockX LLC, claiming the Detroit-based online sneaker retailer has infringed on its trademarks by minting NFTs that utilize Nike’s trademarks without its permission. Nike claims that StockX is selling the assets at inflated prices to naïve consumers who believe, or are likely to believe, that the digital asset is authorized by Nike.
In response, StockX has asserted that its NFTs are not “virtual products” or “digital sneakers.” According to StockX, each NFT is “effectively a claim ticket, or a ‘key’ to access the underlying Stored Item,” i.e., a specific physical good authenticated by StockX that purchasers can either leave in StockX’s climate-controlled high-security vault or take possession of, at which time the NFT is removed from the customer’s digital portfolio and permanently removed from circulation.
One of the questions to be resolved is whether traditional trademark legal doctrines, such as the first-sale doctrine, protects a seller, such as StockX, or whether the NFTs are new, distinct products that seek to capitalize on the trademark owners’ marks.
In another lawsuit, the high-end luxury brand Hermès filed a lawsuit against Mason Rothschild, the man behind the collection of “MetaBirkins” NFTs, which Hermès claims infringes on its famous “Birkin” trademark. Although Rothschild has a disclaimer on his website that he is not affiliated with Hermès, he refused to cease selling the digital assets. Rothschild has asserted, in part, that under the First Amendment he has the right to make and sell art that depicts branded products and that he has the right to identify his depictions of Birkin bags as “MetaBirkins,” a name that both refers to the context in which the art is available (via the “Metaverse”) and alludes to the artwork’s commentary on the Birkin bag and fashion industry.
It is always challenging for the law to keep pace with the expansion and development of new technologies and innovations. It is no different with NFTs. With the increased growth of NFTs, the need for protection also grows. Although NFTs present many opportunities for businesses, it is essential that NFT sellers clearly delineate in the smart contract what is and is not permitted with respect to intellectual property rights. In that way, both NFT sellers and buyers will be able to protect themselves and best monetize these assets.
Register now for FREE unlimited access to Reuters.com
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.
Sharon Urias is a partner and serves as the Intellectual Property Practice Group Leader at Greenspoon Marder LLP in the Scottsdale, Ariz., and Los Angeles offices. She regularly represents clients in intellectual property litigation involving trademarks, trade secrets, domain name disputes, patents and copyrights. Her email address is email@example.com.