Member Article

Although NFTs have existed for a number of years, and have changed the world of merchandise and art, it is worth considering how intellectual property (IP) rights interplay with this asset class.

This article considers NFTs in their component parts with a view to understanding how IP law, and specifically the areas of copyright and trade marks, apply. 

What is an NFT?

An NFT stands for non-fungible token and is a digital asset with a unique digital identifier, recorded on a blockchain. Consideration of how IP rights interact with NFTs broadly requires a breakdown of an NFT’s composition: (1) unique metadata, (2) the potential digital creative output appended to it and (3) the smart contract. 

1. Metadata: One element of an NFT is the metadata which is added, as a block of data, to the applicable distributed ledger (DL), which is in many cases a blockchain. An NFT’s metadata may contain unique characteristics such as its filename, its creator’s identity or pseudonym and, importantly, the unique identifier key or link to the digital asset that it represents (for example, its token ID). 
2. Creative Output: A common misconception is that its non-fungibility, or uniqueness, only derives from the creative output associated with the NFT – such as digital art, skins in a videogame or access rights to events. Instead, and importantly, an NFT’s identifier on the DL is what provides an NFT its non-fungibility. For example, where the NFT contains a photo, the photo itself is one constituent part of the NFT but the photo itself may be fungible as there may be identical copies of the photo, for example in digital and printed form. An analogy is commonly drawn with fine art, whereby 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. 
3. Smart Contract: When an NFT is minted (i.e. created), it is underwritten by a smart contract which governs the rights and restrictions of what the owner can do with that NFT. Once smart contracts are written they function automatically, so when predetermined conditions are satisfied  the smart contract will automatically execute. For example, on the assignment of an NFT, a smart contract may automatically create a deposit for the original creator to be automatically remunerated by way of a royalty.

What is copyright? 

In the UK, provided conditions of originality and fixation (the requirement that the work be recorded) are met, copyright arises automatically on the creation of certain types of work, usually in favour 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, the source code, object code and preparatory design materials in relation to it may also be protected by copyright as a literary work.  

Copyright lasts for seventy years after the death of the author and fifty years from the year of making of sound recordings and broadcasts. Broadly, the copyright holder has the right to prevent copying of that work. As such, copyright affords the author a 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) associated with an NFT. Copyright may also apply to the metadata and smart contract code of an NFT, although this is largely untested at law. 

One example of copyright in action is the illustrative case of the Spice DAO, or decentralised autonomous organisation. The Spice DAO was set up to fund 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 manuscript, intending to “produce an original animated limited series inspired by the manuscript and sell it to a streaming service”. 

Unfortunately for the Spice DAO, purchasing the manuscript does not transfer the copyright in the underlying Dune book from Frank Herbert’s estate to the Spice DAO. In fact, Frank Herbert’s estate had licensed the film rights to Legendary Entertainment which produced the 2021 film version. As such, the Spice DAO had no rights to create derivative works simply because they owned a copy of the unpublished manuscript. In this instance, copyright exists in the manuscript as a literary work and should that literary work be utilised to form the creative output associated with an NFT then that NFT owner must have the explicit consent of the manuscript 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 minters and purchasers. 

Copyright in creative output does not pass automatically on the purchase of an NFT under the majority of most standard forms of smart contract including the most common, the Ethereum standard ERC-721. Again, a parallel can be drawn with fine art: when an art collector purchases an original Banksy, the art collector does not obtain a right to reproduce the artwork and sell it to the general public - that right remains with the creator subject to the usual limitations under copyright laws.

In this instance, reproduction on an NFT would constitute copyright infringement and Banksy could pursue a claim. In order to transfer copyright in a work from the copyright owner, a written assignment of the copyright is required. This must expressly form part of the smart contract or be contained in a separate deed of assignment outside of the smart contract. Consequently, any use of the underlying digital asset that involves copying or commercialisation will likely form copyright infringement if the consent of the copyright holder has not been obtained. As such, the sale and resale of an NFT does not automatically transfer the copyright in the underlying digital asset unless a copyright assignment forms part of the smart contract.

What is a trade mark?

A trade mark designates the origin of specific goods and services. A mark is usually: words, stylised words or a logo, and in very limited circumstances can include slogans, the shape of goods, smells, sounds and colours.

In the UK, trade marks are usually registered to offer the maximum level of protection for brand owners. When registered, a trade mark provides its holder with a statutory right to the 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 trade mark infringement against any person who uses an identical or similar mark in the course of trade in connection with identical, similar or (in some circumstances) dissimilar goods or services which seek to ride on the goodwill of that brand. The owner of the trade mark must show that the unauthorised use has caused or is likely to cause confusion amongst consumers.

NFTs and Trade Marks

Minters have created NFTs which incorporate brands’ registered trade marks without owners’ consent. Minters should be aware of including third party trade marks without consent, which may result in trade mark infringement.

A high profile example in the United States features the Hermès trade mark that was used by Mason Rothschild in his ‘Metabirkins’ project, which included unauthorised use of the Hermès registered trade mark and design of the shape of their handbag. Rothschild used this to create, and subsequently mint, digital artworks that 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 example of a court decision for trade mark infringement in relation to NFTs. Read our article for a full analysis in relation to this case here.

In the European Union, Juventus FC won a ruling for trade mark infringement against NFT producer, Blockeras s.r.l.. The Blockeras NFTs comprised trading cards of the Juventus striker Christian Vieri, which featured the word marks ‘Juventus’ and ‘Juve’ as well as the design of the club’s infamous black and white jersey. Juventus sought a preliminary injunction to prevent Blockeras from selling those NFTs and the Rome Court of First Instance ruled that the unauthorised minting, advertising and sale of NFTs had infringed the trade mark rights of the registered owner, Juventus, and granted the club a wide-ranging injunction prohibiting Blockeras from engaging in any further production, marketing or sale of the NFTs as well as the digital contents associated with the NFTs. The court considered extensive online merchandising activity, and global recognition of the club’s marks given “the club is the most successful in Italian football”.

Juventus held registrations for its marks in Class 9 of the NICE classification of good and services for use in connection with ‘digital downloadable publications’, and the court determined this covered use as NFTs. This judgment was the first of its kind in Europe and marks a pattern of consistency, on both sides of the Atlantic, where courts are recognising that NFT creators are committing trade mark infringement when they use registered trade marks without the consent of trade mark owners.

Concluding thoughts

The development of digital assets  is an everchanging 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 goal of the jurisdiction of England and Wales becoming a global hub for digital assets, and in particular, for crypto-tokens and crypto-token systems. The EUIPO has also released guidance relating to applications to register trade marks for virtual goods and NFTs, but we are yet to see the UKIPO’s guidance on the topic. However, we do 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 release updates and advise clients according to the latest developments in this space.

 

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