Deep Dives
The U.S. Patent and Trademark Office and the Copyright Office announced late last year that they would seek comments in connection with a joint study of “intellectual property law and policy issues associated with non-fungible tokens (‘NFTs’).” The Offices called on relevant entities to shed light on “the current and potential future uses of NFTs in your field or industry, including the types of assets associated with NFTs (e.g., digital assets, physical goods, services).” They also asked stakeholders to “describe any IP-related impacts those in your field or industry have experienced in connection with actual or intended uses of NFTs” and to discuss the extent to which “current IP laws [are] adequate to address the protection and enforcement of IP in the context of NFTs.”
After extending the deadline for comment by a month early this year, the USPTO and Copyright Office received an array of responses reflecting various’ organizations and individual attorneys’ views on NFTs – and blockchain more broadly – and the opportunities and challenges at play. After combing all of the responses, here are (some of) what I think are the most important takeaways …
Primarily, many commenters address the impact of NFTs for companies across industries. In a comment submitted in February, Sheppard Mullin partner James Gatto, who co-leads the firm’s blockchain and fintech practice, states that “blockchain will be more impactful than the internet, and using NFTs and related technologies will cause tokenization of all types of physical and digital assets and other entitlements.” The International Trademark Association (“INTA”) echoes this sentiment, stating that “the potential future reach of NFTs is vast, building upon the uses already seen in the marketplace.” For instance, “Future digital assets – including artwork versions of well-known brands and brand products – can be expected as brands seek to find new ways to interact with consumers in the physical and digital worlds.”
Dapper Labs – the blockchain product-maker behind CryptoKitties, NBA Top Shot, NFL All Day, etc. – states that blockchain presents companies and creators with an array of “evolving” opportunities that “are not simply associated with [digital] artwork anymore.” Many “newer use cases” of NFTs involve “ticketing, membership passes, music, association with real-world assets, and supply chain management, among others.” In particular, such uses give companies the ability to: (1) “connect directly with their community of NFT holders without relying on central platforms;” (2) automatically generate secondary sale proceeds; and (3) drive “new revenue streams [from existing IP] and interact with fans in new ways,” including by “repurposing artwork to take advantage of these new digital markets.”
As for “one of the biggest potential expansions of the use of NFTs,” INTA says that this comes in the form of “the tracking and sale of authentic products, and prevention of counterfeit products.” While this is “a current use case in some scenarios,” the trademark group claims that “the use of NFTs to authenticate rare products can be expected to increase over time.”
Backing up a bit, one recurring point in many of the comments centers on how the Offices define an NFT: “A unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership (as of a specific digital asset and specific rights relating to it).” Gatto, for one, calls this definition as “inaccurate,” as “NFTs do not necessarily authenticate an asset.” By way of example, he says, “I can take a copyrighted image owned by a third party, mint an NFT and sell it. That NFT does not authenticate the image. It is an infringement. To certify authenticity, there needs to be some validation that the entity minting the NFT owns or has the relevant rights to the asset associated with the NFT. Most minting platforms do not do this.”
The American Intellectual Property Law Association (“AIPLA”) similarly states that “NFTs do not necessarily authenticate an asset,” and that “if the original minting of the NFT was performed using third- party IP without a license, then the NFT does not certify authenticity.” And still yet, trademark and domain management services platform Corsearch declares that there are, in fact, “limitations to using NFTs to document the authenticity of an asset” given that NFTs “only provide a record of ownership and provenance, and not necessarily a guarantee of authenticity.” While NFTs “can verify that a particular item is the original item,” Corsearch asserts that NFTs “cannot necessarily prove that the item is genuine or not a counterfeit.”
Ownership is also a thorny issue, according to commenters. Gatto maintains that the term “ownership” is often misused in the context of NFTs, making it particularly important to distinguish between ownership of the token and the license rights to a digital asset associated with the token. “Typically, a user does actually own the token and can resell it,” while in many cases, the token owner “only receives a license to the digital asset associated with the token.” As such, “It is important to be clear in the license what rights a user receives (e.g., a personal, non-commercial use license to display the asset or commercial rights) and any restrictions imposed by the license.”
AIPLA concurs that “NFTs do not necessarily represent ownership of the IP rights in an asset, [as] with NFTs, often the purchaser owns the token,” but the terms of the deal only “permit the purchaser to display the digital asset for personal, noncommercial purposes and the issuer retains all IP rights not expressly granted.”
Against this background and given that there is no universally accepted definition of NFTs, Gatto indicates that “some of the core concepts that should be woven into the definition would be: a cryptographic token, have a unique token ID, ownership of which is recorded to a blockchain (or other distributed ledger technology) (e.g., by association of the token ID with the public key of a wallet), where the token represents rights to one or more asset and/or other entitlement.”
At the same time, AIPLA encourages the Offices to reconsider the portion of the definition which states that an NFT “cannot be copied, substituted, or subdivided” because it “may not be accurate in all cases” given that the “types of NFTs that exist are evolving.” AIPLA points to one type of NFT, a dynamic NFT, “the metadata [for such an NFT] and what the token represents can change over time.” For example, “an NFT can be programmed so that the associated image changes from night to day, or from a sword in a game to another weapon.” (This type of NFT is at play in the MetaBirkins case, with counsel for Hermès arguing that Mason Rothschild can – and has – changed the digital file to which the METABIRKINS NFTs are linked to.)
Prompted with a question about whether current IP laws are adequate to address protection and enforcement of IP in the context of NFTs, most respondents agree that IP laws are not in need of a major overhaul to accommodate the development of NFTs. AIPLA, for example, claims that “IP owners have used trademark and copyright applications and registrations, as well as common law rights, to enforce against infringing uses of their IP by unlicensed, counterfeit, or otherwise infringing NFTs, and have worked with third-party technology providers to track infringing and counterfeit NFTs that make unauthorized use of their copyrights, trademarks, and trade dress.” (The USPTO, for one, is still working its way through NFT-related applications for registration and providing guidance along the way, while the UKIPO recently issued guidance on NFTs.)
Gatto agrees that for the most part, “Existing IP laws should be adequate to address the protectability of NFTs. Often, the NFT token is primarily a unique identifier and is not likely, by itself, to be protectable IP. However, the digital asset associated with the NFT is likely to be protectable under the same legal tests as other digital assets. The asset(s) associated with an NFT often include materials subject to copyrights, trademarks, and patents.”
On the copyright front, AIPLA notes that “IP owners have used – and can use – the DMCA process with U.S.-based marketplaces and other platforms to take down the infringing NFT,” but this is, of course, not a perfect remedy, as it “does not necessarily eliminate the NFT or the infringing asset associated with the NFT.” The American Bar Association (“ABA”) agrees, claiming that “take down remedies pursuant to existing DMCA practices are arguably less effective in the NFT environment when compared to content publication and distribution platforms before the popularization of distributed web3 technologies because an NFT is stored on the blockchain, either along with or linking to the copyrighted content, and so, a take-down request may not in every instance effectively stop the allegedly infringing use.”
“Even if a marketplace is willing to take down a listing for an infringing work,” ABA acknowledges that this is not necessarily a perfect remedy, as “that work may be outside the control of the marketplace for purposes of the DMCA or continue to pop up in another marketplace.”
As it relates to copyright infringement, Dapper Labs believes that “the current DMCA notice and take-down procedures work well to disable access to NFTs associated with infringing content from front-end interface websites.”
In terms of existing trademark registrations: Vorys’ Adam Sherman and Maureen Kelly state that it is “still unclear whether [trademark holders] can rely on their existing registrations for their core physical goods to claim trademark infringement or dilution targeting virtual goods in the metaverse, especially if they do not own a famous brand.” (This is what INTA argued in a recently released metaverse white paper; however, the MetaBirkins case provides some reassurance to trademark holders that “real world” rights apply.) “Trademark owners should have protection from counterfeiters in the metaverse whether or not they have current presence or immediate plans to operate in the metaverse,” the Vorys attorneys assert. “This is because consumers are likely to be confused by use of trademarks in connection with digital goods and services that are not connected with the source of the physical goods/services.”
To counteract what they see as an impending rise in unauthorized reproductions of the trademarks of “well-known and semi-well-known brands” (that may or may not be operating in the virtual world) on digital goods in the metaverse and in connection with NFTs, Sherman and Kelly suggest “a modified, more permissible use requirement for registrants of digital goods.” To qualify, they state that “applicants must already own an application or registration (1) for the same mark and (2) for the accompanying actual goods.”
Non-IP Laws: Dapper Labs – which is currently facing litigation over whether its “NBA Top Shot Moments” NFTs amount to unregistered securities – reveals that “the most critical legal issues hampering the development of NFT ecosystems often arise in areas other than IP law.” For example, it states that “NFTs continue to have an uncertain status under securities laws. In particular, under current securities laws, an NFT faces risk of being deemed a security if it relies on a central actor to make the NFT more valuable, or if the NFT’s utility is not fully functional at the time it is issued.”
An array of commenters pointed to ENS domains as an area of concern, with AIPLA, for instance, stating that blockchain domains “are not subject to ICANN or other centralized procedures for cancelling or transferring domains, [meaning that] the only way for the brand owner to obtain custody of the blockchain domain using its trademark may be to track down the owner of the NFT associated with the blockchain domain and negotiate with the owner.” This can be very difficult and “also incentivizes squatters to purchase infringing domains so they can charge the brand owner unreasonable prices,” the IP organization asserts, noting that “blockchain domains can be particularly dangerous in the hands of an infringer because they can link directly to a wallet that can be used to steal consumer funds by imitating the brand owner.”
ABA contends that the Anticybersquatting Consumer Protection Act (“ACPA”) “may have some utility with respect to infringing web3 domain names,” as if an NFT domain name is registered or minted with a bad faith intent to profit from the goodwill of a third-party trademark, “the trademark owner theoretically should be able to seek a remedy under the ACPA much like it could with any other infringing domain name.” But again, the ABA notes that “the nature of blockchain-generated domain names makes it very difficult if not impossible to force a transfer of an infringing blockchain domain name.” However, it maintains that “some web3 domain name systems work through the use of registrations instead of persistent ownership, so it may be possible to force a transfer of the registration and token to the trademark owner’s blockchain wallet.”
And for a few other issues/concerns raised by responding parties that are worthy of note …
First Amendment/Free Speech – INTA states that: “Establishing ownership of NFTs, particularly those that may incorporate real-world items, may be difficult in the future. Application of existing laws surrounding first amendment/free speech implications, derivative artworks, and more will need to either expand to this space or be modified to fit the realities and expectations of consumers in the NFT space. As companies seek to explore NFTs for authentication, the potential application and protection of those authentication mechanisms may be difficult, especially if a company is trying to do so through the trademark registration system.”
Resale – AIPLA says that “the applicability of the first sale doctrine to digital assets associated with NFTs and the impact on resale royalties” is an issue worthy of attention. ABA similarly cites secondary market issues, stating that “a further challenge is that the expectation of resale royalties or revenue sharing upon the resale of NFTs,” as there is “a widespread misconception that these secondary market rights are included in the structure of the NFT itself, when in fact they are added in a separate ‘smart contract’ that is layered on top and must be recognized and honored by the marketplace through which the secondary sale takes place.”
Computer-Generated Imagery – INTA further asserts that: “The creation of NFTs raises questions as to whether existing IP laws and regulations cover the creator’s claimed rights created through the blockchain technology. For example, some NFTs, like CryptoPunks, are generated algorithmically. Because they are not invented or created by a human being, they may not be eligible for design patent protection or copyright protection in countries that require human invention/authorship (e.g., the U.S.).”
Jurisdiction – INTA maintains that “a further challenge that has yet to be addressed is whether traditional courts will be able to enforce orders of infringement, injunctions, monetary damages, and jurisdictional controversies. NFT cases are so new that in addition to understanding the application of tests for IP infringements, unfair competition, and false designation of origin, the enforcement of judgments is an unknown for brand owners.”