Legal Considerations on NFTs for Intellectual Property and Business

Collins Dictionary The word of the year for 2021 was “NFT”, the acronym for “non-fungible token”. NFTs are digital tokens that are stored on a blockchain (most often Ethereum). Today, most NFTs are digital collectibles and digital art. Much like keeping money in a bank account, NFT holders store their NFTs in a digital wallet – the most common digital wallet being “Metamask”, which can be used by downloading a browser extension or phone app – which connects to NFT market websites where NFTs can be bought and sold. The NFT holder can keep the NFT in the digital wallet, transfer it to another wallet (much like having multiple checking or savings accounts), or sell it to someone else, usually through an online marketplace. online (including the most widely used market, OpenSea, which was recently valued at $13.3 billion). In the vein of famous works of art, some of the most valuable NFTs can even be pledged as collateral for a loan.

While NFTs may have started out as digital collectibles, that’s just the tip of the iceberg. NFT’s investment and business activity has surged over the past six to nine months. In February 2022, Andreessen Horowitz (A16z) announced he was leading the funding round for an NFT project/brand, with a reported valuation of around $5 billion. Nike, Adidas, HSBC, Louis Vuitton, Instagram, Facebook, TikTok and many other big brands have also recently announced substantial NFT investments, projects and initiatives. With growing use cases and unprecedented levels of venture capital and business investment, the future is clear: some of the most valuable brands and intellectual property in the years and decades to come will be digital and native NFTs.

Unlike “traditional” valuable IP rights – usually negotiated by lawyers and recorded in a written license/assignment agreement – anyone can create (or “create”) NFTs with a single click, without no contract, negotiation or even basis. buyer information. This raises the question: what are the rights of an NFT holder, if nothing is traded and the counterparties are unknown? Indeed, many NFTs do not have terms and conditions or do not specify whether the buyer is acquiring a personal license or a commercial license. But even in the “clearer” cases where these rights are delineated, much remains unclear and ready to be challenged.

For context, NFT projects permitting commercial use typically include wording to the following effect: “Subject to your continued compliance with these Terms, [the creator/founder of the NFT project, whether Nike, an individual artist, etc.] grants you an unlimited worldwide license to use, copy and display the purchased Art for the purpose of creating derivative works based on the Art. Examples of such commercial use would be for example. be the use of the Art to produce and sell merchandise (T-shirts, etc.) displaying copies of the Art…” In contrast, NFT projects allowing personal (but not commercial) use typically include wording to the effect of: “Subject to your continued compliance with these Terms, [the creator/founder of the NFT project] grants you a worldwide, royalty-free license to use, copy, and display the Purchased Art, and any Extensions you choose to create or use, solely for your personal, non-commercial use.

Let’s say the creator/founder sells an NFT to the original purchaser, subject to a commercial and personal license. If the original purchaser sells the same NFT to a subsequent purchaser, the subsequent purchaser may not have acquired the same rights as the original purchaser (because the original purchaser may not have the right to transfer the full panoply of rights ). In such a situation, subsequent buyers may find themselves having paid a substantial sum for next to nothing. Adding further insult to injury, subsequent purchasers may not even know the identity of the creator/founder or initial purchaser – as there may be no way to verify the identity of the counterparty depending of his wallet address (for example., if the seller’s digital wallet address is 0x1234 and the buyer’s digital wallet address is 0x2345, in the absence of a thorough chain analysis, the buyer is unlikely to be able to determine the name or contact details of the seller, which would only be identified as “0x1234”). So if a buyer spends thousands of dollars on an NFT to use the image in the NFT to develop a line of clothing, and the buyer later learns that they cannot commercially exploit the image, the buyer may have no recourse against the seller.

Also, often the terms and conditions for an NFT project are posted on the NFT project’s website (for example, if Nike has created an NFT project, then Nike will likely post the terms and conditions on their website), but they may not be published on the third-party marketplace website (equivalent to Amazon or eBay) where the sale transaction takes place, and may not be incorporated into the digital transaction through which the buyer acquires the NFT and the seller transfers the NFT. Aggrieved buyers who are unaware of the unfavorable or prohibitive terms in such cases will likely seek legal counsel to seek to void transactions or assert non-disclosure claims. Can the creator disclaim all liability on the grounds that the buyer should have consulted the general conditions? Will the market be able to disclaim all liability on the grounds that it is only an intermediary? These problems, among many others, are bound to arise.

License rights in the context of NFTs are becoming a key issue, and will surely be tested in court and legislated in the years to come. While well-established infringement and related intellectual property law may provide useful guidance, it cannot be transposed across this new digital native intellectual property system. With the enormous value creation, any IP lawyer will need to be aware of these issues, which are sure to increase as the stakes rise.

© Copyright 2022 Stubbs Alderton & Markiles, LLPNational Law Review, Volume XII, Number 111

About Charles D. Goolsby

Check Also

SC Judge Sanjay Kishan Kaul Highlights Importance of Philanthropy in Legal Education

NEW DELHI“The Singhvi Endowment represents the best of Dr. Abhishek M. Singhvi’s views and contribution …