Non-fungible tokens (NFTs) and intellectual property rights

NFTs and intellectual property

I had the pleasure of speaking at a webinar organized by the Canadian Blockchain Consortium on the topic of The Regulatory and Legal implications of NFTs. My focus was on non-fungible tokens (or NFTs) and intellectual property rights. Below are my speaking notes which set out my views on whether all the claims about NFTs are true, whether NFTs verify the authenticity of physical or digital assets, what do people buy when the acquire NFTs and what can they do with them, and do creators, sellers and buyers of NFTs need to worry about intellectual property issues. A link to the YouTube video of the webinar is below and is followed by a detailed bibliography prepared with the assistance of McCarthy Tetrault’s wonderful library/research staff on the topic of NTFs and intellectual property rights for those that want a more in depth understanding of this issue.

What are NFTs and what are they used for?

A non-fungible token (NFT) is a unit of data – a unique crypto token – stored on and managed on the blockchain. The blockchain is a decentralized ledger that tracks the ownership and transaction history of  each NFT.

An NFT is called non-fungible because, unlike a traditional cryptocurrency, each token is said to be unique.  According to Investopedia, non-fungible tokens or NFTs

are cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.

However, suggesting that these tokens are always fungible is somewhat misleading. A token may be unique and non-fungible if the content it contains or links to is unique and is not contained in another token. But that is not always the case. Many NFTs are minted and linked to the same content such that they are for all intents and purposes fungible e.g. one NTF associated with a limited edition artwork is the same as the other NFTs for the same limited edition artwork. These are for all intents and purposes fungible NFTs.

NFTs, in theory, have value because of scarcity, especially when coupled with some interest in desirable content and because the blockchain is believed to establish ownership and authenticity – what is known in the art industry as “provenance”.

They are also minted (or made) using a blockchain like Ethereum which enables numerous applications. They are powered by a smart contract code that can govern characteristics such as ownership, transferability, linking to an asset including a digital asset, setting out usage terms and restrictions, and allocation of proceeds in connection with transfers.

While NFTs can have all kinds of uses, they often leverage the “one of a kind” collectibles market. In the analog world, think of baseball cards, autographed items from some celebrity or sports professionals, rare coins, an autographed piece of art, and stamps. (I collect rare tech and IP cases from around the world, hardly the stuff for a popular NFT.) NFTs take scarcity and uniqueness into the digital realm.

In theory, the NFT purchaser acquires some digital asset, or some interest or license to a digital asset. NFTs are frequently associated with digital art and other images (such as a Jack Dorsey tweet which sold for $2.9 million or Beeple’s digital artwork which sold at a Christie’s auction for $69 million), music, videogame artifacts, and videos,

Sports “moments” or “collectibles” are a big hit such as MLB Champions which used to offer player bobbleheads that could be used in a game. You can now get Los Angeles Dodgers Crypto tokens bobbleheads. Another is NBA Top Shots which sells “Moments” of great plays.

But, there is really no end to what can be associated with the token. According to Investopedia,

NFTs can be used to represent real-world items like artwork and real-estate. “Tokeninzing” these real-world tangible assets allows them to be bought, sold, and traded more efficiently while reducing the probability of fraud. NFTs can also be used to represent peoples identities, property rights, and more.

Do NFTs verify the authenticity of physical or digital assets?

It is often claimed that NFTs provide “authenticity”, “originality”,  “ownership”, and “uniqueness” of the digital work, and as noted above, provide what is known in the art industry as “provenance”.

For example, SuperRare promotes itself and its CryptoArt as follows:

(i)           What is SuperRare?

SuperRare is a marketplace to collect and trade unique, single-edition digital artworks. Each artwork is authentically created by an artist in the network, and tokenized as a crypto-collectible digital item that you can own and trade.

You can think of SuperRare like Instagram meets Christies. A new way to interact with art, culture, and collecting on the internet!

(ii)         What is CryptoArt and how is it valuable?

Each artwork on SuperRare is a digital collectible– a digital object secured by cryptography and tracked on the blockchain. That’s just a fancy way of saying they’re provably scarce items that can be collected, and that hold value just like cryptocurrencies like ether and bitcoin. (emphasis added)

MLB champions promote Dodgers crypto token bobbleheads of players as follows:

Traditional collectibles are limitedcoveted, and valuable

Crypto Bobbleheads may not be physical, but they exhibit these same qualities because of the blockchain

The blockchain guarantees true digital ownership: each Crypto Bobblehead is provably uniqueand part of a set of just 40,000 in existence and will never be minted again

As Crypto Tokens, these cards may hold value similar to a collectible or artwork and can be auctioned, shared with others or saved. (emphasis added)

These claims sometimes confuse the token with the creative work, e.g., the artwork. NFTs can authenticate ownership of the token itself and the blockchain can record a history of transactions or dealings with the token and how the token is linked to the asset.

But, the NFT itself does not establish that the asset exists, that any rights are capable of existing in the underlying work, the ownership of the copy, or who owns the intellectual property rights or copyrights in the work. NFTs also don’t prevent multiple NFTs for the same work from being minted or stop non-NFT copies from being made available.

So the claim that NFTs provides “authenticity”, “originality”,  “ownership”, or “uniqueness” of the digital work is not really true or is at least overblown. Buyers should, just like when they buy an analog collectible, need to trust the source (are they buying a token from someone with Chrtisties’ reputation?) or need to do appropriate diligence.

What do people buy when the acquire NFTs and what can they do with them?

There is a lot of confusion here. It arises mainly because there are different uses and models for NFTs. Generalization here can be misleading.

In principle, people are buying a token on the blockchain. The token itself has little intrinsic value. The value is associated with the content that is linked to it.

In some cases the content is not stored on the token. Some tokens may store data for the content within the NFT code (on-chain storage). SuperRare, as an example.  For practical reasons, the token more frequently contains a hash that corresponds to a specific content file that exists somewhere else such as in a cloud (off-chain storage) and buyers get a URL that enables the owner to access the content, assuming the host continues to make it available.

Are people buying NFTs getting something of value?

In theory, the NFT purchaser acquires some ownership, interest or license to a digital asset. But the value and rights can vary.

Like all collectibles, the value depends on subjective elements. NBA Top Shots which sells Moments sums it up well in its legal terms:

Subjectivity of Moments. The value of each Moment is inherently subjective, in the same way the value of other collectibles is inherently subjective. Each Moment has no inherent or intrinsic value. Some collectors might prefer to have a Moment featuring a certain NBA player, while another might prefer an equivalent Moment featuring a different NBA player. Each NBA player can have more than one Moment associated with them, and those Moments will each have different characteristics.

Buyers may own the NFT, but don’t usually own the IP rights to the digital content linked to the token. Unless there is a transaction that complies with formalities under copyright laws for transferring ownership, the copyright including the right to make and distribute further copies is reserved to the copyright holder.

There is a somewhat unfounded assumption that a purchaser of an NFT owns it free and clear, like tangible collectibles that can be bought and sold freely. When a person buys a hardcopy of a piece of art, the person is able to deal with the copy as she or he pleases including reselling it, subject to copyright rules which can still apply to prevent some acts e.g. copying and distributing the work linked to the NFT. The person also has all of the rights of any owner of personal property which generally doesn’t constrain the marketplaces where the collectible can be shown off or resold. There are generally also no lingering rights including obligations to compensate owners when a work is resold (at least not in Canada). But this is often not true with NFTs.

Buyers often don’t even necessarily own the copy of the work associated with the token. Contract terms often govern what is acquired and frequently copies of the digital content are subject to restrictive licenses. For example, purchasers of NBA Top shots get the following rights:

  • Characteristics of Moments. Moments are comprised of a photograph of one or more NBA players, a video of one or more NBA players, and a set of statistics that are associated with one or more NBA players. Each Moment has a defined set of attributes – including scarcity – which help determine the value of the Moment.

  • Buyers “own the underlying NFT completely”. “This means that you have the right to swap your Moment, sell it, or give it away. Ownership of the Moment is mediated entirely by the Flow Network.”

But these rights are subject to limited license terms:  

(iv) Further User Ownership Acknowledgements. For the sake of clarity, you understand and agree: (a) that your purchase of a Moment, whether via the App or otherwise, does not give you any rights or licenses in or to the App Materials (including, without limitation, our copyright in and to the associated Art) other than those expressly contained in these Terms; (b) that you do not have the right, except as otherwise set forth in these Terms, to reproduce, distribute, or otherwise commercialize any elements of the App Materials (including, without limitation, any Art) without our prior written consent in each case, which consent we may withhold in our sole and absolute discretion;…

(v)  User License to Art.  Subject to your continued compliance with these Terms, we grant you a worldwide, non-exclusive, non-transferable, royalty-free license to use, copy, and display the Art for your Purchased Moments, solely for the following purposes: (a) for your own personal, non-commercial use; (b) as part of a marketplace that permits the purchase and sale of your Purchased Moments, provided that the marketplace cryptographically verifies each Moment owner’s rights to display the Art for their Purchased Moment to ensure that only the actual owner can display the Art; or (c) as part of a third party website or application that permits the inclusion, involvement, or participation of your Purchased Moment, provided that the website/application cryptographically verifies each Moment’s owner’s rights to display the Art for their Purchased Moment to ensure that only the actual owner can display the Art, and provided that the Art is no longer visible once the owner of the Purchased Moment leaves the website/application.

(vi) Restrictions on Ownership.  You agree that you may not, nor permit any third party to do or attempt to do any of the foregoing without our (or, as applicable, our licensors’) express prior written consent in each case: (a) modify the Art for your Purchased Moment in any way, including, without limitation, the shapes, designs, drawings, attributes, or color schemes; (b) use the Art for your Purchased Moment to advertise, market, or sell any third party product or service; (c) use the Art for your Purchased Moment in connection with images, videos, or other forms of media that depict hatred, intolerance, violence, cruelty, or anything else that could reasonably be found to constitute hate speech or otherwise infringe upon the rights of others; (d) use the Art for your Purchased Moment in movies, videos, or any other forms of media, except to the limited extent that such use is expressly permitted in these Terms or solely for your own personal, non-commercial use; (e) sell, distribute for commercial gain (including, without limitation, giving away in the hopes of eventual commercial gain), or otherwise commercialize merchandise that includes, contains, or consists of the Art for your Purchased Moment; (f) attempt to trademark, copyright, or otherwise acquire additional intellectual property rights in or to the Art for your Purchased Moment; or (g) otherwise utilize the Art for your Purchased Moment for your or any third party’s commercial benefit.

What can users do with an NFT in the absence of restrictive contract terms?

 Buyers will not own the IP rights including copyrights which gives the owner the right to authorize or stop users from exercising their exclusive rights. Many NFTs will be associated with content that is subject to copyright. The threshold is low for protection (generally a work must be “original” which in Canada requires some “skill and judgement” and in the U.S. some “creativity”) and copyright covers a wide swath of creative content including artwork, photos, video, game characters – the stuff most NFTs are currently associated with.

The IP rights vary from jurisdiction to jurisdiction but generally include the right to make copies, stream content like for video content, and in many jurisdictions to display, exhibit, and/or show (perform) them in public. In some jurisdictions copyright owners also have rights to authorize linking to content in certain circumstances.

Because NFTs and the content is digital, it doesn’t take much to potentially infringe a copyright absent permission. NFTs, for example, can be displayed in digital frames at homes or in galleries, online, or on social networks. They can also be physically printed. These acts likely implicate one or more copyright rights.

 In the absence of an agreement on usage, some rights would be implied. The test for the scope of implied licenses vary from jurisdiction to jurisdiction. There has been lots of litigation over this in other contexts. In general, at least in Canada, a term may be implied on the basis of custom or usage, or on the legal incidents of a particular class or kind of contract, or on the presumed intention of the parties where necessary to give business efficacy to the contract, or as otherwise meeting the ‘officious bystander’ test as a term the parties would say they had obviously assumed.[i]

Presumably there would be some right of display, but not necessarily a right to make or distribute copies, or show them in galleries. In some countries, like in Canada, exceptions for infringement such as for making incidental copies as part of a technical process may apply.

Owners of copies of tangible articles have the right to resell the articles to third parties. This right, for works subject to copyright is referred to as the “first sale” doctrine, and is either expressly part of copyright laws such as in the U.S., or has been recognized as a restriction the copyright owner cannot impose once a tangible copy of a work has been lawfully sold.

However, in many jurisdictions the “first sale” doctrine does not apply where a work is licensed or where the work is in a digital form and some reproduction is required to transfer it. The U.S ReDigi case involving the resale of digital music is a good example of a court finding there is no digital exhaustion right. The decision of the CJEU in the e-books case is another example. The law here raises interesting questions about the right to resell an NFT which contains or links to copyright content without the express or implied consent of the copyright owner.

Do sellers, and buyers need to worry about IP issues?

Both sellers and buyers of NFTs should have concerns about intellectual property issues.

I referred to copyright which generally applies to make it an infringement to do certain things without consent, express or implied of the copyright owner, if an exception to infringement does not apply. This includes making copies, publicly displaying or performing the work, or authorizing someone to do an infringing act. Generally, copyright is a strict liability statute so not knowing you are infringing is not a defense.

A variety of acts can get sellers into copyright trouble. For example, minting an NFT without rights clearances. If the NFT stores the work, that is making a copy. Making a copy of the work to host it in a cloud to link to the NFT can be infringing. Creating a mashup of content you don’t entirely own may be infringing, depending on the circumstances of how it is created and if it is commercialized. The Canadian copyright UGC (user generated content) exemption will not apply where the purpose of creating the mash-up is to commercialize it.

Some people may assume that because they own a copy of a work such as an artwork, that they can mint an NFT with it. But, the purchase of a work does not convey, or almost invariably does not convey, the copyright in it. Thus, the owners of a copy of a piece of art cannot mint and sell NFTs associated with it without the copyright owner’s consent. In one case, a listing was removed from OpenSea, one of the largest NFT marketplaces, because it was associated with a drawing for which the copyright was still owned by the artist’s estate.

If the NFT (or associated content is infringing) then acts done by buyers with the NFT will likely also be infringing. This includes any public display or making copies.

Reselling an NFT associated with infringing content can also be infringing in Canada if the seller knows that the associated work is infringing. Even linking via an NFT to infringing content might infringe copyright in some jurisdictions.

If the content is hosted off the token, copyright owners can send takedown notices (such as under the U.S. DMCA). Most hosts will remove the content, thus breaking the link to the content in the NFT.

Thus, where copyfraud or counterfeiting or unlicensed uses are involved, both buyers and sellers have risk exposures.

But, it doesn’t end with copyrights. Other rights can be violated, for example:

    • Trade-marks or logos: if an NFT is minted and sold and includes the unauthorized use of brands, or the NFT is advertised in association with an unlicensed brand, that can be infringing.
    • Personality rights: if someone mints an NFT and uses the image or likeness of a famous person, whether an actor, musician, artist etc without consent, that can lead to violation of personality rights, which can vary in scope around the world.
    • Moral rights: there are two rights (in Canada), the right of paternity (the right to be associated by name), and the right of integrity (a right to prevent certain kind of changes to a work that can prejudice the honor or reputation of the author). These can also be violated with certain minting practices e.g., someone mints an NFT wrongfully claiming her/she is the author or misrepresents who the author is, or makes certain types of changes to a work before minting it.

Sophisticated parties such as music labels and movie studios know how to do their diligence to clear rights and to verify authenticity and originality of content. But, many actors in the NFT spaces don’t have that experience.

Also, many NFTs are sold without warranties of any kind. NFTs, like crypto-currencies, will likely be treated as personal property. There are strong consumer protection laws and laws related to the sale of goods, but there are issues as to whether they apply to the sale of intangible goods. So, purchasing an NFT is often a “buyer beware” situation.

My remarks at the webinar did not address other issues associated with NFTs. For example, depending on the offering, there may be securities law issues, Denise Weeres spoke about this at the webinar. There are other issues including anti-money laundering  (AML) laws that need to be complied with. (Ana Badour partner and co-leader of McCarthy Tetrault’s Fintech Group would be a great source for information about AML and NFTs.)

YouTube video of the NFT webinar

The YouTube Video of the webinar event can be accessed here.

NFTs and Intellectual Property Bibliography

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Davis, Ryan; Could NFTs Help Illuminate The Murky Patent Market? May 19, 2021

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Kessler, Carly A.; NFTs Are Reshaping Artists’ IP Rights – Bloomberg Law  Mar. 24, 2021

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Yau, Gerrit; NFTs: Beyond Digital Art and Collectibles | Cassels.com

 

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[i] See, generally, M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. 1999 CanLII 677 (SCC).

 

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