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Paving the IP Road for NFTs

With the emergence of Non-Fungible Tokens (NFTs) digital technology, establishing intellectual property strategy, including Copyrights and Trademarks, is crucial to pave the road ahead. NFT’s popularity has soared recently with blockchain supporters and entrepreneurs, emphasized by multi-million dollar auctions. NFTs representing unique assets such as videos, music, games, artwork collectibles, digital real estate, and digital artwork, have their value based on non-fungible, distinctive features of the item being sold.

As opposed to fungible (interchangeable) tokens which have the same value, such as Bitcoin, NFTs are “minted” and sold. Once sold, the new “owner” can sell it as any other item they own. NFTs can be created with a resale royalty in it that simultaneously pays the creator each time the NFT is resold. There is only one rightful owner of the NFT at a time. The “chain” of ownership is tracked and confirmed by ledger-blockchain. Using this, the authenticity, origin and uniqueness of the NFT can be verified, making NFTs more popular. Verified authenticity of an exclusive digital asset is in high demand.

Applying copyright law to digital assets means that a purchaser of an NFT doesn’t automatically obtain the copyrights to the “underlying” work. Copyrights can be transferred using a self-executing smart contract when an NFT is sold, but usually the purchaser buying an NFT is just taking ownership, like buying a rare, autographed first edition copy of a book, they don’t own the copyrights to the original work.

As a new technology, NFTs are still covered by copyright law based on the nature of the underlying works. Section 102(a) of the Copyright Act of 1976 expresses that assets reproduced or perceived with the assistance of a machine or device such as a computer or smartphone, and items fixed in “later developed” tangible forms of expression, are protected, which includes much of the digital asset formats relating to NFTs. Protection for some other subject matter related to NFTs such as artwork, video, music, computer programs and items containing literary works are protected under Section 106 of the Copyright Act.

NFTs are also covered by trademark law, the use of a mark to identify a source of services and/or goods used in “interstate commerce.”¹ If someone purchases an NFT that has a trademark associated with it, the purchaser is not purchasing the right to utilize the trademark, unless that is an actual condition to the NFT’s transaction. For infringement of a resale of an NFT with a trademark to be determined, several questions would need to be asked:

• Does the trademark holder asserting the claim of infringement own a valid and legally protectable mark;
• Did the alleged infringer make unauthorized use of the mark in connection with the distribution, sale, offering for sale, or advertising of goods and/or services in interstate commerce; and
• Is such use by the alleged infringer likely to cause consumer confusion in the marketplace.²

As with any new technology, questions will be raised and analyzed regarding copyright and trademarks and NFTs are no exception. The answers to these questions that result from more businesses and people utilizing the NFT marketplace will allow both purchasers and sellers to maintain a valuable NFT portfolio and position in the market.

Footnotes

Carter III, Alvin B., Bedar, James E., Gilman, E. Patrick, Willsey, Peter, “NFTs And IP: Traditional Questions Recontextualized,” 2021-06-14, https://www.mondaq.com/unitedstates/trademark/1080178/nfts-and-ip-traditional-questions-recontextualized

1. 15 U.S.C. §§ 1051 to 1141(n).
2. See, Lamparello v. Falwell, 420 F.3d 309, 313 (4th Cir. 2005); A&H Sportswear, Inc. v. Victoria's Secret Stores, Inc., 237 F.3d 198, 210 (3d Cir. 2000).