Although NFTs have been around for a number of years, and have changed the world of goods and art, it is worth considering how intellectual property (IP) rights interact with this asset class.
This article examines NFTs in their components with a view to understanding how IP law, and specifically the areas of copyright and trademarks, apply.
What is an NFT?
An NFT stands for non-fungible token and is a digital asset with a unique digital identifier, registered on a blockchain. Considering how IP rights interact with NFTs largely requires a breakdown of an NFT’s composition: (1) unique metadata, (2) the potential digital creative output attached to it, and (3) the smart contract.
- Metadata: An element of an NFT is the metadata that is added, as a block of data, to the relevant distributed ledger (DL), which in many cases is a blockchain. An NFT’s metadata can contain unique properties such as the file name, the creator’s identity or pseudonym and, importantly, the unique identification key or link to the digital asset it represents (such as its token ID).
- Creative output: A common misconception is that its non-fungibility, or uniqueness, only stems from the creative output associated with the NFT – such as digital art, skins in a video game, or access rights to events. Instead, and more importantly, an NFT’s identifier on the DL is what gives an NFT its non-fungibility. For example, where the NFT contains an image, the image itself is part of the NFT, but the image itself may be fungible as there may be identical copies of the image, for example in digital and printed form. An analogy is often drawn with art, where an NFT represents the certificate of authenticity over a digital asset in the same way that a signature represents the artist’s provenance over a painting.
- Smart contract: When an NFT is minted (ie created), it is signed by a smart contract that governs the rights and limitations of what the owner can do with that NFT. Once smart contracts are written, they work automatically, so when predetermined conditions are met, the smart contract will automatically execute. For example, upon awarding an NFT, a smart contract can automatically create a deposit for the original creator that is automatically reimbursed in the form of a royalty.
What is copyright?
In the UK, provided that the conditions of originality and fixation (the requirement that the work be recorded) are met, copyright arises automatically upon the creation of certain types of work, usually for the benefit of the author. The works protected by copyright include original literary, dramatic, musical or artistic works and sound recordings, films or broadcasts. A computer program, its source code, object code and preparatory design material relating to it may also be protected by copyright as a literary work.
Copyright lasts for seventy years after the author’s death and fifty years from the year the sound recordings and broadcasts were made. Generally, the copyright holder has the right to prevent copying of that work. As such, copyright gives the author the right to control what is done with their original work.
NFTs and copyright
Copyright will protect the creative output (artwork, literary and/or musical work) linked to an NFT. Copyright may also apply to the metadata and smart contract code of an NFT, although this is largely untested by law.
An example of copyright in action is the illustrative case of the Spice DAO, or Decentralized Autonomous Organization. Spice DAO was created to finance the purchase of an unpublished manuscript for an unmade film adaptation of Alejandro Jodorowsky’s book “Dune”. Spice DAO paid €2.66 million for the script, intending to “produce an original animated limited series inspired by the script and sell it to a streaming service”.
Unfortunately for Spice DAO, purchasing the manuscript does not transfer the copyright of the underlying Dune book from Frank Herbert’s estate to Spice DAO. In fact, Frank Herbert’s estate had licensed the film rights to Legendary Entertainment who produced the 2021 film version. As such, Spice DAO had no rights to create derivative works simply because they owned a copy of the unpublished manuscript. In this case, copyright exists in the manuscript as a literary work, and if the literary work is used to form the creative output associated with an NFT, that NFT owner must have the express consent of the manuscript’s copyright owner. As a result, when an NFT is minted, a number of IP-related issues can arise which, without copyright advice or thorough due diligence, can often lead to points of contention for both coiners and buyers.
Copyright of creative output is not automatically transferred upon purchase of an NFT under most standard forms of smart contract including the most common, the Ethereum standard ERC-721. Again, a parallel can be drawn with art: when an art collector buys an original Banksy, the art collector does not acquire the right to reproduce the artwork and sell it to the public – this right remains with the creator subject to the usual restrictions under copyright laws.
In this case, reproduction on an NFT would constitute copyright infringement, and Banksy could pursue a claim. In order to transfer the copyright to a work from the right holder, a written transfer of copyright is required. This must expressly form part of the smart contract or be contained in a separate transfer deed outside the smart contract. Accordingly, any use of the underlying digital asset that involves copying or commercialization is likely to constitute copyright infringement if the consent of the copyright holder is not obtained. As such, the sale and resale of an NFT does not automatically transfer copyright to the underlying digital asset unless a copyright transfer forms part of the smart contract.
What is a trademark?
A trademark indicates the origin of certain goods and services. A brand is usually: words, stylized words or a logo, and in very limited cases can include slogans, shape of goods, smells, sounds and colours.
In the UK, trademarks are usually registered to offer the maximum level of protection for brand owners. Once registered, a trademark gives the holder a statutory right to exclusive use of the mark in connection with the goods or services for which it is registered. Upon registration, the owner has the right to claim trademark infringement against any person using an identical or similar mark in commerce in connection with identical, similar or (in some circumstances) different goods or services seeking to ride on the goodwill of that mark. The owner of the trademark must show that the unauthorized use has caused or is likely to cause confusion among consumers.
NFTs and trademarks
Minters has created NFTs containing brands’ registered trademarks without the owners’ consent. Minters should be aware of including third party trademarks without consent, which may result in trademark infringement.
A high profile example in the US has the Hermès trademark used by Mason Rothschild in his ‘Metabirkins’ project, which included the unauthorized use of the Hermès registered trademark and design of the shape of their handbag. Rothschild used this to create, and later stamp, digital artworks which were then collectively sold in an exclusive collection of NFTs for over $100,000. Rothschild was found to have infringed and this was the first instance of a court ruling for trademark infringement in relation to NFTs. Read our article for a full analysis on this matter here.
In the EU, Juventus FC won a trademark infringement ruling against NFT manufacturer, Blockeras srl. Blockera’s NFTs consisted of trading cards of Juventus striker Christian Vieri, which featured the wordmarks “Juventus” and “Juve” as well as the design of the club’s infamous black and white jersey. Juventus sought a preliminary injunction to prevent the Blockeras from selling these NFTs, and the Rome Court of First Instance ruled that the unauthorized embossing, advertising and sale of NFTs had infringed the trademark rights of the registered owner, Juventus, and granted the club a comprehensive varying injunctions prohibiting Blockeras from participating in the further production, marketing or sale of the NFTs as well as the digital content associated with the NFTs. The court considered extensive online merchandising activity, and global recognition of the club’s characters given “the club is the most successful in Italian football”.
Juventus had registrations for its marks in Class 9 of the NICE Classification of Goods and Services for use in connection with “digital downloadable publications”, and the court found that this covered use as NFTs. This ruling was the first of its kind in Europe and marks a pattern of consistency, on both sides of the Atlantic, where courts recognize that NFT creators commit trademark infringement when they use registered trademarks without the consent of trademark owners.
Final thoughts
The development of digital assets is an ever-changing area of technology, and the legal landscape is adapting accordingly. The Law Commission has proposed new reforms relating to digital assets, to further the Government’s aim for the jurisdiction of England and Wales to become a global hub for digital assets, and in particular for crypto-tokens and crypto-token systems. EUIPO has also issued guidance relating to applications to register trademarks for virtual goods and NFTs, but we have yet to see UKIPO’s guidance on the subject. However, we know that the term “downloadable digital files authenticated by non-fungible tokens” is accepted for use to describe goods in Class 9. We will continue to issue updates and advise customers according to the latest developments in this area.
