NFTs, Metaverse, and Intellectual Property Rights: What Artists and Brands Need to Know About Their Legal Rights in Web3
With the advent of news stories about NFTs selling for exorbitant prices, more and more NFTs are coming to market in hopes of also striking gold. But among the wild west of non-fungible tokens (NFTs) and blockchain technology lies a host of intellectual property rights issues, including increasing threats of trademark and copyright infringement, that may turn some prospects into fool’s gold.
What are NFTs?
In addition to intellectual property issues as it relates to brands, the increasing popularity of NFTs also raises the issue of what intellectual property rights are being bought and sold in an NFT transaction.
Let’s first break down what a NFT is and what it isn’t. A non-fungible token is a digital token with a unique ID, linked to an underlying asset, that is stored and verified on the blockchain using software codes, known as “smart contracts.” Blockchain technology is in effect a digital ledger that records transactions across a decentralized network. Unlike purchasing a physical piece of property, the purchaser of a NFT is purchasing a non-physical certificate of authenticity in code that represents a tangible asset. The smart contract contains the details of the underlying asset and the rules and rights that attach to the NFT.
Who Needs Trademark Protection?
In 2021, the United States Patent and Trademark Office (USPTO) received 1,263 filings relating to the metaverse space compared to a total of three in 2020. The filing rates have skyrocketed each month thus far in 2022. Litigation is underway to determine whether trademark brand protection extends into the metaverse. For example, Nike is suing NFT retailer StockX for trademark infringement for selling its shoes in the metaverse. Many companies, including CVS, NBA, Nike, Brooklyn Nets, Walmart, Kobe Bryant, Garbage Pail Kids, and Crocs have filed trademarks to secure their brand in the web3 space.
What Do You Own With an NFT?
In terms of intellectual property, the NFT doesn’t contain or transfer any IP rights to the underlying asset, unless it states otherwise. Any copyrights and trademarks to an NFT remain with the IP holder. You can see how this can quickly create confusion in the NFT marketplace. From the seller’s position, you must be careful as to what rights you hold in the digital world and what you are transacting in the smart contract. From the buyer’s position, it’s the ultimate buyer’s beware. It’s easy for buyers to be confused as to what they’re purchasing and what rights, if any, they have as a result. Unlike a physical item you display in your home, an NFT is nontangible and laden with uncertainties as to what you actually own.
What About the Copyright?
If you are an artist distributing copies of your original work via an NFT (known as “minting”), then you can rest knowing you own the copyright to your art. In fact, it is paramount that you file your copyright with the United States Copyright Office to fully protect your copyright.
A good example as to how copyrights work with NFTs is in visual arts where an artist sells a certain number of prints. Whether the artist releases a limited number of prints, i.e. 10 prints versus 10,000 prints, will greatly affect the price. In this example, the artist maintains the original copyright to the art. In the NFT world, the artist would also maintain the original copyright, while the NFT would represent the print copies with the author’s signature and print edition contained in a code that links it to the original piece of art. Just like the real art world, the number of print editions will greatly affect the price. If the artist were to sell the original painting with the copyright, then you can imagine the price would potentially be in the millions depending on the artist’s reputation. This example could extend to any and all types of art, including music, film clips, collectibles, sport figures’ clothing, and brand name products.
If you are an NFT seller basing an NFT off someone else’s art, brand, or original work, then you may be infringing upon someone else’s copyright. Unless there has been a transformative use of the art to make it original, obtained permission by the owner, or it falls within a fair use exception, then the NFT seller faces potential copyright infringement litigation, in which case the buyer of the infringed NFT is out of luck too.
Ideally, brands can use licensing agreements as a way to distribute their work and receive royalties in exchange. In the same way, a brand can issue licenses to t-shirt companies to sell at Target, the same can be done in the NFT space.
What About Enforcement of IP in the Marketplace?
OpenSea.com markets itself as the first and largest NFT marketplace. It has little, if any, barrier to entry aside from the necessary steps for creation of the NFT and payment with a crypto wallet. As a result, you can imagine the volume of potential infringement violators. Some NFT platforms provide an avenue for trademark takedown notices, including OpenSea, while others have yet to institute any systems for IP complaints. Holding platforms accountable will likely be the subject of upcoming congressional legislation.
Another challenging area will be the international enforcement of copyright and trademarks, which is already proved challenging before blockchain technology. It will be made even more difficult to enforce with decentralization and the wide use of pseudonyms.
What Should You Do as an Artist or Brand?
In summary, here’s a checklist of intellectual property considerations in the NFT and metaverse space.
For artists and brands:
File trademark for brand protection in categories relating to the crypto and/or metaverse space. If you already have a trademark for your brand, it may or may not extend into the metaverse (forthcoming court decisions will potentially give more direction). If you don’t own any trademark, but plan to enter the metaverse, then you will want to protect your brand with a trademark registration.
File a copyright registration for your works, i.e. literary, screenplays, music, art, before minting an NFT. (This is a good idea even if you’re not entering the digital world.) If you are not the owner of the IP, obtain permission or a license for the work.
Be mindful of what you are transacting in the NFT sale. Explicitly exclude your copyright in the transaction, unless that is your actual intent (unlikely).
For buyers:
Verify that the seller owns the copyright of what you’re purchasing. Don’t assume the seller is the copyright holder.
Inquire as to the number of prints or editions being minted to verify value.
Know what rights or licenses you are purchasing, if any.