Demystifying NFTs and intellectual property: what you need to know – Reuters

demystifying-nfts-and-intellectual-property:-what-you-need-to-know-–-reuters

May 10, 2022 – Suddenly, the world is atwitter about NFTs! From the Super Bowl LVI to fractionalized NFT ownership of Banksy’s “Love Is in the Air,” NFTs are a hot topic in many circles. But what about the intellectual property implications of NFTs? This three-part series will consider potential IP protections for NFTs, implications for design patents, and trademark protections for NFTs.

But first, let’s cover some basics…

What is an NFT?

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Nonfungible tokens (NFT) are a type of digital certificate for authenticating asset ownership using blockchain technology. Each NFT includes a unique identifier and metadata about the associated asset that cannot be replaced or replicated, making NFTs ideal for establishing and tracking ownership of both natively digital and tokenized physical assets.

Because NFTs are nonfungible, they are not mutually interchangeable like commodities or other fungible assets where the underlying assets are considered of equal value. This is why banks will trade a damaged bill for a new one.

But while societies have for eons distinguished nonfungible physical assets and valued them differently based on their unique characteristics (e.g., original artwork, collectible trading cards, real estate, etc.), this was not previously workable for purely digital content (e.g., natively digital artwork, metaverse in-game assets, etc.) where CTRL+C and CTRL+V commands can effectively create a perfect copy. NFTs allow us to distinguish original digital assets from copies, transforming purely digital content into unique, verifiable assets people can also value differently and exchange with confidence.

How are NFTs and blockchain connected?

NFTs leverage blockchain technology to record ownership and verify authenticity. “Minting” an NFT refers to processes of generating the cryptographic token used to represent a unique asset and recording it on a blockchain. Once an NFT is minted, it has become cryptographically published on the blockchain such that the NFT cannot be swapped or edited.

Once an NFT becomes minted, smart contract programming facilitates and records transfers of the NFT between buyers and sellers. The smart contract code defines the rules applicable to the NFT (e.g., terms of purchase, resale terms, etc.) and self-executes the transfer of NFT ownership when its criteria for doing so is met. This creates an advantage for buyers and sellers because it creates a secure, efficient marketplace with simplified transfers and verifiable chains of title.

But, of course, NFT creators cannot create or transfer ownership rights in an underlying asset that did not already exist. For example, one cannot gain ownership of a physical asset like real estate by minting an NFT for a tokenized parcel of land legally owned by someone else. Similarly, for natively digital assets like digital artwork, one cannot download artwork created by someone else and rightly claim ownership of the original after minting an NFT of an identical copy.

NFTs and intellectual property protection

NFTs may be subject to IP protections, including copyright, design patent, and trademark rights. As such, NFT purchasers should pay attention to what IP rights, if any, come part and parcel with the NFT. Indeed, many or most NFTs include a license that only grants the NFT buyer the license to use, copy, and display the NFT.

For example, Jack Dorsey sold an NFT of his first ever tweet for nearly $3 million. The owner of the NFT did not gain intellectual property rights in the tweet itself and could not, for example, print the tweet on hats and sell them without permission because Dorsey still owns the copyright.

But while most NFT creators restrict commercial use, there are certain creators that give more expansive rights to NFT owners. Members of the Bored Ape Yacht Club (BAYC) have commercial usage rights to their ‘apes,’ meaning they can make and sell hats, T-shirts, mugs, etc. Similarly, owners of CryptoKitties have broad rights under the license terms and can commercialize their own merchandise, as long as the revenue does not exceed $100,000 annually.

As it relates to copyright, copyright protection exists in the United States once the NFT is created. So if the NFT is sold, that does not mean the copyright ownership necessarily transfers with the sale. This nuance means that unless there is an assignment of copyright with the NFT, the copyright generally remains with the owner. Any royalties that may come from the work later will belong to the owner of the copyright for the underlying work, regardless of who owns the NFT of the original work.

NFT creators can also choose to add a royalty rate during the minting process, with royalty specifications added to the smart contract. Moreover, NFT royalties can give creators compensation each time their NFT is sold. This option presents a new way for artists to continue monetizing their work beyond the initial sale with lingering IP rights.

Brand owners should also consider extending their trademark registrations to cover uses that include NFTs. For example, Nike, the footwear and apparel company, has filed trademarks for making and selling virtual Nike-branded footwear and apparel. Walmart also filed several trademark applications in December 2021 related to making and selling virtual goods.

Beyond trademark and copyright protection, brand owners should consider how existing or future design patents can protect against counterfeits or infringement. Design patents are valuable because, unlike other intellectual property protections, they entitle owners to all of an infringer’s profits rather than the portion of profits attributable to the use of the design.

Can NFTs be forged?

While an NFT cannot be duplicated, others could attempt minting new NFTs for copies of the original asset to create confusion and profit off the original brand. Consider the Hermes Birkin bag, known worldwide for its design and exclusivity. An NFT created with an image mimicking the bag could — and has — become made and sold without attribution to the Hermes brand.

Hermes recently sued artist Mason Rothschild for creating the “MetaBirkin” NFTs, alleging that the use of this NFT would cause customer confusion. Hermes alleges that the artist, using the Birkin likeness, created digital renditions of the Birkin handbags and has sold them for thousands of dollars. But while Hermes has trademarks for its leather goods, specifically its handbags, the NFTs sold are not classified as leather goods. They are digital assets, for which Hermes does not have a trademark. Rothschild argues both that his use of the trademark is protected by the First Amendment because the NFT MetaBirkins are covered in fur, and are a social commentary, and that the use of the Birkin trademark is an artistic expression that does not mislead consumers.

On May 5, 2022, the court, in the Southern District of New York, denied the defendant’s motion to dismiss, indicating that the court would issue an opinion for this case. It remains to be determined whether Hermes will prevail.

Can NFTs be used to protect against counterfeiting?

Because the NFTs themselves cannot be duplicated, companies are beginning to use them to fight counterfeiting. The practicalities can be nuanced, but the ability of NFTs to help fight counterfeiting stems from the ability to distinguish original digital copies from subsequent copies. This allows companies and buyers, in turn, to verify natively digital and tokenized physical assets using the blockchain.

For example, counterfeiting is a huge problem for retail companies. By tokenizing their physical products with an official NFT minted for each one, a purchaser need only consult the blockchain to confirm authenticity.

Nike appears to be headed in this direction with its “CryptoKicks” patent (U.S. Patent No. 10,505,726). When a buyer purchases a physical pair of shoes, they will also receive an NFT of their CryptoKicks linked to the physical pair of shoes. Nike and prospective buyers can then use the NFT to confirm authenticity of the physical shoes and that they passed through a valid chain of title that began with Nike.

Moving forward

Obtaining intellectual property protection for your brands in the world of digital assets is more important than ever. While the area of NFT trademark and patent infringement is not fully developed, the implications of failing to protect your brand could result in losses.

The next article in this series will discuss the implications of design patent protections for NFTs.

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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.

Elizabeth Ferrill is a partner at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, and is located in the Washington, D.C., office. She focuses her practice on all aspects of design patents, including prosecution, counseling, post-grant, and litigation. She can be reached at elizabeth.ferrill@finnegan.com.

Soniya Shah is an associate at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP and is located in the Washington, D.C., office. She focuses on patent litigation and prosecution and handles intellectual property matters related to electronics and information technology. She can be reached at soniya.shah@finnegan.com.

Michael Young is a partner at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP and is located in the Reston, Va., office. He co-chairs the firm’s Blockchain, NFT, and Other Digital Assets industry group and represents clients across a range of technologies, including wireless tracking, embedded systems, Internet of Things (IoT), financial technology (FinTech), and crypto assets. He can be reached at michael.young@finnegan.com.

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