NFTs create trademark issues. For these Minnesota lawyers, expertise is a commodity

The craze for people paying absurd amounts of money to own unique cartoon characters or short video clips stored in non-fungible tokens, or NFTs, is over — but the legal questions surrounding ownership are heating up.

The NFT market peaked in early 2022 at $17 billion in trade sales volume, but by September, industry sales volume is said to have dropped to less than half a billion.

Accelerating, however, are legal battles over who can claim ownership of these digital artworks or prove theft of intellectual property.

Computer or man-made NFTs are not fully protected under trademark law today, but people sell copies or infringe images and sell them to the highest bidder.

In February, a federal jury in New York ruled that a digital artist infringed on luxury brand Hermes’ Birkin trademark with his creation of an NFT resembling the popular bag.

For Twin Cities intellectual property and trademark attorney Joey Balthazor, the lawsuit by luxury brand Hermes — which resulted in the artist reportedly paying the French company $133,000 in damages — is a landmark ruling.

It is the first case that has really challenged trademark or intellectual property rights for NFTs and crypto-assets, Balthazor said.

The market for digital goods, created to resemble real brands that people buy for their online gaming profiles, is a booming business. But most brand owners have yet to gain full control over it.

However, the Hermes settlement is a warning to NFT creators. It also gives Balthazar and other Twin Cities attorneys specializing in patents, IP, trademarks and copyrights an example of how to go about helping clients caught in the murky intersection of law and NFT.

What is legal, what is not

Sellers of NFTs simply share, for a price, a piece of data. Knowing when copyright infringement occurred, or how to avoid it, has been difficult.

“And the legal system doesn’t know how to handle a piece of data on the blockchain, or how to track its intellectual property,” said Daniel Tysver, a Minneapolis trademark and IP attorney.

Blockchain is the cryptic ledger of transaction technology where crypto data such as NFTs and other tokens are stored.

For NFT creators, it is also not clear what they can register for trademark or patent protection. That’s a significant part of the NFT legal equation, considering the US Patent and Trademark Office has received more than 10,000 trademark applications for NFT-related goods and services over the past few years, Kathi Vidal, Under Secretary of Commerce for Intellectual Property and Director for the US Patent and Trademark Office, said during a recent online panel.

“And we expect that number to grow,” she said.

The US Patent and Trademark Office and the US Copyright Office are working on a joint study with input from industry experts to determine how the nation moves forward with NFT laws. The joint study, a response to a request by the US Senate Subcommittee on Intellectual Property, will help officials decide what policies to support and what position the US will take on the issue, Vidal said.

Right now, an NFT is similar to a certificate of authenticity, and does not necessarily have any value or status as a commodity, unless the nature of the token being authenticated is specified, such as downloadable images of action figures or sneakers. Blockchain is also not considered a good or a trade in registrable service, although it may be an attribute of the good, or a means of performing an activity, said Rebecca Eisinger, attorney for the US Office of Trademark Quality Review and Training, and Mary Munson-Ott, attorney for the Trademark Classification Policy and Practice Unit, in a recent webinar.

To add, cryptocurrency is a form of payment, and not considered a good or service, they said.

Competence in demand

To obtain an official identification for an NFT, filing a trademark requires precise wording of what is being authenticated, Eisinger and Munson-Ott said.

Helping to file these trademark applications is where local attorneys see business growth.

In 2020, approximately 10% of incoming requests for blockchain-related IP and patents were with Tysver’s firm, Forsgren Fisher McCalmont DeMarea Tysver. In the last six months of 2022, 60% of calls were for blockchain-related requests.

In 2021, Peder Jacobson, patent attorney at Christensen, Fonder and Dardi and Herbert, experienced inbound requests for blockchain-related patents. Patent and trademark attorneys help clients prepare applications, file on their behalf, and respond to application denials by federal offices.

– There is a lot of capital [in this space]because everyone has their own tokens and tokens are worth a lot more, so they have a lot more money to invest in legal services, which are generally not fun things to throw money at,” Jacobson said. “That’s when we saw the height of demand for legal services in my practice, which is patenting.”

At the crypto height between late 2020 and 2021, Seungwon Chung, who along with Balthazor works at Taft Stettinius & Hollister, experienced an increase in requests from clients wanting to properly record digital currency for tax purposes and in divorce settlements.

However, blockchain patents may slide into low importance going forward, Jacobson said. In this rapidly growing industry, creators want something that will block the competition to have an advantage.

“We have about 20,000 cryptocurrencies,” he said. “You have to invent something that will force all these cryptos to communicate with your patent.”

Although the value of NFTs has declined, the popular digital data item remains an important source of work for firms, local lawyers said.

“Copyright licensing has limits,” Tysver said. “If you don’t have the full understanding of it, it could lead to court,” Tysver said.