NFTs and Intellectual Property

In this episode of MoFo Perspectives, MoFo corporate partner and blockchain co-chair Dario de Martino speaks with MoFo IP partner Joyce Liou and Stanford Law School professor and MoFo of counsel Paul Goldstein about the emerging popularity of NFTs and the IP issues raised by them.

Transcript

Speaker: Welcome to MoFo Perspectives, a podcast by Morrison & Foerster, where we share the perspectives of our clients, colleagues, subject matter experts, and lawyers.

Dario de Martin: Welcome to MoFo Perspectives. I’m your host, Dario de Martino. I’m a corporate partner and co-chair of our blockchain practice. I am very pleased to be speaking today with my partner, Joyce Liou, who co-leads our trademark group, and Of Counsel, Paul Goldstein, the lead professor of law at Stanford University. Joyce and Paul, thanks for being with us today.

Paul Goldstein: Glad to be here, Dario.

Joyce Liou: Thank you for having us.

Dario de Martin: Today, we’ll be discussing non-fungible tokens or NFTs, and more specifically related IP issues. NFTs have taken the digital world by storm over the past few months, but before getting into some of the key IP issues with Joyce and Paul, I’ll just take a few minutes to provide an overview and try to distill the unique characteristics of NFTs. To those who, like me, always try to put things in context, NFTs first gained popularity as part of the crypto kitties craze in 2017. Crypto kitties allowed buyers to buy and trade digital versions of kittens. The market for those digital kittens rose steeply for certain rare items, and then quickly fizzled, but NFTs have remained, and their use has dramatically increased recently. Some in the cryptocurrency and entertainment fields have referred to NFTs as a game changer. So, what are these NFTs? Well, NFT stands for non-fungible token.

Dario de Martin: It is a form of digital representation of an asset that is stored on a blockchain-enabled database, which essentially allows anyone to track its providence, authenticity, ownership, or transfer. Imagine uploading a file to a blockchain. In theory, any digital content can be minted into an NFT, any file of a JPG, meaning digital images or an MP3, meaning digital sounds: think photographs, songs, tweets, memes, video games, items, or traditionally, a digital deed to real estate. Now, the beauty of NFTs is that they allow uniqueness of a digital item. And if these are non-fungible, because unlike other cryptocurrencies, such as Bitcoin or Ether, NFTs are not interchangeable with one another. Think of a dollar bill, right? That is fungible. Similarly, a single Bitcoin is fungible. It doesn’t matter what dollar bill or Bitcoin I have as long as I have a dollar bill or one Bitcoin.

Dario de Martin: So I think it’s important to stress that an NFT is a digital representation of an asset. It reflects ownership, but not the actual asset. It is not a content file in and of itself. It does not contain digital art or a video clip, which itself may have intrinsic value. Rather, the NFT is a unique cryptographic key contained within a digital token that verifies the corresponding content file as genuine and establishes a record of ownership as it is transferred on a blockchain. For example, a deed that real estate could be embodied and stored on a blockchain as an NFT, which could then be transferred from the seller of the property to a buyer as a means of recording the sale transaction and new ownership. So, NFTs present significant new opportunities for content creators, owners, and marketplaces, but they also present novel legal issues and risks from securities laws to consumer protection laws, data privacy, environmental laws, anti-money laundering, sanctions, and of course, intellectual property. Today, we’re going to discuss the key IP issues that come up when affecting a transaction relating to NFTs. Let me start with Paul. Paul, what are the key IP implications for NFTs?

Paul Goldstein: Sure, Dario. From a copyright perspective, the implications are straightforward. When you acquire an NFT that may refer to an image, let’s say you are acquiring not any rights in the image itself, but only ownership of the image. An overly simplified example would be when you go to an art gallery and purchase a work of art, a framed canvas, and bring it home, you have, at that point, acquired ownership only of the painting, and not of the underlying rights to exploit the copy, to distribute, to perform, display the painting. But that oversimplifies a bit because as you pointed out, the NFT itself does not embody the painting, but rather it refers to it. It’s sort of a certificate of title. So the more precise analogy would be if you purchased that painting from a gallery and said I wanna leave it with the gallery for safekeeping. It’s a very valuable painting. And the gallery gives you a receipt, a certificate of ownership. Once again, that gives you an entitlement to the image, but not to the underlying rights. You have that receipt in your hand, just as you would have that kind of claim through an NFT.

Dario de Martin: Got it. Thank you, Paul. So, if I understand this correctly, the work must be either a work created in a digital medium, right? Think about the digital collage consisting of 5,000 works by the artist known as Beeple, also known as Mike Winkelmann that recently sold for 69 million dollars or a digital image of a physical work, such as a painting or sculpture.

Paul Goldstein: That’s exactly right. An example of the latter would be the very popular sports clips, I think, coming out of the National Basketball Association, which would be a traditional copyrighted work, a non-digital work, that can itself be subjected to an NFT.

Dario de Martin: Got it. So, that means that an NFT can be tied to a physical object, but it’s not the object itself. I think it’s important to remind market participants of that very key distinction.

Paul Goldstein: Right.

Dario de Martin: Great. So, it seems like NFTs can be transformative in some respects, but are also not without potential risk. Everybody has heard about the market for NFTs recently really exploded, and some buyers have also shown an appetite for bragging about ownership rights of the NFTs associated with popular or even iconic works. But some content creators have complained that their work has been used or technically tokenized into an NFT without their permission. What happens if a copywriter work is minted as an NFT without the copyright owner’s permission?

Paul Goldstein: Once again, the copyright implications are straightforward. Motion picture companies will live in mortal fear of taking an image of for a set that has in it, some copyrighted work hanging on the wall. And if they go ahead and reproduce that image without permission from the owner of the copyright in the painting, or let’s say it’s a billboard appearing on a street in the case of the documentary, they are subject to a copyright infringement suit by the copyright owner. It would be no different for the NFT marketer that is doing the same with a copyrighted work.

Dario de Martin: Got it. Joyce, what do you think? Would you like to add anything?

Joyce Liou: Yes, thanks Dario. NFTs can open the door to other IP issues depending on the work or asset that’s being referenced by the NFT. For example, as Paul just mentioned, there’s been a lot of press coverage lately about NFT’s association with athletes, artists, and other famous people. One new NFT product is called NBA top shot, which is comprised of basketball player video highlights that are licensed by the NBA, and that can be traded by fans on an NFT platform. Tweets from well-known Twitter accounts have even been sold as NFTs. In this type of market, I think the most important thing to know is that if you want to commercially exploit the name, image, or likeness of another person, you need the consent of that person. Almost every state in the U.S. recognizes an individual’s right of publicity, which, by the way, is not limited to celebrities. There is an important caveat to this. You may be able to avoid liability if your use of somebody else’s name, image, or likeness is incidental or inadvertent. To infringe under the law, the use generally has to be made with an intent to profit from publicizing that person.

Dario de Martin: That’s very interesting. Thank you, Joyce. So it seems like name and likeness constitute a further set of rights that may be infringed by the creation of sale of NFTs, correct?

Joyce Liou: That’s correct.

Dario de Martin: What about trademarks? How do NFTs implicate these rights?

Joyce Liou: It’s the same analysis under traditional trademark law, just recontextualized with NFTs. The question is, does the use of the trademark cause a likelihood of confusion in the NFT market? In other words, will someone be confused into thinking that an NFT was issued or sponsored by a specific company or person when that is not the case? Now, when we’re talking about an NFT that leverages a person’s name, image, or likeness, we also have to consider a different claim. There is a potential claim for false endorsement in that context. Many people don’t realize that trademark law doesn’t just protect against confusion from traditional trademarks like brands and logos. It also applies to the use of a person’s name, image, or likeness to endorse a product. We call this an individual’s persona, and that persona is treated just like a trademark in this context. For NFTs, the key question is going to be whether this creation or sale of an NFT that invokes somebody’s name, image or likeness is likely to confuse customers into thinking that that person has sponsored the NFT when he or she has not.

Dario de Martin: Great. So because NFTs are a barely developed eCommerce, it is possible that some NFT holders may allege that they misunderstood the extent to which they acquire rights when they purchase a NFT. What are the potential claims that buyers of NFTs may have against marketplaces?

Paul Goldstein: Well, contract governs, and we have a fair amount of case law evolving out of the worldwide web generally on the enforceability of terms of use, and those terms would seem to apply here as well. Those are upheld, even though they’re in fine print, and very few people I know actually read them front to back. They are, nonetheless, binding terms, and I would imagine they would be enforced, unless, of course, they were overwhelmingly inappropriate.

Joyce Liou: I agree with Paul. I think the adage buyer beware applies with full force to NFTs. I would expect any legitimate NFT platform to have extremely detailed terms of use that make clear what exactly a consumer is purchasing with an NFT. And as we discuss at the beginning, at the end of the day, you’re rarely acquiring the underlying IP in the work, such as the copyright itself. The terms of use should limit what you can or can’t do with that work. And if the terms of use are clear, anyone that buys an NFT for an exorbitant amount of money really does so at his or her own risk.

Dario de Martin: Got it. It seems like the recommendation is for marketplaces to make sure to draft terms of use very carefully and for potential buyers to read those terms of use.

Paul Goldstein: Certainly before laying out 69 million dollars, I’d give it a careful read!

Dario de Martin: Yes. That would make sense to me. Great. This has been a great conversation. Is there anything else that NFT platforms or NFT marketplaces should pay attention to?

Paul Goldstein: You referred earlier to NFTs as being a game changer. And as we discussed, it’s not much of a game changer for IP so far, but I think NFTs, to some extent, and blockchain more generally promises to be a huge game changer for intellectual property law going forward. Just in the case of NFTs, the one point we didn’t discuss, is it’s not uncommon in the case of these NFTs for the purchaser of an NFT to promise upon resale of the NFT, to give a portion of the gain and value back to the original owner. This is something that has an equivalent in copyright type law. The artist’s resale right, which has always been difficult to enforce and has not been widely applied, hereby contract and using the genius of blockchain technology. This could be completely automated as all the sales will be traced. Even more generally and not too far in the future—

Paul Goldstein: —I think that the smart contract part of blockchain is gonna play a tremendously important role in the enforcement and management of copyrights. Just to give an example, one of the most common sources of copyright infringement litigation in the case of images today is where a textbook publisher has obtained licenses to reproduce images, photographic or other images in a textbook. There may be 5,000 images in that textbook, each with its own license, each coming from a different photographer or stock agency. Those turn into lawsuits when the publisher has failed to monitor the time. It may be a three-year license and the book is now going into a new edition in the fourth or fifth year, and they just haven’t tracked because there are so many rights to track. They haven’t tracked that particular one. That’s a copyright infringement. The beauty of blockchain is that it can monitor that and through those uses and through smart contracts can automatically let the publisher know when it needs to renegotiate a license. It could actually renegotiate the license on preset terms, but we can expect all of the friction associated with licensing to be reduced significantly in this and other kinds of copyright transactions by blockchain.

Dario de Martin: That sounds like a match made in crypto heaven!

Paul Goldstein: Yes, indeed.

Dario de Martin: Thank you, Paul. Well, this has been a very interesting conversation, so thank you, Paul and Joyce, and until next time.

Joyce Liou: Thank you.

Paul Goldstein: Thank you, Dario.

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