The Interplay Of NFTs In Intellectual Property Law

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A day does not go by without a new story about non-fungible tokens (“NFTs”). For instance, a reworked Andy Warhol computer image from the 1980s sold for $870,000 at a Christie’s auction. The famous “Charlie Bit My Finger” video on YouTube, which holds a record with more than 885 million views, sold for $760,999. Jack Dorsey, the co-founder, and CEO of Twitter recently sold his first tweet – the first tweet on Twitter – for $2.5 million in a charity auction.[1] The auction house Christie’s announced the artist Beeple sold a piece of artwork for more than $69 million, the third highest price for a living artist. But the work entitled “Everydays: The First 5000 Days” is not a physical work of art. It is all digital.[2]

All of these transactions involved the use of NFTs. This flourishing technology could change how we own everything, from artwork and concert tickets to our homes. Forbes Magazine reports that, in May, people bought and sold an estimated 85,787 NFTs per day for a total value of $5.8 million.[3] NFTs could also impact ownership of intellectual property, both its value and its monetization.

To understand the impact on NFTs on IP, we first need to understand what an NFT is and how they work. With that basic understanding, we can then see how NFTs are bound to shape the monetization of intellectual property.

What are NFTs?

Investopedia defines NFTs as cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other.[4] What does this really mean? Let’s parse the definition to understand it better. A “fungible” good can be interchanged for another of like kind. For instance, money is the best example of a fungible good. If I ask anyone if they have “two $10s for a $20,” the $20 bill is easily converted to the two $10 bills, and the value of the transaction does not change; it is still worth $20. In contrast, a “non-fungible” good is not interchangeable. A Mickey Mantle rookie card cannot be interchanged for a Roberto Clemente rookie card. Baseball cards are not fungible because each card has unique qualities that add or subtract value (Mantle’s rookie card sold for $5.2 million dollars at auction, while Clemente’s sold for $478K).[5],[6] Each card represents a different baseball player that makes the card unique. Another common example is a car. For example, if someone borrows my car, it would not be acceptable for the borrower to return another car.

How about a token? In plain meaning, a token represents a feeling or an event.[7] A token establishes or persuades by evidence that a particular fact exists. A driver’s license is a token (or proof) that a person has completed all the necessary requirements to drive in a particular state. In the blockchain world, a token represents any asset. Tokens can act as a store of value for conducting internal and external transactions and offer a different kind of monetary system including digital assets. A token also shows the legal owner of a unique asset.

With this understanding, we can form a definition of a non-fungible token in plain English: NFTs represent unique, non-transferrable digital assets on a blockchain where each NFT has only one owner, and where each NFT has a particular value.

Just like all things in blockchain, NFTs are governed by standards. NFTs are covered by two standards: ERC-721 defines the minimum interface—ownership details, security, and metadata—required for exchange and distribution of the tokens. This standard is limited to the use of NFTs, so, for example, each token requires a new smart contract. The ERC-1155 standard enables someone to mix fungible and non-fungible items together into a single smart contract reducing the overhead costs and simplifying the transaction.

The most famous example of an NFTs is that of cryptokitties.[8] Launched in November 2017, cryptokitties are digital representations of cats with unique identifications on Ethereum’s blockchain. Each kitty is unique and has a price. They reproduce among themselves and produce new offspring, which have different attributes and valuations as compared to their parents.

NFTs and Intellectual Property

With a simplified definition and some background in NFTs, how would NFTs impact the valuation and monetization of intellectual property? In simple terms, NFTs may simplify transactions with the added benefit of security.

For patents, a patent owner may decide to turn their issued patent into an NFT. This may make it easier for patents to be sold, traded and commercialized by investors and innovators. To this end, back in April, IPwe and IBM announced an agreement to represent patents as NFTs.[9] Records of the NFTs will be stored in the IPwe platform which is hosted in the IBM cloud and powered by the IBM blockchain.[10] Smart contracts[11]  may be used to facilitate the transaction and may be built into the token with standardized terms associated with every patent. The owner of the patent sets the contract terms, including what is public and what is not. For instance, Jack Fonss and his consulting company, True Return Systems LLC, are auctioning U.S. Patent No. 10,025,797 on the NFT marketplace OpenSea. Bidding for the patent, believed to be the first to be auctioned as a non-fungible token, started at around $7.5 million.[12] Built into the NFT representing Fonss’ patent is a self-executing contract that simplifies the cost and number of documents required in the transaction. As discussed before, as ownership of an NFT is known (one owner), it is easier to determine who to contact if there is interest in, for instance, pursuing a licensing agreement or a straight purchase of the patent asset.

There are some caveats in the implementation of NFTs for patents. Ownership of an NFT does not automatically confer ownership of the patent asset. Buying the NFT means you are the owner of the NFT in the blockchain. A proper agreement in writing will be necessary to complete the transfer of ownership and rights associated with the patent as well as proper assignment with the United States Patent and Trademark Office.

Similar questions apply to purchasers of NFTs when dealing with trademarks and copyrights. The biggest issue as seen above is that the owner of the NFT does not have the rights to the intellectual property unless it is drafted into the smart contract. The bottom line is that a purchaser may buy an NFT that has a trademark associated with it or an NFT involving a work of art, but the purchaser is not acquiring the right to use, for example, the trademark, unless such an acquisition is a condition to the NFT’s sale.

For trademark owners, a key consideration may be how to handle the possibility of the use of their brand name in an NFT. Unless specifically licensing the work for use in NFTs, it may be wise to add a clause in the licensing agreement to preclude the licensee from creating NFTs based on the licensed work. If a brand owner grants it, what may be the potential benefits and pitfalls of such grant? It may be a benefit to structure a royalty agreement into a smart contract.

Brand owners may want to consider the use of NFTs for brand authentication and marketing of goods and services.[13] LVMH (the owner of Louis Vuitton, Tiffany, and Dom Perignon) reportedly is using the AURA blockchain to allow consumers to use NFTs to trace the authenticity of their branded luxury goods.[14]

For copyright owners, presumably, the author of the work still owns the copyright in the work embodied in the NFT itself. The purchaser of the NFT generally will NOT receive ownership of the work of art embedded in the NFT, nor the right to reproduce, or transform that work of art. As part of creating an NFT, the author may create further terms that may include, but not limited to, including a grant of license or ownership to the platform to use the copyright. For instance, just like a musician would need permission to sample or remix someone else’s music and start selling it as their own, the creator of an NFT would need permission from the copyright owner of the work which they are embedding in an NFT and offering for sale. A violation of these exclusive rights could constitute copyright infringement.

Takeaways on NFTs?

Non-fungible tokens offer IP owners new possibilities to monetize their portfolios. IP owners should learn the benefits and pitfalls of using this new technology to enhance the value of their portfolio. As a result, advice of IP counsel in these matters is essential to reduce the risk of potential issues.

[1] https://www.cnbc.com/2021/03/22/jack-dorsey-sells-his-first-tweet-ever-as-an-nft-for-over-2point9-million.html#:~:text=The%20tweet%2C%20which%20says%2C%20%E2%80%9C,sold%2C%20just%20like%20physical%20assets.

[2] https://onlineonly.christies.com/s/beeple-first-5000-days/beeple-b-1981-1/112924

[3] https://www.forbes.com/sites/whittiertrust/2021/04/06/the-one-strategy-high-net-worth-individuals-depend-on-to-grow-wealth/?sh=2d517a7443bd

[4] https://www.investopedia.com/non-fungible-tokens-nft-5115211

[5] https://www.beckett.com/news/1955-topps-roberto-clemente-rookie-card-tops-475000/#:~:text=1955%20Topps%20Roberto%20Clemente%20Rookie%20Card%20Sells%20for%20%24478%2C000

[6] https://www.beckett.com/news/1952-topps-mickey-mantle-sells-for-5-2-million-highest-ever-for-a-baseball-card/

[7] https://www.merriam-webster.com/dictionary/token

[8] https://www.cryptokitties.co/

[9] https://newsroom.ibm.com/2021-04-20-IPwe-and-IBM-Seek-to-Transform-Corporate-Patents-With-Next-Generation-NFTs-Using-IBM-Blockchain

[10] Id.

[11] A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained in it exist across a distributed, decentralized blockchain network. (From Investopedia – https://www.investopedia.com/terms/s/smart-contracts.asp)

[12] https://news.bloomberglaw.com/ip-law/the-trendy-hot-nft-market-has-a-new-entrant-patents

[13] https://www.glossy.co/fashion/beyond-the-hype-nfts-stand-to-benefit-fashion-brands-in-the-future/

[14] https://www.lvmh.com/news-documents/news/lvmh-partners-with-other-major-luxury-companies-on-aura-the-first-global-luxury-blockchain/

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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