NFTs and IP: Traditional Questions Recontextualized

Non-Fungible Tokens (NFTs) are the latest trend in the digital ledger technology space and present tremendous economic potential. While the intersection of NFT technology and the growing number of diverse industries utilizing NFTs is an exciting space to navigate, NFTs and their applications are relatively immature. With so many recontextualized copyright and trademark questions surrounding NFTs (discussed below), forming an intellectual property strategy that addresses these questions is essential for creating a path forward in this nascent NFT marketplace.

What are NFTs and Why are They Attractive?

NFTs have become increasingly popular with blockchain enthusiasts and entrepreneurs alike in recent months. This rise in popularity is underscored by the occurrence of multi-million dollar auctions of limited quantity or one-of-a-kind NFTs representing digital artwork, collectibles, music, videos, digital real estate, games, .jpgs, and .gifs. The most notable example to date is the $69 million sale of "Everydays: The First 5,000 Days" by Beeple.

Looking past the fanfare and innovative applications of the technology, NFTs represent unique assets. They are non-fungible because, unlike fungible (or interchangeable) tokens such as Bitcoin, which all have the same value, each NFT’s value is based on its unique properties and features. When an NFT is created (or “minted”) and then sold, the purchaser owns that NFT and can sell it as they would any other item they own. Significantly, NFT creators can program a resale royalty into an NFT that will automatically pay the creator each time the NFT is resold.

An NFT can only have one legitimate owner at a time, and the chain of ownership is automatically tracked and verified via an immutable, open distributed ledger—blockchain. This means the authenticity, provenance, and scarcity of an NFT can be validated, and therein lies much of the allure and interest in NFTs—the verified authenticity of a unique digital asset.

How Does Copyright Law Apply to Digital Assets?

A key concept to understand when entering the NFT marketplace is that a purchaser of an NFT does not automatically acquire the copyrights to the underlying work. It is possible to transfer rights to the underlying work via a self-executing smart contract when an NFT is sold, but a purchaser in most instances is merely buying an NFT resulting in ownership akin to buying a rare book—they own an autographed first edition copy of Lord of the Rings, but they do not own the copyrights to the underlying work.

In the United States, copyright law is governed by the federal Copyright Act of 1976, as amended (the “Copyright Act”), which provides for the protection of “original works of authorship fixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.”[1] Protected subject matter as provided in § 102(a) of the Copyright Act includes: (i) literary works; (ii) musical works, including any accompanying words; (iii) dramatic works, including any accompanying music; (iv) pantomimes and choreographic works; (v) pictorial, graphic, and sculptural works; (vi) motion pictures and other audiovisual works; (vii) sound recordings; and (viii) architectural works. Dependent on the type of work, a copyright owner enjoys the exclusive rights to reproduction, adaptation (i.e., preparing “derivative works”), distribution, public performance, and public display (as applicable).[2]

How does this apply to NFTs? Section 102(a) of the Copyright Act contemplates the protection of works fixed in “later developed” tangible mediums of expression, which encompasses many of the digital asset formats associated with NFTs because such assets can be perceived or reproduced with the assistance of a machine or device such as a computer or smartphone. Moreover, Section 106 of the Copyright Act provides protection for the type of subject matter that is often associated with NFTs (e.g., artwork, music, video, documents containing literary works, and computer programs).

Traditional Questions Recontextualized

Like many emerging technologies, NFTs present new legal questions and concerns, but traditional concepts of copyright law still apply based on the nature of the underlying works. As a result, many familiar copyright questions are being presented in an entirely new context. For instance:

• What happens if a copyrighted work is minted as an NFT without the copyright owner’s permission?
  • While NFTs are a new frontier in many respects, traditional legal frameworks apply to the underlying works minted as an NFT. This means anyone that mints an NFT for an underlying copyrighted work without the permission of the copyright owner could be liable for direct infringement because the reproduction, distribution, and/or public display of a copyrighted work are among the exclusive rights of the copyright owner.[3] Further, an infringing party could face criminal liability if the infringement is willfully committed and the other elements of criminal infringement pursuant to 17 U.S.C. § 506(a)(1) are present.^[4]
• Is it considered copyright infringement if you post a recently purchased NFT on social media?
  • Section 109 of the Copyright Act provides important exceptions to the exclusive rights granted to copyright owners under Section 106 in what is known as the “first sale” doctrine. Section 109(c) provides that the owner of a particular lawfully made copy of copyrighted work may, without authorization of the copyright owner, “display that copy publicly, either directly or by the projection of no more than one image at a time, to viewers present at the place where the copy is located.”[5] The analysis of whether a particular social media post fits within this exception to the exclusive rights of a copyright owner will depend on whether the copy of the underlying work is lawfully made, whether the display on social media is considered a display of “one image at a time,” and if there were any licenses granted to the purchaser.[6]
• Does the minting of an NFT have an effect on a fair use analysis related to the underlying work?
  • Fair use is a defense available when copyrighted works are used for criticism, comment, news reporting, or educational purposes. Courts determine whether this defense is available on a case-by-case basis by analyzing four factors: (i) purpose and character of use, (ii) nature of the copyrighted work, (iii) amount and substantiality of the borrowed portion, and (iv) the effect of the use on the market.[7] Courts often weigh additional factors and circumstances when analyzing fair use, but in modern times tend to place most weight on the “effect of the use on the market (value of the work)”. This is the general framework of a fair use analysis under Section 107 of the Copyright Act, but keep in mind that this analysis can be rather in-depth when specific facts are applied. It will be interesting to see if the tokenization of the underlying copyrighted work is incorporated into the analysis as an additional factor or circumstance considered by courts.
• How do immutable, self-executing blockchain-based “smart contracts” interact with copyright assignment and licensing agreements that “live” off-chain (not occurring on the blockchain)?
  • Smart contracts are comprised of conditional code statements primarily written in the Ethereum-based language known as Solidity. These contracts cannot be changed and live on the blockchain, so before preparing a smart contract, a person minting an NFT should conduct a diligence review to see if the underlying work is subject to any other licenses or agreements not present on the blockchain that would prohibit the minting of the NFT or limit the terms of the related smart contract.
• While different than copyright, do moral rights such as attribution and integrity apply to digital assets minted as an NFT?
  • The non-transferable moral rights of attribution and integrity (authority over the destruction or modification of a work) are available to the author of a work of visual art under the Visual Artists Rights Act of 1990 (“VARA”).[8] The Copyright Act defines works of visual art as:

“(1) a painting, drawing, print, or sculpture, existing in a single copy, in a limited edition of 200 copies or fewer that are signed and consecutively numbered by the author, or, in the case of a sculpture, in multiple cast, carved, or fabricated sculptures of 200 or fewer that are consecutively numbered by the author and bear the signature or other identifying mark of the author; or

(2) a still photographic image produced for exhibition purposes only, existing in a single copy that is signed by the author, or in a limited edition of 200 copies or fewer that are signed and consecutively numbered by the author.”[9]

This definition is in line with the unique or limited edition treatment often given to NFTs, but the question still exists as to whether the digital nature of a work of art minted in an NFT is covered by VARA.

What About Trademarks?

Like copyright law, trademark law also applies to NFTs, but it is important to distinguish the two. Trademark law differs from copyright law because trademark protection applies to the use of a mark in the course of business to identify the source or sponsorship of goods and/or services, while copyright protection applies to works of authorship fixed in any tangible medium of expression (as noted above), regardless of whether the uses of such works identify the source of goods/services.

At the federal level, United States trademark law is governed by the Trademark Act of 1946, or the Lanham Act, which provides for, among other things, the protection of trademarks used in interstate commerce.[10] Owners of a protected trademark are able to exclude others from use if such use would cause confusion in the marketplace.

A purchaser may buy an NFT that has a trademark associated with it, but the purchaser is not acquiring the right to use the trademark, unless such an acquisition is a condition to the NFT’s sale. This raises the question of whether the resale of an NFT with a prominently placed trademark is considered infringement. To answer this, the following elements of direct infringement need to be analyzed in context to determine whether or not infringement has occurred: (i) does the trademark holder asserting the claim of infringement own a valid and legally protectable mark; (ii) did the alleged infringer make unauthorized use of the mark in connection with the distribution, sale, offering for sale, or advertising of goods and/or services in interstate commerce; and (iii) is such use by the alleged infringer likely to cause consumer confusion in the marketplace.[11]

More Industries, More Questions

The above copyright and trademark questions provide a sampling of potential NFT related questions that will require extensive analysis on a case-by-case basis. We can expect more industry-specific copyright questions to arise as more industries leverage the NFT marketplace, such as, “How does NFT music royalty-sharing work?” and “Can an owner assign or license copyrights in an underlying musical work after an NFT is sold? If so, what is the appropriate licensing mechanism, and how are NFT resale royalties treated in an off-chain licensing scenario?” Analyzing these types of questions as the NFT space and the law develops will be integral to maintaining a valuable NFT portfolio and position in the market.

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[1] 17 U.S.C. § 102(a).

[2] 17 U.S.C. § 106.

[3] 17 U.S.C. § 106.

[4] 17 U.S.C. § 506(a)(1); The other elements are “(A) for purposes of commercial advantage or private financial gain; (B) by the reproduction or distribution, including by electronic means, during any 180-day period, of 1 or more copies or phonorecords of 1 or more copyrighted works, which have a total retail value of more than $1,000; or (C) by the distribution of a work being prepared for commercial distribution, by making it available on a computer network accessible to members of the public, if such person knew or should have known that the work was intended for commercial distribution.”

[5] 17 U.S.C. § 109(c)

[6] NTD – This analysis assumes that the NFT is of a unique underlying asset that has been purchased and is being displayed by the current owner.

[7] 17 U.S.C. § 107.

[8] 17 U.S.C. § 106A.

[9] 17 U.S.C. § 106A.

[10] 15 U.S.C. §§ 1051 to 1141(n).

[11] See, Lamparello v. Falwell, 420 F.3d 309, 313 (4th Cir. 2005); A&H Sportswear, Inc. v. Victoria's Secret Stores, Inc., 237 F.3d 198, 210 (3d Cir. 2000).

The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.