IP licenses in NFT’s terms and conditions are under development

With the proliferation of non-fungible tokens (“NFTs”), particularly in the art space, an interesting and potentially ground-breaking practice has developed whereby certain intellectual property (“IP”) associated with the NFTs is licensed to the NFT purchasers and their subsequent successors. This type of IP license was made famous by the developers of the Bored Ape Yacht Club, who included a commercial use license in their terms and conditions and, based on public statements, intended that these licenses would allow NFT holders to more fully commercialize Bored. Monkeys. Granting the owner of an NFT, or for that matter any reproduction of a work of art, a commercial use license has not been common practice until now, as the buyer is traditionally only allowed to use that item. This trend of giving greater IP rights to NFT owners is in line with the ethos of Web3 – allowing holders to have more control over digital assets and content.

This licensing of commercialization rights to a particular NFT holder provides interesting opportunities for buyers to monetize their NFT purchases. It also presents new challenges as developers try to find the most appropriate legal construction to serve the interests of both the overall project and individual owners of the NFTs. Some of these challenges played out recently when major changes were made to the licensing terms of two popular NFT projects: Moonbirds and CryptoPunks, each of which demonstrated a different strategy for allocating IP ownership to NFTs. Moonbird NFTs have sold for as high as 350 ETH (about $570,000 based on the current price of ETH as of August 22), and CryptoPunk NFTs have sold for as high as 8,000 ETH, about $13 million based on the current price on ETH as of August 22).

Moonbirds change to CC0

One approach to licensing that is uniquely “Web3” is the placement of otherwise copyrighted IP in the public domain through the use of Creative Commons “No Rights Reserved” (“CC0”) agreements. The idea behind CC0 is that when art is placed in the public domain, it allows more people to use and otherwise promote that art without fear of infringement, which in turn increases the notoriety and value of the original works.

The original Moonbird Terms of Sale licensed the artwork in the individual Moonbird NFTs to the holders of those NFTs for commercial use. The relevant extract from the original terms is below:

August 4, 2022, Kevin Rose (a founder of the Moonbirds Project) announced on Twitter that Moonbirds would move to a CC0 public license. This change from only licensing the artwork to individual owners – to now allowing the general public to have equal rights over the use of that artwork has upset some Moonbird NFT holders who previously had greater IP rights and were suddenly left with diluted commercialization rights due to the sudden change in license terms.

Yuga Labs launches long-awaited CryptoPunks licensing

Another example of potential decentralization of IP ownership of NFTs is contained in the terms recently released by Yuga Labs in connection with CyptoPunks. When Yuga Labs acquired CryptoPunks in March 2022, they released a press release saying “[w]With this acquisition, Yuga Labs will own the CryptoPunks and Meebit brands and logos and, as they have done with their own BAYC collection, Yuga Labs will transfer IP, commercial and exclusive licensing rights to individual NFT holders.”

On August 15, 2022, the long-awaited license terms were finally released. Some interesting features of these concepts include:

• An explicit link of license rights to the asset itself, meaning that when the asset is transferred, the license rights that come with that asset follow.

• List of the smart contract on which current NFTs were distributed, potentially to cut off claims by V1 CryptoPunk owners to IP rights under the agreement. V1 CryptoPunk owners bought an NFT with a bug in the smart contract code. To fix the code bug, the original creator (Larva Labs) released a new smart contract. V2 CryptoPunks became successful and popular. Recently, original V1 CryptoPunk owners decided to wrap their V1 CryptoPunk NFTs in a new smart contract and sell them. The wrapped version of V1 CryptoPunks fixes the coding bug, but resulted in duplicate CryptoPunk NFTs (ie the artwork is identical between V1 and V2).

• No explicit reservation of rights to change the IP license terms going forward (which was included in the Moonbirds terms).

These terms from Yuga are far more comprehensive than the Bored Ape Yacht Club license agreement. Ed Lee, the author of Nau NFT, put together a helpful infographic showing certain differences between the CryptoPunks and Bored Ape Yacht Club licenses.

It is unclear if this CryptoPunks license was released first to determine any weaknesses or gaps before a revised license for Bored Ape Yacht Club holders was released, or if it was simply done to create clarity after their statement on the issue regarding their CryptoPunk IP Purchase.

Final thoughts

The Web3 industry mentality around decentralization of ownership, including ownership of copyrights and other IP, is a new development that is likely to have legal ramifications across all industries. As with any developing industry, it will likely take time for laws to be established regarding these current Web3 industry practices. As shown in the licensing changes above for Moonbirds and CryptoPunks, these current practices and the laws surrounding them are constantly changing. Therefore, it is important for developers to engage legal counsel early on to help these developers craft an appropriate IP strategy for their particular goals. While there are clearly challenges in extending and decentralizing IP to NFT owners, these trends are an exciting development in that they show Web3 being put into commercial practice.