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NFTs and IP: What Owners And Sellers Need to Know

Blockchain technology is changing the world. With it has come a whole new category of investment opportunities, including non-fungible tokens—better known as NFTs—that've been fodder for headlines since breaking into the mainstream in 2021.

It’s the sky-high purchase prices of NFTs garnering most of the attention since they became popular last year. But behind these attention-grabbing transactions are the intellectual property considerations that NFT owners and sellers—brands included—must keep top of mind.

Trademarks 101

While it’s true that blockchain technology and NFTs have thrust trademarks into the 21st century, at the end of the day, a trademark is a trademark regardless of its application.

So, what exactly is a trademark? In simple terms, this type of IP is a design, symbol, word or phrase that serves to identify the source of a product—think Nike swoosh or the slogan, “Just Do It,” both of which clearly associate a pair of shoes or piece of apparel with the famed sportswear and lifestyle company.

Of course, understanding the intersection of trademarks and NFTs requires a quick explanation of these unique digital assets as well.

Fundamentally, an NFT is metadata about an asset that’s stored on a blockchain—a blockchain being a shared database that securely stores and verifies information. Where assets like an original Picasso, a LeBron James rookie card (which not too long ago sold for $5.2 million), or even a piece of real property are physical, NFTs are essentially non-physical certificates of authenticity in code form.

An infamous example is the first ever tweet sent by Twitter founder Jack Dorsey. That message, “just setting up my twttr,” published back in March 2006, can be viewed, free of charge, by anyone on the planet with internet access. But with the advent of blockchain technology, actual ownership of those five words—at least, digital ownership—became a real possibility. In fact, a few lines of code representing Dorsey’s message (along with its own blockchain-based digital signature that verifies the NFTs authenticity and ownership) was purchased just about a year ago for 1,630.58 ether, a cryptocurrency (like Bitcoin) that, at the time of the transaction, was worth $2.9 million.

Here’s the rub, when a digital asset, like Dorsey’s tweet, is purchased, the owner of the NFT doesn’t obtain any IP rights in and to the underlying asset, absent an agreement (licensing or otherwise) to the contrary. What this means is that any trademarks tied to an NFT remain in control of the trademark holder (presumably, the creator or brand). By way of example, when Mr. Dorsey sold his “just setting up my twttr” missive, the buyer who forked over millions in crypto for the tweet did not secure any right to use the highly recognizable Twitter logo—a protected trademark that can be seen prominently within the tweet.

While it’s true that individuals and entities selling NFTs aren’t typically relinquishing IP rights in and to their underlying creative works, this new market driven by blockchain technology is moving many to seek trademark registration of digital assets to protect their brands nonetheless. Nike has done just that by filing for trademarks with the intent to make and sell virtual Nike-branded sneakers and apparel. While this may seem far-fetched to some, the Oregon-based company has actually secured a patent for CryptoKicks, which tokenizes exclusive shoe designs. As explained in the patent, when a customer purchases a pair of CryptoKicks, which are actual shoes that can be sported around town, the buyer will also receive a digital asset unique to the shoe that comes with it. This NFT can move from buyer to buyer, which is a big deal given the thriving resale sneaker market and is central to NFT investment.

The Peril of Copyrights

The growing universe of NFT buyers and sellers must also understand the importance of copyright law and its application to this budding asset class. Long story short, permission must be obtained to use copyrighted materials in NFTs.

Creators wanting to sell NFTs that incorporate the work of others must tread lightly. In fact, the failure to secure permission from a copyright owner before including copyrighted material in an NFT could subject the originator of the digital asset to legal action and financial exposure in the form of copyright infringement litigation. This is particularly true in the absence of a defense premised on the doctrine of fair use.

For the uninitiated, copyright law encompasses a “bundle of rights” exclusively held by a copyright owner. These include the right to copy, perform, distribute, adapt or modify a work (or display it in public). Thus, anyone creating an NFT should nail down the legal right to use and sell any and all of its embedded elements. Creators can do so by way of licensing agreements that set forth important provisions governing minting parameters, the number of NFTs that can be created, and royalty payments, among other things.

The IP-Related Takeaway for Players in the NFT Game

Anyone interested in dabbling in NFTs should be mindful of all potential IP considerations. And for those holding creative assets, you’d be wise to seek protection by way of early registration of trademarks and copyrights before your IP find its way onto a blockchain. Either way, experienced IP counsel is a must.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.