Will NFTs Make Intellectual Property Laws Fungible?
The latest crypto fad is among us during this post-covid digital explosion. Non-fungible tokens, or NFTs, are blowing up across the entertainment and digital world. My hallway in the Clubhouse Drop-in Audio app is filled with rooms chattering about NFTs selling for thousands and in some cases for millions of dollars by using NFTs like this Lebron James dunk. Other NFTs that are being sold are from the CEO of Twitter, Jack Dorsey, who announced he would sell the first tweet which reached $2.5M and the music group Kings of Leon dropped an album via NFT!
An NFT is a unique crypto-asset linked to a piece of digital art, music, collectable, or in-game item. This is like a baseball or Pokémon card but for the digital age. Like cryptocurrency (e.g., Bitcoin, Ethereum), NFTs use blockchain technology to record ownership and validate authenticity. Unlike cryptocurrency, each token is unique (i.e., non-fungible). Most NFTs are active on the Ethereum blockchain. Some NFTs, like the NBA “moments” at NBA Top Shop, are on a private blockchain. Many, NFTs are bought and sold on marketplaces like OpenSea using cryptocurrency. But what are you actually buying?
What do you own when you buy an NFT?
You own the token. When you buy an NFT, you hold the right to claim ownership of the NFT itself and the right to exclude others from claiming ownership of the NFT. Beyond that, the terms of the NFT blockchain will govern – the smart contracts embedded in the blockchain code.
NFTs are like the intangible personal property under property law, separate from intellectual property laws like copyrights. Intangible personal property like NFTs can’t be touched because it is digital but it still holds value to it. Like any other digital asset, it can be bought, sold, delivered, used as collateral, gifted, or mortgaged.
So, who owns the copyright in the underlying work of an NFT?
Initially, the author(s) owns the copyright in their work unless and until they transfer ownership of the copyright to someone else. So, unless the NFT includes a transfer of copyright in the underlying asset, then the author, not the NFT holder, owns the copyright. Identifying the author or authors is important because certain rights, like the right to terminate copyright transfers after a certain length of time, cannot be waived, even if sold on an NFT.
The authors are free to transfer ownership of the copyright at any time as long as the transfer is (1) in writing; and (2) signed by the copyright owners. The authors retain ownership of the copyright until both of those events occur. The uncertainty part with NFTs – How do you implement copyright law’s “signed writing” requirement in the context of the blockchain that uses digital wallets and anonymity? Will ownership transfers of copyrights through blockchain transactions be acknowledged? How will assignments on an NFT be recorded or reflected with USPTO? When will law meet tech?
Anyways, unless the purchase specifically states otherwise, owning an NFT does not grant you any rights to the intellectual property of the underlying asset. It is just like buying the artwork at a gallery. With NFTs, you are purchasing the digital-art, crypto-art, token-art – whatever you want to call it. Just because you bought the (digital) art to hang on your (digital) wall doesn’t mean you can prevent others from displaying copies of the (digital) art because you are not the copyright owner.
Although it is likely you are not purchasing the underlying copyright, NFTs may provide additional benefits. For example, NFTs may allow musicians to include early access to concert tickets, or merchandise to fans who purchase their albums distributed on an NFT blockchain network. NFTs may even be able to limit the accessibility to the number of digital copies available in the marketplace just like there were limited amounts of vinyl records back in the day.
Most likely scenario: The copyright owner will grant NFT purchasers a license.
Most likely, the copyright owner will grant the NFT owner and future buyers a license to make certain uses of the work. A copyright owner is free to let others use the work by licensing use through an NFT. At the same time, an NFT issuer (a copyright owner or licensee) may wish to restrict certain uses – i.e. how it is displayed on the internet to prohibit unsavoury uses for brand protection; how many resales can occur; or any other creative licensing restrictions potentially available on a smart contract blockchain.
This all depends on the terms governing the NFT, which vary wildly. The NFT may control how the NFT owners use these digital assets. For example, the CryptoKitties license allows NFT owners to make commercial use of their kitties as long as the use does not result in earning more than $100,000 in gross revenue each year. On the other hand, the NBA Top Shop license grants the owner of a “moment” a non-exclusive license “to use, copy, and display” the moment solely for “personal, non-commercial use,” “as part of a marketplace,” or “as part of a third-party website or application that permits the inclusion” of the moment.
What does owning a “moment” mean? When you buy a moment, the NBA Top Shop ownership terms states:
[Y]ou own the underlying NFT completely. This means that you have the right to swap your Moment, sell it, or give it away. Ownership of the Moment is mediated entirely by the Flow Network. Except as otherwise permitted by these Terms in cases where we determine that the Moment has not been rightfully acquired from a legitimate source (including, without limitation, through any of the Category B Prohibited Activities), at no point will we seize, freeze, or otherwise modify the ownership of any Moment.
Owning the NFT completely does not mean that you have ownership of the underlying copyrighted work. NBA Top Shop recognizes the separate distinctions by defining in their terms “Purchased Moments” and “Third Party IP.” “Purchased Moment” means a Moment that you Own. “Third Party IP” means any third party patent rights (including, without limitation, patent applications and disclosures), copyrights, trade secrets, trademarks, know-how or any other intellectual property rights recognized in any country or jurisdiction in the world.
Purchasing a moment also comes with restrictions. For example, you agree that you may not attempt to trademark, copyright, or otherwise acquire additional intellectual property rights in or to the Art for your Purchased Moment.
Specifically to IP, the terms provide that if the Art associated with your Purchased Moment contains Third Party IP (e.g., licensed intellectual property from the NBA or an NBA player), you understand and agree as follows:
- That you will not have the right to use Third Party IP in any way except as incorporated in the Art, and subject to the license and restrictions contained therein;
- That, depending on the nature of the license granted from the owner of the Third Party IP, [NBA Top Shop] may need to (and reserve every right to) pass through additional restrictions on your ability to use the Art; and
- To the extent that we inform you of such additional restrictions in writing, you will be responsible for complying with all such restrictions from the date that you receive the notice, and that failure to do so will be deemed a breach of the license contained in this Section 4.
If NBA Top Shop becomes a model for future NFTs, the terms demonstrate the separate aspects of intangible or intellectual personal property versus intellectual property as defined under the law. Artists and content creators must realize that NFTs are not a replacement for registering your underlying intellectual property.
What does this all mean for Third Party IP holders?
Regardless of the NFT or NFT terms, if an intellectual property owner wants to enforce or protect their rights, the owners will need to register with the USPTO. Without a registered patent, copyright, or trademark, the owner will not be able to initiate a lawsuit for damages and the difficulty in removing, recovering, or modifying NFTs will be greatly heightened. NFTs provide a novel avenue for intellectual property owners to restrict the use of their IP in the digital marketplace from use to monetization aspects. However, NFTs are not a replacement for registering the underlying intellectual property.
NFTs will create new market opportunities for artists, musicians, brands, innovators, investors, and consumers. The difficult part will come when infringed copyrights are uploaded to an NFT and there have been years of transactions. How that will play out will be exciting and nervous to watch. Determining the scope of rights that will accompany an NFT, in addition to IP registrations, requires a lot of careful thought incorporating an overall IP strategy.
In short, Non-fungible tokens will not make copyrights, trademarks, patents, or trade secrets fungible. It will change, hopefully, for the better, the way we monetize and use intellectual property in the marketplace.