Will intellectual property issues derail NFT adoption?

by · July 18, 2022

The fast-growing but loosely regulated nonfungible token industry (NFT) is already affecting many areas of human endeavor “from academia to entertainment to medicine, the arts and beyond,” two U.S. senators recently wrote in a letter to the US Patent and Trademark Office (USPTO). ) and the US Copyright Office. Lawmakers requested a study to explain how this new technology fits into the world of intellectual property (IP), including copyright, trademarks and patents.

This is an area that some say is characterized by ambiguity and inconsistent application of the law, and sometimes indifference from the courts. “Many feel it is time for Congress to step in and provide the predictability needed for innovation to flourish,” Michael Young, partner at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, told Cointelegraph.

The joint study requested by Senators Patrick Leahy and Thom Tillis from the agencies, due in June 2023, is based on a recent series of high-profile lawsuits – Nike against StockX, Hermès against MetaBirkins and Miramax against Quentin Tarantino – which raise some sticky questions about NFT- creation, ownership and dissemination.

In one case, an NFT was stamped – without permission – with sneakers with the Nike Swoosh. In another, NFT-related digital images were made of Hermès’ Birkin handbags, covered in fur, not leather, but also unlicensed. In a third, a well-known film director created NFTs from a film he directed but did not own.

A “wave of lawsuits has already begun for trademarks and copyrights, and courts are struggling to apply principles made long before the NFTs existed,” Anna Naydonov, partner and co-chair with Young in Finnegan’s industry group Blockchain, NFTs and Other Digital Assets, told Cointelegraph .

“The lack of clarity about software-qualified patents remains a major concern for NFTs and other crypto-based innovations both in the United States and abroad,” said Young. Much the same can be said about trademark and copyright issues, especially the secondary liability of marketplaces such as OpenSea, as well as metaverse virtual worlds and similar platforms where copyright infringement may occur, Naydonov added.

However, not everyone agrees that new legislation is needed. Some believe that government intervention in the United States and elsewhere would not only be superfluous, but that they could stifle NFT adoption and innovation.

Is the current law sufficient?

The real problem, as Gina Bibby, a partner at Withers Bergman LLP, told the Cointelegraph, could simply be “a lack of education about what NFT ownership really means.” One important thing that people seem to overlook is that:

“In the absence of a contractual agreement – such as a smart contract – that explicitly includes intellectual property rights (IP), the purchase of an NFT does not confer any copyright, patent or trademark rights or even ownership interests in the physical world on which the NFT is based. on. ”

Are there, without a doubt, some false ideas out there about NFT ownership and confusion about who can do what?

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“Yes,” Eric Goldman, assistant dean of research and professor at the Santa Clara University School of Law, told Cointelegraph. “In the offline world, the buyer of a painting or a sculpture does not automatically buy the associated copyrights.” That is, unless the copyright is transferred separately, the artist or sculptor can “commercialize depictions of the art / sculpture and prevent the property owner from doing the same.” Although the average consumer is not always aware of this, the US Copyright Act explicitly states:

“Ownership of a copyright, or of any of the exclusive rights under a copyright, is different from ownership of any material object in which the work is incorporated.”

Goldman sees “many erroneous claims” being made these days that “owning one part controls the other”, ie that the NFT owner controls the IP or the IP owner controls the NFT. People often fail to acknowledge that, just as in the physical world, a work of art and the object of copyright of the object are often owned by two different persons, so also “an object with IP and its NFT can and will often be owned by two different persons.”

Growing pains in a new industry?

But every new technology brings new questions, and perhaps today’s debate is just another example of technology moving faster than the law. Will regulators and legislators struggle to keep up with change?

“It’s the opposite,” Joshua Fairfield, a law professor at Washington and Lee University, told the Cointelegraph. “The law is already in place and has been for hundreds of years. Real estate is one of the oldest legal disciplines. There is no reason why anyone can not own an NFT as we own cars, houses, shares or the money in our bank accounts – after all, each of these real estate interests is also an entry in a database of who owns what. “

The problem here, Fairfield continued, is that copyright law grew to overshadow online personal real estate interests, telling the Cointelegraph:

“If I own a book, I own the copy, even though the book contains copyrighted material. But online, I do not own an e-book because too many courts only recognize intellectual property rights. “

However, that is beginning to change now, as courts recognize that intangible assets such as domain names or NFTs are no different from any other form of personal real estate that we wish to own, Fairfield added.

In Goldman’s view, the problem here is “similar to the issues of domain name ownership we struggled with a quarter of a century ago.” A domain name can be part of personal property even if it is not protected by trademarks, he said, predicting that “the non-IP rules designed to protect these domain names will help resolve NFT ownership disputes.”

Bibby, on the other hand, does not agree that copyright law has grown to overshadow personal real estate interests online. “When intellectual property laws are applied in a thoughtful and measured manner, other interests, including personal property interests, are likely to be respected.”

Confusion along these lines is not limited to NFTs, of course. A decentralized autonomous organization (DAO), SpiceDAO, recently paid over $ 3 million at auction for the unpublished script for the Dune movie, and intended to make an animated limited series about the book for a streaming service.

Then it learned, too late, that in the United States and Europe, buying a script with creative work does not give the buyer copyright either. SpiceDAO was ridiculed on Twitter for its oversight, among other things. As Andrew Rossow, a technology lawyer and Ohio law professor, told the Cointelegraph in February:

“Spice DAO and the Dune Failure was a landmark in itself that sends a very powerful message to everyone involved in the NFT space – creator or owner. The $ 3 million mistake that was made proved that intellectual property domination in digital art is crucial to success and longevity. ”

When asked about necessary clarifications, either through laws or other means, Fairfield replied that people need to know that the owner of an NFT owns the copy of the photograph or work of art, “just as we own a car or a painting or a book, and can sell it. and captures its value increase regardless of attempts at restrictions hidden in license agreements. ”

“Right now, when people put millions of dollars into an NFT, they are told that they do not even own the right to capture the increase in value. That makes investments unsustainable, he said. What is needed is “recognition that ownership of an NFT is a normal daily ownership of personal property,” Fairfield added, explaining:

“This means that NFTs are passed on to heirs after death. If an NFT is stolen, the owner can go to court to get it back. If an NFT is damaged or destroyed, the owner can get the value of the person who did it. the owner knows that they will be able to capture the increase in value of NFT if it turns out to be a good investment. ”

Increasing fraud can lead to an action

Some believe that there is a risk if governments become too aggressive with regulatory and legal reforms in new technologies. “Government intervention in new technological arenas always creates a risk of misregulation that harms or hinders development, especially when technology is evolving rapidly or the authorities do not understand the technology,” Goldman noted.

But the status quo may not be sustainable here because “NFTs are currently being used to commit consumer fraud,” Goldman added. “When the fraud figures are large enough, the authorities must intervene to protect consumers.”

This in turn can lead to over-regulation. “Unfortunately, the fraudulent angles of NFTs have a real risk of overshadowing the activities of the legitimate NFT players. The legitimate actors will potentially be hurt by the actions of the authorities, even if they did the right thing all the time,” Goldman said.

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“Such risks always exist, and that’s why intellectual property rights and marketing attorneys in this area hope that the U.S. Patent and Trademark Office, the U.S. Copyright Office, the Federal Trade Commission, and / or lawmakers work closely with key industry stakeholders to understand key issues. legal challenges and the technology behind NFTs, and come up with workable solutions, Young said. Naydonov added that “regulation and legislation without industry input can set the United States back compared to other jurisdictions.”

“People need to be educated”

However, Bibby sees no need for a complete legal reform. What is required instead is “a discussion of what we currently know about NFT ownership,” she told the Cointelegraph. People need to be educated and understand that a basic NFT purchase does not carry copyright, trademark or patent rights – unless express language declares otherwise. She added:

“Throughout modern history, laws have been tested by innovation and survived. The US Constitution is a perfect example. The real need is to understand how existing intellectual property laws apply to recent innovations such as virtual assets, including NFTs, virtual goods and the like. “

In addition, decisions in several pending lawsuits, including Nike v. StockX and Hermès v. MetaBirkins, are likely to be sufficient to “resolve many of these outstanding issues,” Bibby told the Cointelegraph.

Meanwhile, the senators gave the USPTO and the Copyright Office until June 9, 2023 to complete the study, but given the amazing speed with which NFTs and digital assets are created and disseminated, the market itself can provide some answers before the agencies’ joint work always sees the current light.