Some Intellectual Property Law Considerations When “Minting” An NFT
By Justin M. Jacobson, Esq.
The current buzz in the entertainment, sports, gaming, fashion, and art worlds as well as in other lifestyle, business, and technology areas are the “metaverse” and “non-fungible tokens” known as “NFTs.” However, it is crucial that an individual or company attempting to launch or “mint” their own NFT or any associated blockchain collection or token is aware of all the relevant legal considerations related to this business transaction. While there are many pertinent ones, including those focused on securities law, tax and other financial regulatory matters, this article will solely explore a variety of relevant intellectual property protections and considerations. This includes examining the benefits of copyright law, trademark law, and the drafting of proper licensing terms related to the ownership and usage of the digital asset. This piece also explores potential ownership rights monitoring and enforcement efforts that a project owner or a NFT purchaser might undertake to protect their virtual asset.
Intellectual Property Law and NFT Creation
While the U.S. government and others around the world are still determining how to best regulate and to effectively tax various NFTs and other associated blockchain “assets,” such as cryptocurrencies and select NFT projects; another paramount legal consideration is the intellectual property rights in the associated digital art as well as matters related to the underlying ownership rights in the specific NFT or other digital blockchain linked asset. Consequently, when a party is creating their own NFT project, whether a single token or an entire multi-piece collection, it is crucial to ensure that the intellectual property related to the project is properly cleared, protected, structured, and the ownership rights are expressed in writing, in order that that a purchaser is fully aware of what they do and do not receive when purchasing a specific cryptotoken.
NFT Contract Law – Drafting and Enforcing NFT Usage and License Terms and “Smart Contracts”
As a result, a company launching an NFT must be aware that an NFT collection drop has two contracts at work, the “smart” contract and the “usages and license” term agreement. The “smart” contract is blockchain linked aspect that automates handles the transfer process, including documenting ownership and transfers of the NFT, distributing and calculating fess and royalties, and anything else the creator programs. In addition to this agreement, a separate contract addressing the use of an NFT is prudent. When crafting these documents, it is crucial to ensure that a valid and clear license exists so that all parties understand what rights are transferred and how the purchaser may or may not use the digital asset. This includes whether a buyer has received the underlying copyright in the work as well as whether they are permitted to undertake any commercial or non-commercial uses of it. A lack of clearly expressed rights and usage terms could lead to potential issues related to the NFT’s ownership which might impact its overall value.
Additionally, since many existing third-party NFT marketplaces, including Opensea, do not provide a minting party with an opportunity to specify which rights are provided to a purchaser in a marketplace listing, it is imperative that both licensor (minter) and licensee (purchaser) know exactly what each party receives in a specific transaction. As a result, the project creator should clarify the exact usages for an NFT, including how wide or narrow the owner’s rights are. In this regard, certain NFT marketplaces and platforms, such as Open Sea, provide a minting party with the opportunity to insert a “third party link to the creator’s website [… and] such website may include [additional] Purchase Terms governing the use of the NFT” which the NFT purchaser “will be required to comply with.” (Section 5 – Third-party Content and Services) This provides the creating party with an opportunity to include additional ownership terms to ensure that both parties in the transaction understand what is acquired and how the buyer can or cannot utilize the NFT.
Furthermore, some existing NFTs specifically grant the token purchaser with an “unlimited, worldwide license to use, copy, and display the purchased art for the purpose of creating derivative works based upon the art,” such as the Bored Apes Yacht Club (BAYC). (Ownership – Paragraph iii) As a result, various owners have established their own business ventures utilizing the digital artwork, including the creation of a record label as well as individuals selling their own apparel lines incorporating their NFT design. Finally, other NFT projects may place a set monetary limitation on a purchaser’s commercial usage of an NFT. For example, CryptoKitty places a “$100,000” limit on the amount that an owner of a “Purchased Kitty” can generate from sales related to the digital work. This usage structure gives additional utility and value to the asset owner and may be a way to balance both parties’ rights instead of prohibiting all commercialization of an NFT or providing unlimited commercialization of it. (Section 3(c)(ii))
In addition to confirming that the ownership and usage terms of an NFT are clear; a project’s IP owners must ensure that the party, whether the original owner or the purchaser, has the ability, duty and the contractual right to police and prevent any stolen, fake or “plagiarized” NFTs, including mandating this party to utilize any appropriate DMCA or other copyright infringement procedures to protect the rightsholders’ interest in the NFT. This means that a minter or a purchaser must monitor the active NFT marketplaces for any existing infringements; and, if any are identified, the party must take prompt enforcement action to prevent the unauthorized use. For instance, the individual could reach out directly through the marketplace platform or may utilize other similar takedown notice procedures or other appropriate steps, such as issuing cease and desist and other demand letters, where necessary.
Another provision that is beneficial are those that address and provide indemnification to the minting party for any improper or illicit actions undertaken by the NFT owner. Similarly, a prospective NFT purchaser may desire similar indemnification language as well as some contractually obligation that the NFT creator to polices or provides the NFT holder with the right to pursue any infringements made by a third parties as well as to ensure that the purchaser have proper rights to the acquired digital collectible.
Trademark of NFT Collection Name or Company Name for Metaverse Inclusion or NFT digital items
Another beneficial legal protection for an NFT owner is the usage of trademark law. Similar to other public identifiers, such an artist or performer’s name, a gamer-tag or a band name, an NFT collection name as well as an existing company or a new brand name can receive trademark protection. This protection might apply to a particular project or collection’s name or logo as well as for a company’s name, logo, color, slogan, or hashtag in a variety of digitally focused business categories and goods. This includes potentially applying for protection for digital assets and NFTs, for downloadable virtual goods, or even for retail stores featuring specific virtual goods.
In fact, this has become a new trend with both existing NFT projects as well as for established brands applying for trademark protection in the metaverse and in other digital token-related categories, including McDonald’s. Additionally, the retail store Saks applied for protection for its brand name “SAKS” in Class 009 for “digital media, namely, digital collectibles, digital tokens, non-fungible tokens (NFTs) and digital art.” (U.S. Serial No. 90/789,965). Similarly, sportswear company, Nike who had previously activated in the “metaverse” with games such as Roblox, has also applied for protection for its brand name. This includes the company submitting trademark applications to protect its name, “Nike” as well as for its “swoosh” logo (U.S. Serial Nos. 97/095,855 and 97/095,944) in the metaverse. The company has applied in several international classes, including Class 009 for “downloadable virtual goods, namely, computer programs featuring footwear, clothing, headwear, eyewear, bags, sports bags, backpacks, sports equipment, art, toys and accessories for use online and in online virtual worlds,” in Class 031 for “entertainment services, namely, providing on-line, non-downloadable virtual footwear, clothing, headwear, eyewear, bags, sports bags, backpacks, sports equipment, art, toys and accessories for use in virtual environments,” as well as in Class 035 for “retail store services featuring virtual goods, namely, footwear, clothing, headwear, eyewear, sports bags, backpacks, sports equipment, art, toys and accessories for use online; on-line retail store services featuring virtual merchandise, namely, footwear, clothing, headwear, eyewear, bags, sports bags, backpacks, sports equipment, art, toys and accessories.” The brand has gone even further by applying for trademark protection in other IP assets such as its marketing slogan, “Just Do It” (U.S. Serial No. 97/096,236) as well as for another one of its clothing brands, the “Jordan” brand (U.S. Serial No. 97/096,950) in similar classes.
Additionally, a well-known NFT project, “Bored Ape Yacht Club” has applied for protection in a variety of classes for its project name including in Class 016 for “digital collectibles; digital collectibles sold as non-fungible tokens,” in Class 035 to “maintain and record ownership of digital illustrations; maintain and record ownership of digital illustrations represented by non-fungible tokens; providing a website featuring an online marketplace for exchanging digital collectibles” and in Class 045 for “online social networking services provided through a members-only website; computer services, namely, creating an online community for registered users to access a collaborative graffiti board” (U.S. Serial No. 90/739,977). In addition, the same owners have applied for protection of its BAYC logo in several classes for various merchandise such as “jewelry,” “hats,” t-shirts,” “skateboards, and “plush toys.” (U.S. Serial No. 97/015,931) Similarly, another highly successful project, “Cryptopunks” has also applied for protection for various classes for its NFT collection name. (U.S. Serial No. 90587519)
In addition to applying for protection in an NFT project or collection name, proper policing of an existing brand name and other protected IP is crucial for a new company starting in the space as well as for an existing venture expanding into the sale of digital assets and collectibles or other metaverse-related services or products. This means that individuals and businesses must monitor any existing NFT usage related to their company or product name for any potential infringing or other unauthorized use of a protected asset. In fact, there is an existing dispute related to the usage of a protected product name. Currently, the owners of “Birkin” are in an on-going dispute with the creators of the digital “Meta Birkin” NFT project related to the unauthorized usages of their protected trademark in “Birkin” (U.S. Reg. No. 2,991,927).
Copyright Protection For NFT Designs And Collections
Finally, as with any created work that is fixed in a tangible medium of expression, an NFT design or a series of avatars or digital artwork pieces may be eligible for copyright protection. Since an NFT design is fixed in a digital file (i.e., a JPEG file), such as a “profile picture” (PFPs) NFT, a single image or a set could be potentially submitted to the U.S. Copyright Office for copyright registration for the created art or for a series of images. There are many benefits that copyright registration affords the owner, including protecting against any infringing usage of the protected imagery and permitting the party to file a copyright infringement claim in U.S. federal court. Registration of a work can also be useful in policing any unauthorized usage or sales containing the image with social media platforms as well as permits the utilization of U.S. Customs and Border services to impound and stop any counterfeit goods that feature the protected design from entering the marketplace.
Overall, as the NFT craze continues to build and as more companies and brands invest as well as build into the “metaverse;” legal protection and structuring will only become more important. Therefore, it is imperative that any party operating in the space understand and properly approach the space, including protecting themselves and their creative assets as well as clearly defining a purchaser’s rights in their acquired digital asset.
This article is not intended as legal advice, as an attorney specializing in the field should be consulted.
© 2022 The Jacobson Firm, P.C.