Reading the Fine Print — Are Non-Fungible Tokens (NFTs) a New Kind of Intellectual Property?

Co-Authored with Meredith Bacal and Noah Walters

The social phenomenon of NFTs as a new form of digital asset is peaking. On March 11, Beeple sold his Everydays: The First 5000 Days at Christie’s for $69 million; three days prior, Taco Bell was selling Taco-themed NFTs. As brands and independent artists flock to various marketplaces, the question of what it really means to “own” an NFT remains shrouded in secrecy.

NFTs are more than just digital items on the blockchain. These unique tokens are characterized by a variety of technical and artistic features that together form a type of digital property. The basic technical composition of NFTs inherently protect the work from manipulation, duplication, and reproduction. It also allows NFT creators to program rules into the token that cannot be altered. Such technical features allow NFT holders to buy and sell their tokens in a global marketplace without fear of counterfeits and spurious consumers. Still, the comforts of the blockchain will not shield artists, buyers and sellers from the basic tenets of intellectual property (IP) laws.

IP laws govern the intangible creations of the human mind and include copyrights (protecting art), patents (protecting invention), and trademarks (protecting brands). The most relevant branch of IP law within the current NFT ecosystem is copyright, which gives the copyright holder a legally enforceable claim to control the use and reproduction of an original artistic, literary, dramatic, or musical work. Copyright arises automatically once an original work is created, and vests with the original creator of the work (subject to some limited exceptions). These rights can be transferred to subsequent owners of a work during the life of the copyright, which is not in perpetuity. NFTs that reproduce the likeness of celebrities also wade into the rights of personality and the ability to control the exploitation of an individual’s name, voice and likeness.

An ongoing thesis of NFTs is that decentralized marketplaces transacting in various forms of art are inherently creator-friendly and reinforce the underlying rights subsumed in copyright law. On the other side of the spectrum, some argue that NFTs may be exacerbating the issue of copyright infringement and undermining the concept of ownership in an artistic work.

Rights of Creators

NFTs have created a new marketplace for artists to sell their works in a medium that should ensure artistic integrity. Inherent with any NFT are digital protections from manipulation. The NFT facilitates a never-ending, self-perpetuating chain of ownership in the original piece demonstrably existing on the blockchain. Forgeries may still exist, but with the ledger tracking transactions, individuals should be able to see whether the NFT originates from the creator.

From an IP perspective, non-fungible design may also reinforce the artists’ moral rights, i.e. the right to preserve the integrity of a work, even after a sale or commission. This inherent right can sometimes permit creators to choose the context in which a previously purchased work can be exploited.

Still, the technical feats protecting artist rights via the NFT may be the same mechanism contributing to possible infringements. Considering the immutability of the blockchain, once a token is published, nothing can be done to change the state of the NFT and its associated rights — the NFT will theoretically exist forever. If an NFT is minted without the artist’s permission, how can the creator enforce his or her IP rights against a digital asset that can never be destroyed or altered? Or, due to the pseudonymous nature of many blockchains, how could an artist even identify a possible infringer?

Even if the NFT ecosystem establishes protocols to eliminate bad actors, there are still numerous instances where well-intended artists could create an infringing work. Without applicable consent, original works substantially derived from pre-existing materials (aka “derivative works”) can render the subsequent artist liable for exploiting protected IP. This could impact the trade of NFTs because the reseller of an NFT could be found liable if the artistic work expressed in the NFT infringes copyright in another work.

Creators have already begun to complain about individuals selling unauthorized copies of their works as NFTs and similar complaints will likely be made about exploitation of personality rights. Personality rights protect the right to control the commercial use of one’s name, voice and likeness. Misappropriation of personality can occur when an individual’s identity is used to sell a product or service without explicit permission. There have already been reports of numerous celebrity-based tokens being sold without appropriate permission. Also, as NFTs rise in popularity and value, celebrities and influencers will begin exploiting their own names and likenesses as digital tokens, so any future infringements of those rights will be carefully vetted and strictly enforced.

Rights of Consumers

Consumers are drawn to NFTs because they provide verifiable ownership in something unique and scarce. The appeal of such assets is evidenced by substantial market growth (the NFT market tripled in 2020 to $250+ million), and rapid adoption by mainstream and longstanding institutions ranging from the NBA to Pringles chips. An important by-product of the popularization of NFTs is the development of several marketplaces that bypass art gallery institutions and traditional auction houses. These platforms serve an important function of acting as secondary markets for the re-sale of tokens. Such secondary marketplaces are unique to the art and collectibles world because they allow both creators and consumers to capture the resale value of NFTs in parallel, without relying on intermediaries.

Consumers, however, need to be mindful of what they are actually buying and the kind of ownership that they are acquiring in an NFT. Some NFT marketplaces that trade in exclusive licensed property often provide consumers with a very limited license, rather than a formal transfer of ownership. One such private marketplace contains language in its Terms of Service stipulating that the purchaser is acquiring a non-exclusive, non-transferable, royalty-free license to use, copy, and display the work, solely for “personal, non-commercial use…” (emphasis added). For musical NFTs, as a recent example, the purchaser is probably not obtaining rights in the copyright of a song’s composition. So, for all those ‘unreleased demo’ auctions currently available as NFT products, there is nothing stopping the composer/artist from releasing the song in a traditional sense after its “exclusive” NFT sale.

The mere act of buying a hyper-exclusive NFT, does not give the purchaser a right to control the underlying IP in the work. In other words, ownership of a first-edition “Slaughterhouse-Five” does not automatically give the owner a right to publish the book and just because you bought a Batman NFT does not mean you can now start selling Batman figurines.

Major marketplaces that facilitate the trade of NFTs are also making a concerted effort to disclaim the very advantages proclaimed by the proponents of NFTs. Often, Terms of Service contains language that there can be no guarantee or assurance of the uniqueness, originality or quality of the work or metadata contained on the token. This kind of disclaimer provides a certain degree of legal protection to the platform, which is purporting to act only as facilitator or administrator of trade between the consumer and creator. This reinforces the fact that consumers have no surety that the underlying work is not an infringement of IP.

Clearly, we are witnessing the development of distinct marketplace dynamics. The consumer is often left with the puzzling question of what it is that they truly own when they purchase an NFT, which requires a greater emphasis for buyers to read the fine print. Such ownership constraints further the proposed thesis that the value in NFTs actually follow the initial sale and should be viewed as a tradable digital experience in a crypto-based marketplace and not as stand-alone intellectual property.

The hype around NFTs is understandable and appears to provide a creator-friendly platform that give consumers access to previously unavailable scarce digital assets. However, both creators and consumers should be mindful of the IP they are trading in and that the blockchain is not a shield to basic IP laws. NFTs are still in the very early stages of its technical capabilities and the non-artistic utility of NFTs will emerge from the current hysteria; in other words, cue the patent lawyers.

In the end, if you’re wondering what you are buying when you get an NFT… read the fine print.

Special thanks to Meredith Bacal and Noah Walters for co-authoring this article with me.

This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content.

Writing about the attention economy. Intellectual Property I Entertainment I New Media. Former Senior Counsel with Live Nation Entertainment.

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