In recent years, the world has witnessed the rise of non-fungible tokens (NFTs) as a new and exciting digital asset. NFTs have gained significant popularity, particularly in the realms of art, collectibles, and gaming.
However, with the emergence of NFTs, several intellectual property rights (IPR) issues have arisen, necessitating a thorough examination of global legal cases for much clarity.
Non-fungible tokens (NFTs) have taken the world by storm, traded in the vast realm of cyberspace, harness the power of cryptocurrency, and are securely encoded using the technology of blockchain.[1] Artists, musicians, sports memorabilia firms, and publishers have embraced NFTs as a means to commercialize their creative works and leverage their intellectual property rights.
NFTs are unique digital assets representing ownership or proof of authenticity of a specific digital item. Unlike cryptocurrencies such as Bitcoin, NFTs are indivisible and cannot be exchanged on a one-to-one basis. They rely on blockchain technology, predominantly using Ethereum’s blockchain, to verify and secure ownership.
Intellectual Property Issues Surrounding NFTs
A. Copyright Infringement
The emergence of NFTs has raised intriguing questions about the relationship between these digital tokens and copyright laws, necessitating careful examination of various issues. To understand this intricate relationship, the three fundamental elements constituting an NFT, i.e., unique metadata, associated digital creative content and the underlying smart contract, need to be considered.
One significant concern revolves around the distinction between owning the copyright to the original asset and owning the copyright to the associated NFT. Does purchasing an NFT grant the buyer actual ownership of the copyright to the underlying artwork, or just a digital copy? To understand this, one must analyse the smart contract governing the transaction between the creator and the NFT buyer.
Under the Indian Copyright Act of 1957, artistic works include paintings, sculptures, photographs, and more. The Act grants authors economic rights, such as the exclusive right to reproduce and create derivative works.[2] However, when someone acquires a physical painting, they are buying the tangible artwork itself, without necessarily obtaining the rights to reproduce or sell replicas. The transfer of underlying copyright occurs only when the copyright owner explicitly confirms in writing their intention to transfer those rights.[3] In the realm of NFTs, the copyright and ownership of the digital asset typically remain with the original author, while the purchaser of the NFT generally receives the right to exhibit it, unless the smart contract explicitly addresses the transfer of economic copyrights. For instance, when Jack Dorsey sold his tweet through an auction on Valuables platform, the NFT was characterised as purchasing “an autographed certificate of the tweet” while further explicitly clarifying that such sale would not transfer the copyright in the tweet to the buyer. Thus, the buyer would not be allowed to use the tweet by, say printing it on a t-shirt, without Dorsey’s permission. In absence of any such agreement on usage of the NFTs, some rights would be implied, the scope of which would vary across jurisdictions. The Act, under Section 57, however, instils in author the right to claim authorship, to restrain or claim damages owing to any distortion, mutilation or modification of their work, notwithstanding the terms of the smart contract.
Another crucial aspect pertains to the rights granted to NFT holders, whether it constitutes an assignment of copyright or a mere license. In most cases, the copyright remains with the author, and the NFT holder receives a limited right to use, reproduce, and display the artwork for non-commercial purposes. The nature of the smart contract determines whether it operates as a license agreement or an agreement for assignment. An assignment involves transferring all rights associated with the intellectual property to the assignee, while a license authorizes the licensee to use the intellectual property under specific circumstances. Regardless of the scenario, the ownership of the original artwork remains with the author, while the NFT purchaser gains limited economic rights, such as the right to exhibit or use the NFT in a digital video game collectible. NBA Top Shot, for example, offers a template NFT license that grants the buyer a personal license to use and exhibit the associated art, along with a commercial license to create products showcasing the artwork, subject to a yearly gross revenue limit.[4]
Furthermore, the prevalence of counterfeiting poses a significant challenge in the NFT space, as the responsibility for verifying the authenticity of digital artwork lies with the intermediary facilitating the NFT listing. Determining the true identity of the wallet owner linked to an NFT can be challenging without advanced computer forensics. Unfortunately, cases have emerged where artists have discovered their work being counterfeited and uploaded to blockchain platforms, leading to the creation of fraudulent NFTs.[5] In such instances, a legal question arises: does the intermediary facilitating the sale of counterfeit NFTs bear responsibility for copyright infringement?
Under Section 51 of the Indian Copyright Act, copyright infringement occurs when an individual profits from communicating a work to the public in a manner that infringes upon the copyright. Consequently, intermediaries could potentially be held liable for copyright infringement by the original author in cases involving counterfeit NFTs. This would allow authors to initiate legal action within India’s jurisdiction against both the intermediary and the counterfeiter
B. Trademark Infringement
Owing to the rising popularity and significance of the metaverse and NFTs, there has been a notable surge in businesses seeking trademarks associated with such NFTs. For instance, the trademark holders like the National Basketball Association (NBA) have sought protection for their marks, such as “NBA Top Shot,” encompassing downloadable virtual goods and digital collectibles facilitated by blockchain technology and smart contracts.[6] An NFT can range from symbols and pictures, to signs, drawings, depiction of pieces of clothing, works of art, etc. These distinctive shapes of the NFTs can be protected as a trademark. Globally, regulatory bodies like the European Union Intellectual Property Office (EUIPO), the USPTO, and the UK Intellectual Property Office (UKIPO) have issued comprehensive guidelines which offer clarity and effective protection of these assets in the virtual landscape. In India, the Trademarks Act of 1999 governs trademark enforcement in India, granting brand owners the ability to prevent others from using their protected marks if it would cause confusion in the marketplace. Recently, in January 2023, the 12th edition of Nice Classifications was also brought into force which incorporates NFTs within Class-9, reflecting the evolving prevalence of trademarks in relation to NFTs and metaverse.
As discussed above, the sale of an NFT does not entail the transfer of underlying rights. A trademark infringement may arise when an unauthorised party mints, advertises, offers for sale or sells an NFT, without the owner’s permission. A question may arise as to whether the resale of an NFT prominently displaying a trademark could be deemed an infringement.[7] To assess infringement, one must examine the elements of direct infringement in light of the facts of the case and employ the triple identity test. This test examines whether the alleged infringer made unauthorized use of the mark in connection with the delivery, sale, or offering of goods, whether the trademark holder owns a legitimate and legally protectable mark, and whether the alleged infringer’s use of the mark is likely to cause consumer confusion in the marketplace. Furthermore, the challenge lies in identifying the infringer, as the immutability of blockchain transactions and the pseudo-anonymous nature of NFT ownership complicate the enforcement of intellectual property rights post-sale. Thus, determining how and whom to pursue for trademark infringement or passing off becomes a cumbersome task.
It is, further, essential to be mindful of not incorporating third-party trademarks into NFTs without proper consent as this increases the chances of potential trade infringement. An instance could be the case of Mason Rothschild’s ‘MetaBirkins’ NFTs which incorporated the registered trademark of Hermès while replicating the distinctive design of their renowned handbag, without proper consent. Here, the developer was initially warned to stop the project and labelled as a “digital speculator” who sought to get rich quickly. The New York Court, however, found this to be trademark infringement. Thus, if the minted NFTs include unauthorised use of brands or are advertised in association with an unlicensed brand that can be infringing, there is a violation of the asset owner’s rights. There might also be a possibility of trade secret infringement where activities of a transacting party of NFTs, contents of which include unauthorised confidential information, act in bad faith breaching the owner’s rights.
Further, cybersquatting is another significant concern in the digital landscape, involving the registration of domain names that correspond to trademarks or trade names with the intention of selling them at a profit. The Supreme Court of India, in the case of Satyam Infoway Ltd. v. Sifynet Solutions Pvt. Ltd., distinguished between trademarks and domain names.[8] In Yahoo! Inc. v. Akash Arora, the court emphasized the importance of similarity in actions for passing off, recognizing the likelihood of confusion and deception when domain names are nearly identical or similar.[9] Another case involving Morgan Stanley saw the National Arbitration Forum ruling against a cybersquatter who registered the domain “NFTMorganStanley.com,” ordering the transfer of the domain name to the complainant due to bad faith and potential public deception.[10] In India, the Trademarks Act affords trademark-like protection for domain names under Section 29.
C. Patent Infringement
Most companies protect the technical features underlying their products through patents. These patents enable NFT blockchain owners to license their technology for NFTs and provide consumers with authentic collectibles associated with the brand. For instance, the renowned shoe brand Nike holds a patent for creating “cryptographic digital assets for footwear.” This patent ensures that consumers can verify the originality of their purchased product while also possessing a digital collectible version of the shoe in their digital wallet (known as Cryptokicks). It is important to emphasize that for a patented invention to be eligible for patent protection, it must be unique and meet the criteria of novelty. Thus, listing NFTs that are associated with any such invention that is afforded protection under patent laws, would result in patent infringement. In India, however, the position of patent law with reference to NFTs is uncertain since NFTs are both an art and a computer programme. According to section 3 of the Patents Act of 1970, a software or computer programme per se are not patentable since they are not innovations.
Some players, like IBM, Jack Fonss, True Return Systems have taken steps to trade patents as NFTs which is believed to allow for an easy sale, trade, and commercialisation or monetisation of patents. Although tokenisation of patents has some benefits like greater transparency, simpler transactions, cost efficiency, etc., certain potential concerns are also raised with such representation of patent assets. The chain of title, which is of vital importance for patent assets, might face issues due to the free trade of encumbrances via blockchain technology. The question of their representation before various IP offices could be raised since conveyancing these assets on a blockchain may be void unless recorded. Another concern that may arise is that of confidentiality of royalty streams, licensing terms and patent purchase arrangements, which is often accorded importance in patent transactions.
D. Other Rights
Unlike the statutory laws, the regulation of the right of publicity laws also needs to be considered which would vary based on state jurisprudence. Despite the differences in the scope of protection, it is universally recognised that this right is based on the use of one’s name, likeliness, image, or “other indica of identity” for commercial or trade purposes. This right is morphed from a branch of tort of privacy. The issue regarding this right becomes more acute with the rise of online creations. An example could be the case of the use of “avatars” in electronic sports games where athletes’ images were used for these games without consent or payment. The court rejected these avatars First Amendment protection since the depictions were more “literal” rather than artistic. Thus, the creator of an NFT would require a commercial license to avoid violation of personality rights. In the absence of such an agreement, the courts would apply a combination of venerable common law, statutory enactments and constitutional principles. Another category of rights that might be potentially infringed is moral rights. These could be with reference to minting practices, i.e., it was minted wrongfully, or through misrepresentation of authorship, etc.
Global Legal Cases Clarify NFTs’IPR Implications
As the digital media landscape expands and Non-Fungible Tokens (NFTs) gain popularity, a range of intellectual property issues have emerged, requiring attention and resolution.
One prominent example that brought the concept of NFTs into the global spotlight was the sale of digital artist Beeple’s artwork titled “Everyday: The First 5000 Days” for a staggering sum of USD 69,346,250 at Christie’s auction house.[11] However, this high-profile case also raised concerns about copyright infringement. The artist, Mike Winkelmann (Beeple), was accused of including copyrighted images in his NFT artwork without obtaining proper authorization from the original copyright owners.[12] This incident emphasized the importance of acquiring licenses or permissions for copyrighted material when creating NFTs to avoid potential infringement claims.
CryptoKitties, one of the earliest and most successful NFT projects, faced patent-related challenges. The company behind CryptoKitties, Dapper Labs, filed for patents to protect their innovative NFT technology and blockchain-based gaming mechanics.
Renowned street artist Banksy’s works have frequently been subject to controversy, including concerns about authenticity. In a recent case, Banksy’s representative company, Pest Control Office Ltd, opposed a company’s attempt to trademark the name “Banksy” for various goods, including NFTs.[13]
Cryptopunks creators used distinctive punk-style pixel art, resembling the aesthetics of early video games.[14] The case explored the boundaries of fair use, as the creators argued that their work was a transformative use of existing pixel art styles.
Conclusion
In conclusion, NFTs have emerged as a transformative technology with the potential to revolutionize the management of intellectual property rights. While they offer vast opportunities for creators and businesses, important questions surrounding licensing, counterfeiting, and infringement must be addressed. As NFTs continue to evolve, it is crucial to remain vigilant and adapt legal frameworks to effectively navigate the intellectual property challenges they present. By staying informed and proactive, stakeholders can embrace the potential of NFTs while safeguarding intellectual property rights in this dynamic digital landscape.
FAQs
Q. How do NFTs impact intellectual property rights?
A: NFTs raise concerns about ownership, protection from unauthorized duplication, and fair compensation for creators. Balancing rights and addressing licensing, attribution, and infringement is crucial.
Q: What issues need attention in India regarding NFTs and intellectual property rights?
A: India needs to establish legal frameworks, clarify ownership and attribution, develop licensing mechanisms, and address ethical implications related to cultural heritage and traditional art forms.
Q: How can intellectual property rights be protected in the NFT space?
A: Measures such as strong copyright laws, transparent ownership registries on blockchain, accessible licensing, and awareness campaigns can safeguard intellectual property rights in the NFT realm.
Author: Our Partners Himanshu Deora (left) and Vatsal Gaur( Right)
Footnotes
[1] Robyn Conti & John Schmid, ‘What You Need to Know About Non-Fungible Tokens (NFTs)’ (Forbes Advisor, May 2021)
[2] Copyright Act, 1957, s. 2(1)(c)
[3] Copyright Act, 1957, s. 14
[4] Dapperlabs, ‘NFT License. Help Define What Ownership Means in Blockchain’
[5] Malwarebytes Labs, ‘NFTs explained: daylight robbery on the blockchain’ (Malwarebytes Lab, March 2021)
[6] US Application No. 88/550, 320
[7] NBA Properties, ‘NBA Top Shot’ (United States Patent and Trademark Office, July 2019)
[8] Infoway Ltd. v. Sifynet Solutions Pvt. Ltd., (2004) 6 SCC 145: AIR 2004 SC 3540
[9] Yahoo! Inc v. Akash Arora 1999 II AD (Delhi)
[10] Morgan Stanley v. Joseph Masci Claim Number: FA2104001940938
[11] Jesse Daimani, ‘Beeple’s ‘The First 5000 Days’ Sold To Metakovan, Founder Of Metapurse, For $69,346,250’ (Forbes, March 2021
[12] Quirion, Alison. “What is an NFT and why should archivists pay attention.” Archeota 14 (2021): 10-12.
[13] Rosan Slits, No Monkey Business: Banksy Trademark Not Filed In Bad Faith https://www.mondaq.com/trademark/1267970/no-monkey-business-banksy-trademark-not-filed-in-bad-faith
[14] Eric, Paul Rhodes, CryptoPunks and Copyrights: What’s All The Fuss About?