This is the second in our series of articles seeking to dispel some of the confusion and common misconceptions that surround Non Fungible Tokens (NFTs) when it comes to ownership, intellectual property infringement, commercial issues, data protection, and regulatory risks.
In this article we first take a look at some of the issues to watch out for when it comes to the potential for copyright and trade mark infringement when minting and selling NFTs—whether as part of the initial drop or on the secondary market. We'll then turn to what rights holders can do to protect and enforce their rights.
Minting and selling NFTs
Why should I concern myself with IP?
The introduction of NFTs into the creative industries has raised a whole raft of potential issues. However more often than not these issues aren't being addressed, with businesses being launched and transactions concluded without the benefit of legal advice. We've seen the fallout when inadequately planned projects have collapsed—in public—to the detriment of all involved. We've also seen some very successful projects launched having taken a little time up front to address the likely issues and avoid the potential pitfalls.
If it were our project, we know which we'd prefer.
Do you have the rights in place to mint the NFT?
In our previous article (available here), we talked a lot about ownership—of the NFT, and the asset represented by that NFT. In particular, we referred to the basic principle of copyright in the UK that any original literary, dramatic, musical or artistic work created being first owned by the author, and being automatically afforded copyright protection without the need for registration if the author of the work is a national of, or the work is first published in, the UK.
However, if you are not the author it is essential to ensure you have obtained the necessary rights (whether through a licence or an assignment) in any asset to create your NFT. The fact that a work is in the public domain does not imply any right to use it for your own purposes.
If you are securing a licence to use the asset, you will need to consider the terms of that licence carefully to ensure it captures precisely your intentions for the NFTs. If in doubt, seek professional advice.
What are the risks around minting an NFT without the rights to the underlying asset?
If you use an asset to mint an NFT without securing the necessary rights to do so, you may infringe the intellectual property of the rightful owner of that asset. This is because the minting process will involve copying or creating a digital replica of the asset, which is an act reserved to the rights holder.
For a digital asset, it is often a fairly straightforward matter of copying the digital file. But, taking the example of a physical work for a moment, there may be several steps required to create the NFT, all of which may involve acts restricted by copyright law (and may also involve different authors).
What may seem to be a fairly simple project, such as creating NFTs based on an artist's physical works, can quickly become much more complex as you consider the interests of an increasing number of parties. For example, the subject of the artwork (e.g., in portraiture), or parties with interests in the subject, or those making intermediary copies between the original work and the final NFT.
This is especially true when the NFTs are being created for commercial purposes, as the original artist may have relied on certain exceptions in creating their work which are not available to those copying the work.
Ownership of the NFT, and even ownership of rights in the digital asset associated with the NFT, will not act as a defence to infringement of copyright in an underlying work, nor to a trade mark infringement claim.
Those minting NFTs using existing works or assets may find themselves subject to legal action for intellectual property rights infringement if it becomes known to the rights holder, and they need to be mindful of the consequences of a successful infringement action which can include damages or an account of profits. Even unsuccessful claims can be very expensive to defend if you cannot clearly demonstrate you have all necessary rights, so it's well worth getting it right from the outset.
What are the risks around selling an NFT without the rights to the underlying asset?
The initial drop of an NFT will constitute issuing or communicating copies of the underlying asset to the public, and therefore could amount to an infringing act with respect to copyright if you don't have all necessary rights.
Even if you didn't mint the NFT yourself—perhaps you acquired it on initial drop or on the secondary market—any subsequent sale could also constitute an infringing act.
If your NFT depicts an identical or similar sign to an existing trade mark then there is also the risk of committing trade mark infringement if you go on to offer that NFT for sale. This could be a rather complex claim because, unlike with copyright, the test for trade mark infringement concerns an assessment not only of the similarity of the respective marks but also whether:
(a) it is being used for similar goods or services and there is a risk of confusion amongst the relevant consumer; or
(b) it is being used for dissimilar goods or services but the earlier mark has a reputation such that the later (allegedly infringing) sign takes unfair advantage or is detrimental to the distinctive character or repute of the trade mark.
There may also be the risk of passing off if your NFT depicts a third party business or brand which has the potential to mislead consumers as to the origin of the NFT or imply some sort of association with the brand.
Protecting and enforcing your rights
Assuming you own copyright in a work which could be minted as an NFT without your consent, it is always worth bearing in mind the risk that you may need to prove that your work is 'original' (and therefore enjoys copyright protection) and that you own it.
The threshold of originality under English law is quite low. Essentially it must not be copied from elsewhere and its creation must have required a degree of "labour, skill or judgment". To show this, you should retain records of the genesis and timeline of your work where possible.
Protecting trade marks
Existing specifications of trade marks may not extend to digital assets, and we're seeing many organisations already seeking adjustments to existing trade mark registrations to cover digital assets such as NFTs. It may be worth considering whether to apply for wider coverage of digital assets if your trade mark specifications don't already cover it.
Notice and takedown procedures
We've had a lot of success in dealing with digital counterfeits such as NFTs using notice and takedown procedures based on the EU Electronic Commerce Directive and the US Digital Millennium Copyright Act (DCMA). This usually results in the platform operator delisting the infringing NFT.
Claims for infringement
Bringing any type of IP claim before the UK Courts can be expensive and time-consuming. There are specialist IP Courts that are designed to make the process more streamlined, but even these suffer criticism for not being cost-effective enough.
There isn't really much in the way of precedent in the NFT space so far, but the IP world is glued to the ongoing case Hermès v. Rothschild (being heard in the US District Court for the Southern District of New York). That case concerns Hermès' trade mark action against Rothchild's 'MetaBirkins' NFT.
The latter claims that his NFTs are pictures of fanciful, fur-covered handbags not actual handbags and Rothschild was attempting to comment on the meaning of luxury. Hermès disagrees, alleging that Rothschild is using the MetaBirkins name as an indicator of origin. The ultimate decision in that case may well influence the position taken on similar issues around the world.
The issues associated with NFTs, blockchain, distributed ledger technology (DLT), and digital assets are cross discipline—from regulation and technology licensing, to privacy and IP. Our market leading technology law team has extensive experience and expertise that can help you achieve your strategic objectives when it comes to emerging technologies.
If you have any questions about NFTs, please contact Chris Eastham at email@example.com.
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