• Tuesday, June 25, 2024
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The convergence of intellectual property and non-fungible tokens

The convergence of intellectual property and non-fungible tokens

Technology has come a long way in helping man attain a better standard of living. As the technological universe continues to evolve, newer innovations are introduced regularly and quickly become part of mainstream society. For instance, terms like “metaverse”, “blockchain” and “smart contracts” were virtually unknown and have gained notoriety in the last 6 to 10 years increasingly becoming part of modern language.

One of such new innovations, and the subject of this piece, is Non-Fungible Tokens, popularly referred to as NFTs. Reduced to a very simple form, NFTs are one-of-a-kind- digital certificates that help to link ownership to a unique digital (or physical) item such as a work of art, music, books, memes, or items in video games. In essence, they represent digital proof of ownership of these items, and they are registered on a blockchain. This guarantees their authenticity and makes them very easy to trade over the blockchain’s network.

While the concept of NFTs is still new and somewhat tricky to some, others have been able to take advantage of and gain massively from it. Former Twitter CEO, Jack Dorsey sold his first-ever tweet made in 2006 as an NFT for $2.9million and musician Snoop Dogg’s “Stash Box” NFT Collection was able to raise over $44million in just 5 days. On the Nigerian scene, lots of people are beginning to tap into the NFT space. Notable amongst them is musician/actor, Folarin “Falz” Falana, who on March 31st, 2022, launched his own exclusive NFT collection on the Binance NFT marketplace.

Along with this rapid rise of NFTs to prominence, has also risen the question of its link with Intellectual Property (IP), especially because the majority of NFTs on sale include works of art, images, or music, which qualify as creations of the human intellect and therefore subjects of copyright. The question of IP is one that cannot be waived. Questions concerning the transfer or otherwise of these rights when NFTs are sold, the extent of the rights transferred and the authenticity of “smart contracts” to transfer IP rights as opposed to standard legal contracts, keep arising even as the NFT ecosystem continues to grow and expand.

Against this backdrop, this piece aims to address the intersection between IP and NFTs beginning from the minting, sale, and transfer of these tokens down to possible case scenarios where IP Rights could be infringed upon, and lastly remedies in the event of such.

A foray into the world of NFTs
Non-Fungible Tokens, in essence, can be described as distinctive digital certificates which are inimitable and cannot be exchanged for another. This rarity, or artificial scarcity, if you will, helps to drive up the financial value of these items, thus creating an avenue to make wealth.

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In May 2014, the first NFT named “Quantum” was created. It is an art piece made up of an octagon filled with circles, arcs, and other shapes. Digital art pieces and artworks continue to dominate the NFT space. However, almost anything can be minted as an NFT. As long as the intended material, e.g., books, cars or real estate, can be represented in digital form either through a photo, video or scan, it can be turned into an NFT.

It was in 2021 that NFTs really shot into the limelight, grossing in a trade volume of over $40billion from major NFT marketplaces including Opensea, Nifty, etc. The process for minting and selling an NFT is straightforward and can even be carried out from the comfort of a smartphone via dedicated software applications while purchasing an NFT is carried out by self-executing, “smart” contracts which are written into the code of the blockchain.
The intersection between intellectual property and NFTs

The minting and sale of NFTs has in recent times raised major issues bordering on its link with IP. These issues include:

Type of Intellectual Property Right affected: There are in existence various types of IP rights, including copyrights, patents, industrial designs, trademarks, trade secrets, geographical indications, etc. But the minting and sale of NFTs particularly affect three specific areas of IP and they are Copyrights, Trademarks and Patents.

Copyrights are the most common form of IP Rights one encounters in the NFT ecosystem. This is because the majority of the items which are minted and sold as NFTS (including digital art, music, books, and pictures) are either literary or artistic works. For instance, the most expensive NFT sale ever was that of an artwork collage minted by a graphic artist nicknamed Beeple, which sold for close to $70million at an auction. In the same stroke, it is a literary work (being the hand-written script pages of the 1994 movie, “Pulp Fiction”) which was minted as an NFT that is at the heart of the dispute between actor, Quentin Tarantino and Miramax Studios.

As for Trademarks, it is not uncommon to see NFTs which embody the trademarks or designs of popular brands. For instance, Christian Dior and LVMH (the parent company of Louis Vuitton) have signed up to the AURA blockchain which allows customers to use NFTs bearing the trademarks of these companies to trace the authenticity of their luxury goods.

Lastly, in relation to Patents, there is a need to file for patent protection when one’s innovations touch on the blockchain and on the operation of NFTs. Sports company, Nike has already taken the lead in this regard by applying for and obtaining a patent for “generating cryptographic digital assets for a footwear.” Essentially, once a customer buys a pair of Nike sneakers, they are guaranteed to get “CryptoKicks” – a collectible NFT of the shoe in their digital wallet.

Transfer of the underlying IP Rights: The purchase of an NFT does not usually guarantee the transfer of underlying IP rights in the NFT to the purchaser. Instead, what occurs is similar to the everyday sale of physical copies of creative works like books, music CDs or artwork. In essence, the buyer gets only that singular copy of the work he/she pays for, while the right to reproduce, edit and distribute the work publicly still belongs exclusively to the creator.

What the smart contract – which automatically transfers the NFT from seller to buyer upon fulfilment of certain conditions– does is merely to show proof of ownership and it is not evidence that IP Rights have been transferred. These rights can only be transferred or assigned through standardized legal contracts. This means that the IP rights would still subsist in the actual creator of the work and not be transferred during an NFT sale.

Having regard to Jack Dorsey’s tweet mentioned above, the buyer of that NFT is unable to use or apply it on any merchandise or in print form, without Jack Dorsey’s permission as copyright in the tweet still subsists unequivocally in Dorsey, despite spending millions of dollars on it.

However, there exists an exception to the above rule such that where the creator of the work specifically agrees to transfer the underlying IP Rights in the NFT as part of the sale and includes this in the contract between the parties. For instance, the license for “CryptoKitties”, an NFT on sale on the Opensea marketplace, permits buyers to commercialize or reproduce the NFT as they deem fit, provided that such commercialization does not go over $100,000 per annum.

Infringement of IP Rights: Another key issue in the NFT space is IP infringement. A person’s work can easily be minted and put on sale as an NFT and this is sadly so because the available NFT marketplaces do not yet possess the capacity to sift between works for which due license/permission has been gotten and those for which such permission is lacking.

In recent times, there has been a spate of complaints from individuals and companies whose works have been fraudulently minted into NFTs without their knowledge or consent and then sold for profit. One such example is that of Corbin Rainbolt, a digital painter whose works were minted and posted on an NFT account without his consent. In the same vein, French company Hermes (producers of the luxury Birkin bags) found out that an artist had made NFTs out of their famous bags which he named “MetaBirkins” and put out for sale. The same situation repeated itself with Nike when an online reseller named StockX started selling NFTs of images of Nike’s limited-edition sneakers without permission and went as far as promising buyers that they would redeem the tokens for “physical versions” of the sneakers in the near future. Nike sued StockX in February and the matter is still pending in court.

Essentially, what this portends for holders of IP rights especially artists, authors, musicians and brands with famous logos and trademarks, is that it is crucial that their existent IP protection strategies should be expanded to include the NFT marketplace. For the existent NFT platforms also, steps ought to be taken to ensure that tokens which breach the IP rights of others are not allowed to stay. Opensea, for instance, maintains a notice and takedown policy for tokens that violate the copyrights of others.

Recommendations and conclusions
From Europe to Australia and Africa, the buzz around NFTs continues to grow. This is partly attributable to the fact that it represents an easy way for artists and creators to generate revenue from their efforts and gain recognition for their works. This is where IP Rights come in, to ensure that creators in this quest to generate revenue and gain recognition do not get ripped off in the NFT marketplace. By protecting the copyrights, trademarks, logos and patents of authors, IP rights ensure that everyone has a level playing ground and that the creators can reap the rewards of their creativity.

To prevent infringement and ensure the smooth running of the NFT ecosystem, the following recommendations are proffered. Firstly, minters and sellers of NFTs should tow the conscionable path by ensuring that they have the needed permission/licenses to make use of other people’s work which might be embedded in their NFTs. Secondly, it is the duty of NFT marketplaces to guard against such infringements by being prepared to pull down tokens that violate IP rights. Their stance on IP infringement should be strong and clear for all to see. Lastly, the responsibility still falls upon authors, creators, and famous brands to be vigilant about monitoring their IP by themselves or through third parties to prevent dubious actions of NFT spammers.

Uzoamaka Emerole is a Partner at Dentons ACAS-Law