As an IP attorney helping clients in the blockchain space, I witnessed the early start of NFTs in 2019 and subsequent explosive growth of NFTs in 2021-2022. Non-fungible tokens, also known as NFTs, are digital tokens that are linked to each other by a unique software code and stored on blockchain. This software code, also known as a “smartcontract,” outlines the details of the NFT. Smart contracts will also include intellectual property rights that are associated with the NFT.
NFTs represent real-world items. Once an NFT has been created, it cannot be duplicated. They cannot be deleted, but they can be ‘burned’ to make them ineligible for transfer. They are similar to trading cards or art in digital form. NFTs are valuable in virtual worlds within the metaverse such as OpenSea and Roblox, Cryptoboxes, and Decentraland. There are many platforms available for virtual worlds, and no central metaverse. Perhaps this will change in the future. When new technology like this meets existing laws, it can be very interesting.
The History of NFTs
The history of non-fungible tokens (NFTs) can be traced back to the early days of blockchain technology. The first NFTs were created on the Bitcoin blockchain in 2012, in the form of “colored coins.” These were Bitcoin tokens that were “colored” with metadata to represent a specific asset, such as a piece of digital art. However, the concept of NFTs did not gain widespread attention until the advent of Ethereum, a blockchain platform that allows for the creation of smart contracts.
In 2017, the CryptoKitties game was launched on the Ethereum blockchain, which allowed users to buy, sell, and breed virtual cats that were represented as NFTs. This was one of the first popular use cases for NFTs and it helped to bring attention to the concept of using blockchain to represent unique digital assets.
In 2018, the first NFT art sales began to take place on blockchain marketplaces such as OpenSea, Rarible and SuperRare. These sales were significant because they demonstrated that NFTs could be used to represent valuable digital art and other creative works, and that people were willing to pay significant amounts of money for them.
In 2021, The NFT market boomed, with record sales and mainstream attention. The market saw the sales of million-dollar NFTs, such as Beeple’s “Everydays: The First 5000 Days” sold for $69 million, and several other NFTs sold for over $1 million. This helped to bring attention to the potential of NFTs as a way to monetize digital art and other creative works.
Overall, the history of NFTs is closely tied to the development of blockchain technology, and the concept is still evolving as more people and organizations discover new ways to use NFTs to represent unique digital assets.
nFT legal issues
Non-fungible tokens (NFTs) have raised a number of intellectual property (IP) issues. Some of the main issues include:
- Copyright: NFTs are often used to represent digital art and other creative works, and the ownership of the underlying copyright can be unclear. This can lead to disputes over who has the right to sell or license the work, and who is entitled to royalties or other forms of compensation.
- Trademark: NFTs can be used to represent brand assets, such as logos and mascots, and the ownership of the underlying trademark can be unclear. This can lead to disputes over who has the right to use the brand and who is entitled to any revenue generated from its use.
- Right of publicity: NFTs can be used to represent the likeness of real people, and the ownership of the right of publicity can be unclear. This can lead to disputes over who has the right to use the likeness and who is entitled to any revenue generated from its use.
- Ownership: The ownership of NFTs can be complex and difficult to prove, especially in cases where the NFT is lost or stolen. This can make it challenging to enforce the rights associated with the NFT.
- Smart Contracts: The smart contracts used to create NFTs are still a new technology and their legal status is uncertain in some jurisdictions. This can make it difficult to know how to interpret and enforce the terms of the smart contract.
- Lack of regulation: The NFT market is largely unregulated, which can make it difficult for buyers and sellers to know their rights and responsibilities.
Overall, NFTs and IP issues are closely related, and the use of NFTs to represent digital assets has raised a number of legal questions that have yet to be fully resolved. It’s important for creators, buyers, and sellers of NFTs to be aware of these issues and to consult with legal experts to understand their rights and responsibilities.
How NFTs work?
NFTs can be permanently etched onto a public blockchain ledger once they have been created. The Ethereum blockchain is the most popular blockchain system in the world, and the basis of many NFTs.NFTs are possible in both the real and virtual worlds. They can be traded on various peer-to-peer platforms. However, we now see them in the metaverse. A digital avatar is a tool that allows one to trade, buy, and sell digital goods and services across the universe. These digital goods and services can be transacted using non-fungible tokens or NFTs (another buzzword that you may have heard). They enable authentication of ownership, goods, and identities.
To verify the authenticity and identification of virtual assets, NFTs are posted to a blockchain. These virtual assets often represent goods and services offered in the world that we live in ( , for example, real estate, clothing, vehicles, shows or restaurants, etc.). One can buy a virtual parcel of land near Snoop Dogg’s, host a virtual business meeting using a Toyota(r), and then travel to the meeting via a Holoride(r), Audi(r), backed vehicle. A variety of entities and businesses have also created or are creating their own sub-platforms in the metaverse. The metaverse is ready for commercialization, and intellectual property protection is crucial in its monetization.
Use of NFTs by different Brands and Industries
NFTs are now crossing the boundary from the real to the virtual world. Brands are beginning to buy ‘land in the metaverse’ to sell virtual goods, which includes those in the form of NFTs. They are increasingly being used in many other industries and applications, in addition to their use in the digital art industry, where they verify and validate artwork. High-end fashion houses, for example, are now entering the NFT market. Some sell only digital fashion, while others also sell physical copies of the digital items. Events and ticketing is another industry that is plagued by fraud and forgeries. NFTs are used to combat black markets, scalpers, and ticket fraud.
Many brands are using blockchain technology to create an authenticating system for customers. Luxury brands with high-end products use NFTs to authenticate their goods. NFTs allow brands to authenticate unique pieces or identify counterfeit goods. This is a critical quality control issue for trademark holders. Many companies are also releasing NFT packages with brand licenses. This will generate new revenue streams and increase brand awareness. Musicians are licensing their trademarks to release exclusive digital content.A user can buy fashion items as NFTs, which are only available in the metaverse. Their avatar now has the latest designer outfit but it is virtual. And, most importantly, it appears that there is a market. Reports have indicated that some NFTs are selling for huge sums. The NFT that Jack Dorsey sent out the first tweet was sold for $2.9 million in March 2021.
NFTs and intellectual property matters
Copyright protects original works that are the result of authorship and are written in a tangible medium. Many non-fungible tokens, or NFTs, meet the requirements for copyright protection. They are often used in the metaverse. NFTs, copyrights and the metaverse are important topics to consider. Copyright grants author/owner of copyright a set of rights that includes the right to reproduce, prepare derivative works, distribute, and share the copyrighted work. An NFT acquired by a party that is subject to a copyrighted piece of work should be considered in light of the limitations and rights gained. An NFT is not a right to make copies of the work underlying it.
Copyright law may provide protection depending on the nature and use of virtual assets. Copyright protection may also be available for virtual assets that include images, motion pictures and other dynamic visuals. Expert intellectual property counsel can help you navigate the challenges of implementing takedowns to copyright violations, licensing agreements and royalty collections. This includes those that might arise from this emerging industry.
Clients often ask if they get the copyright when they buy NFTs. It is not always true. It is crucial to know what the smart contract contains that grants the purchaser rights to the digital asset. As with the purchase of a physical painting, the purchaser does not automatically acquire the copyright to the digital asset.Unless the author gives it to the buyer, the artist is the owner of the copyright. The buyer may not be able to sell copies of artwork that is associated with the NFT or display images of the artwork on t-shirts or hats.If a buyer buys an NFT that is based on a copyrighted piece of work, he/she may still need permission from the copyright owner to do certain activities. Copyright law gives the author of an artistic work permission to reproduce, create derivatives and distribute copies. It also allows them to publicly perform the work. The copyright is retained by the author even if the original work or a copy are sold.
Trademark rights to be used in the metaverse can be obtained through the United States Patent and Trademark Office, or any other trademark offices around the world. A trademark registration is essential for brand owners to be able to enforce their trademark rights in the metaverse. However, registration can be difficult as you will see with the pending applications. Metaverse-related trademark applications include virtual goods, retail services that feature virtual goods and entertainment that features non-downloadable virtual goods. Although it is relatively easy to handle an identification issue in a pending application in response to an officer action, brand owners who seek trademark registrations for trademarks in metaverse begin to have problems proving use or what was deemed “premature usage” by one USPTO inspector. The USPTO has issued refusals to metaverse/virtual good trademarks on the basis of confusion with marks for physical products, which is encouraging for brand owners. However, trademark registrations for metaverse trademarks are vital. A metaverse-applicable trademark registration is essential for enforcing rights within the metaverse.
Now, brand owners are filing trademark applications for core brands that have entered the digital age of NFTs/the metaverse. Brand owners are realizing that their trademark protection is not adequate due to the new and changing nature of NFTs as well as the metaverse. A fashion house would typically have clothes, bags, and accessories covered by their trademark registrations. However, they now need to consider digital versions, which would fall under computer software. Particularly, retailers will need to think about whether their trademark registrations include virtual goods retail services. Even though entertainment services are a bit outside the norm for retailers, we see trademark applications that cover them. However, this would allow them to access their services in the virtual metaverse (think of gaming).
NFTs rarely give away intellectual property rights. However, NFT sellers can license certain rights to limited buyers if they are the owner of the digital asset’s copyright. NFT sellers can also decide to sell intellectual property rights to buyers. However, the rights will not be transferred to buyers unless smart contracts or other sales documents license them or assign them.NFTs also present novel and interesting questions for trademarks. Trademarks are different from copyrights which protect original literary and musical works. They are intellectual property rights that consist of words, phrases and symbols that identify goods or services. Some examples of famous trademarks are “Apple,” Nike, and “Amazon.”
We see trademark applications filed in Class 9, specifically for downloadable software. It is possible to include any particular goods, such as downloadable virtual clothing, shoes, and handbags, or technology like downloadable virtual mobile phones. The terms should cover virtual goods. The class 42 is closely related to the class 9. We are seeing terms like ‘Providing online digital collectibles that are not downloadable’ and then listing the goods. However, we also see Class 41 services such ‘entertainment service’. This would include the use of the metaverse or the entry by the user, which is also known as entertainment. Noting that the United States Patent and Trademark Office and the European Intellectual Property Office both issued guidance, it is important to clarify terms like ‘downloadable virtual good’ and ‘nonfungible tokens’ to determine exactly what virtual goods are being covered.
It is worth covering Class 35 for retail store services featuring virtual goods …’, if you plan to sell or trade virtual goods in the metaverse. Non-traditional marks, such as colors, should also be considered when trademark protection is sought for virtual goods and services. Color marks can play an important role in brand identity in the metaverse because the uses are often more extensive than those of the real world. For example, Tiffany might have a shop in the metaverse that sells NFTs for jewelry, but in their “land” anything can be robin’s egg blue, sky, trees, and the avatars of the shop assistants! Colors could have a greater impact on branding and trademarks. While we have limited options for color application in the real world, the possibilities are infinite in the metaverse.
Next is territory. Because trademarks and laws are generally territorial, they can be governed by different laws in different parts of the world. These applications must be filed in the right place. This is a more complicated question than it seems, since there are only a few cases currently going through the Court systems. However, we won’t know for sure until then. It is clear that the metaverse can be accessed anywhere in the world. But who controls it? Who is responsible for legal and illegal activities? Although it seems that the current trend is to file in the US, there doesn’t appear to be any evidence to support this. It could be down to the platform where the metaverse is hosted, and the territory it is located in for governing territory.
Lawsuits From NFTs
Nike, Inc. sued StockX LLC in a continuing lawsuit. The company claims that StockX has infringed its trademarks by minting NFTs using Nike trademarks without Nike’s permission. Nike claims StockX is selling assets at exorbitant prices to ignorant consumers who believe or are likely to believe that the digital asset has been authorized by Nike. StockX responded by claiming that NFTs aren’t “virtual products” nor “digital sneakers”. StockX claims that each NFT acts as a claim ticket or a key to the underlying Stored item. This means that buyers can leave the NFT in StockX’s climate controlled vault, or take it with them. Once the NFT has been removed from the customer’s digital portfolio, it is permanently removed from circulation.One of the issues to be solved is whether or not traditional trademark legal doctrines such as StockX’s first-sale doctrine protect a seller. Or whether NFTs are distinct new products that capitalize on trademark owners’ marks.
Another lawsuit was filed by Hermes, a luxury brand that sells high-end products, against Mason Rothschild. He is the one behind the collection of “MetaBirkins”, NFTs. Hermes claims it infringes its “Birkins”. Rothschild’s website disclaims that he is not associated with Hermes. However, he refused stop selling digital assets. Rothschild claimed, in part that he is allowed to sell and make art depicting branded products under the First Amendment and that he can identify his Birkin bag depictions as “MetaBirkins” which refers both to the context in the art is made (via the “Metaverse”), and also to the commentary of the artwork on the Birkin bag, fashion industry, and the artist.