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BY JULIE A. HOPKINS, ESQ., FOUNDER, HOPKINS IP

JORDAN KUCHTA, JD, UNIVERSITY OF MARYLAND

CAREY SCHOOL OF LAW 2022

BETWEEN THE ANNOUNCEMENT OF A FUTURISTIC METAVERSE, the proliferation of cryptocurrencies, and non-fungible tokens (“NFTs”), people are increasingly captivated with online-related goods and services. NFTs in particular are in the spotlight now. Celebrities flaunt their status by purchasing million-dollar NFTs to use as their Twitter profile picture and collectors display their NFTs in online art galleries. Companies are considering minting NFTs to promote and sell their products. Despite reports that the NFT market bubble will face a sharp decline in 2022, signs of investment and activity remain strong. Approximately 250,000 people a month use OpenSea, the largest NFT marketplace ,while companies such as Coinbase and Robinhood are joining the game.1 Further, in 2021, NFT sales surpassed $17 billion; up from $82.5 million in 2020.2 As with most emerging fields, the law has not yet caught up. As a result, there are many uncertainties about how NFTs should be treated with regard to intellectual property ownership and enforcement.

What is an NFT?

NFTs are unique for two reasons. First, they serve as an authentication tool of the particular asset the NFT represents, which allows anyone to confirm the ownership of a particular NFT.3 Second, ownership of an NFT increases social currency and status. NFTs are extremely popular for the authentication value they provide to buyers and sellers. NFTs exist on a specific type of blockchain depending either on how it was purchased or by preference of the seller or owner. Due to the decentralized nature of blockchain technology, it is immune to volatility. 4 NFTs can represent anything from unique digital artwork, to a poem, or even a video of LeBron James dunking a basketball. Each NFT has unique metadata that ensures it can never be duplicated and the token generally provides a failsafe authentication standard.5 NFTs are non-fungible, meaning unlike a $20 bill which represents the same nominal amount and can be reused and exchanged like any other $20 bill, no two NFTs are the same.6 The first known documented case of an NFT being created, or “minted,” was in 2014.7 Kevin McCoy minted his NFT “Quantum” which is “a pixelated image of an octagon filled with denoting circles, arcs or other shapes which share the same center, with larger shapes surrounding smaller ones and hypnotically pulsing in fluorescent hues.”8 The NFT “Quantum” is now on sale for $7 million. Most NFTs exist on the Ethereum blockchain; a form of cryptocurrency. However, other blockchains are beginning to utilize NFT technology, which may create competition for the dominant Ethereum platform and cryptocurrency.9 Due to the generally large file sizes of NFTs, once the NFT is minted, usually only the file to access the NFT is stored on the blockchain, and the actual NFT is stored “off-chain,” meaning it is on another website or platform that can handle larger file sizes.10 Thus, when you create or purchase an NFT, you are really creating or buying a link to the NFT and not the underlying digital asset.11

While the main value of NFTs is derived from its authentication qualities, many are now purchasing NFTs because of the status and social benefits. Thus, NFTs not only serve as an authentication tool that indicates NFT ownership, but they also represent the underlying asset. For example, the Nyan Cat NFT represents the underlying work: the Nyan Cat. The NFT’s code also demonstrates the ownership authentication of the Nyan Cat, which gives stability and confidence in the NFT market.12 However, the NFT only authenticates the owner of the NFT, it does not authenticate that the underlying asset is legitimate.13

One of the most well-known NFT groups is the Bored Ape Yacht Club (“BAYC”), which includes celebrity owners such as Jimmy Fallon, Stephen Curry, Eminem, Post Malone, and Steve Aoki.14 Many celebrities display their NFTs as social media profile pictures, while music producer Timbaland, plans to use the Ape NFTs in a virtual music group project, expanding the ways NFTs may be used in the future.15 More than 10,000 Bored Ape NFTs have been minted, with some being sold anywhere between $1.5 million and $3.4 million, demonstrating the wealth required to purchase such an NFT, as well as the exclusivity that comes with the purchase.16 There is a misconception that simply screen shotting someone’s NFT—such as a Bored Ape—would confer all of the IP rights to that individual. This is incorrect because the individual who took the screen shot would unlikely be able to sell the NFT for any real monetary value. Buyers would realize the seller is not legitimate by searching the blockchain ledger which keeps track of NFT ownership. Searching the ledger shows that Yuga Labs, the creators of BAYC, is the original seller. If the first known seller is another individual, it is likely illegitimate. While nothing prevents individuals from taking screenshots of NFTs, the overall status

and worth of the NFT comes with owning the original. There are also incentives for owning an original NFT. For example, Yuga Labs has unique perks for being a legitimate member. These include becoming a member of the Bored Ape Kennel Club, obtaining a mutant serum to create a Mutant Abe NFT, and special access to parties across the world in New York, California, Hong Kong, and the United Kingdom.17 As a result, ownership of certain NFTs, such as ones in the BAYC collection, denotes a level of wealth and status, which cannot be obtained by a few taps on an iPhone. Further, as the number of apes available decreases, the prices will likely continue to rise, creating more demand in the NFT market.

Copyright Implications

The explosion of the NFT market has created copyright ownership and enforceability concerns. Three primary copyright issues arise with regard to NFTs: (1) whether NFTs are protected by copyright; (2) whether creating an NFT of an already copyrighted work owned by someone else constitutes copyright infringement; and (3) whether an individual or company hosting an NFT platform is liable when displaying a counterfeit NFT.18 Federal copyright protection extends to “original works of authorship fixed in a tangible medium of expression” and includes things such as literary works, pictures, and sound recordings.19 A work is fixed in a tangible medium of expression when it exists for more than a transitory duration and thus sufficiently stable.20 A work may be considered fixed whether it is in a form that may be perceived directly or in one that requires a machine or device. For example, a book may be fixed in a printed paper format or fixed in a digital e-book file, viewable only with an e-book reader or computer. While copyright attaches the moment that the work is created and  fixed in a tangible medium of expression but is not enforceable until the work is registered with the U.S. Copyright Office.

As is the case in non-NFT related copyright cases, if an individual wants to copyright an NFT they minted, that individual likely needs to own the underlying copyright in the work. For example, if Sally creates her own unique digital painting of a chair with a mutant cat on it, copyright ownership attaches at the moment the painting is in a fixed medium, such as in a digital file. If Sally wants to mint her painting into an NFT and copyright it, she would likely be able to because she owns the underlying copyright in the painting. It is important to note, however, that no court has declared whether an NFT is actually copyrightable,21 although it is likely that an NFT would constitute either a copy or a derivative work and thus would be copyrightable. A derivative work is a work based on or derived from one or more already existing works. However, there are differing views on the copyrightability of NFTs. One argument is that NFTs simply represent code, and are therefore, not copyrightable. Nonetheless, there is a strong argument that the display and registration of the NFT on an NFT platform necessarily requires the replication of the digital asset, which could implicate copyright infringement if the individual does not own the underlying copyright.22 Additionally, if the NFT metadata describes the author or the work incorrectly, that could be a violation of the moral rights of the author.23 If Sally became inspired by a Google image search of a mutant cat on a chair and then created her own work, and then minted it into an NFT, she could face copyright implications. Sally would likely need to prove that her use was transformative, meaning did her work “add[] something new, with a further purpose or different character, altering the first with new expression, meaning or message.”24

Obtaining a copyright license to use another artist’s work is a practice that will continue to be important in the NFT space. Most NFT sales do not include a transfer of rights to the purchaser, meaning the original author will retain its rights.25 Two recent lawsuits regarding the Caked Ape project—a spinoff of the BAYC— highlight the need for explicit contracts because the rights were not defined before the NFT creation and sales occurred.26 Using the Sally example above, a wholly different issue would arise if Sally found the image on Google and decided she wanted to mint it and create an NFT for herself. In that instance, she does not own the underlying copyright in the work, and she has not created her own transformative work; rather, the artist who created that piece has ownership, and thus controls who can make copies or derivative works of the piece. Sally could be liable for copyright infringement if she used the Google image and minted it into an NFT, potentially  resulting in statutory damages if the original artist registered their painting with the U.S. Copyright Office.27 As a result, it is increasingly important for individuals who want to mint their own NFTs to either own the underlying copyright in the work, or, if they want to use someone else’s work, to obtain a license to avoid potential infringement claims. Lastly, there are important considerations regarding the growing counterfeit NFT market if an individual operates an NFT platform or if an individual’s work is wrongly promoted on an NFT platform.28 Individuals are pretending to be other artists and are minting the original artist’s work and attempting to sell it on NFT platforms. For example, someone pretended to be Derek Laufman, a well-known professional illustrator, and published his works as NFTs on Rarible, an NFT platform. After Laufman found out, Rarible took down the fake profile. However, under the Digital Millennium Copyright Act (“DMCA”), the host platform may still be liable to the original author if the appropriate “notice-and-takedown” procedures are followed.29 These cases are highly fact specific, but NFT platforms will continue to face fraudsters seeking to cash in on counterfeit NFTs. The responsibility will fall on the original authors to police their work and file a notice-and-takedown which could implicate liability for NFT platforms moving forward under the DMCA framework.

Trademark Implications

While copyright concerns dominate the NFT space, trademarks must also be considered. Trademarks protect brands which can include “any word, name, symbol, or device, or any combination thereof” used in commerce to identify the source of a good or service.30 Trademarks prevent consumer confusion by appropriately identifying and distinguishing one’s goods from goods of another source or origin. When an NFT is minted, it may contain a trademark owned by another without their consent. Inclusion of another’s trademark could cause confusion as to the whether the NFT originated from the trademark owner, whether there is an affiliation with the trademark owner, or whether the trademark owner sponsored or approved of the production of the NFT. As with copyright cases, obtaining a trademark license is the safest way to provide protection from future liability. Using another’s trademark without their permission has the potential to confuse consumers into establishing a connection between the NFT and the source of the trademark.

Minting and selling NFTs could potentially infringe on another’s trademark rights and in the case of famous marks, cause dilution. Although a court has not yet issued an opinion on how these principles would be applied to NFTs, it could be coming soon. In February 2022, Nike sued StockX, an online reseller, alleging, among several things, that StockX was committing trademark infringement by selling NFTs that contained images of Nike sneakers without its permission.31 Nike specifically alleged that because the company recently acquired RTFKT, which is a “digital art and collectible creative studio,” the company is moving into the NFT space, and thus, StockX’s unauthorized use of its trademark will lead consumers to be confused and “create a false association between the parties.”32 Nike also claimed that StockX’s unauthorized use of its trademark has diluted, and will continue to dilute, its mark.33 In its reply, StockX claims that its Vault NFT “are absolutely not ‘virtual products’ or digital sneakers,” and instead the Vault NFT gives an individual two choices: (1) it allows the individual to “retain digital possession of the Vault NFT and leave the authenticated physical good in StockX’s climate-controlled, high security vault”; or (2) it allows the individual to “take possession of the physical good from the vault at any time in which case the Vault NFT is removed from the customer’s digital portfolio and permanently removed from circulation.” 34

StockX emphasized in its answer to Nike’s complaint that one of the core benefits of possessing a Vault NFT is the easy transferability it gives consumers if they want to make future trades without “incurring transaction costs, delay, or risk of damage or loss associated with shipping physical sneakers to StockX and then to the ultimate recipients.”35 StockX also noted that it has a disclaimer of any association or affiliation with the product brands it lists on its website, and that its use is a nominal fair use, which is no different “than other major e-commerce retailers and marketplaces who use images and descriptions of products to sell physical sneakers and other goods, which consumers see (and are not confused by) every single day.”36 As a result, StockX argues that Nike’s lawsuit threatens the innovation of using NFT technology and denies any wrongdoing. Should the case reach judgement, and an appeal ensue, a judge’s opinion could give insight into how these cases may be argued and litigated in the future. This case could have major implications for other online platforms that act as intermediaries between a producer and consumers and offer goods that necessarily need to include the name of companies.

Conclusion

The rapid rise and progression in the popularity NFTs coupled with law’s failure to keep pace will inevitably lead to intellectual property disputes. At this early stage, it is uncertain how courts will apply trademark and copyright law to this new technology. Before entering the NFT space, it is important to understand the technology and the potential intellectual property implications of minting, purchasing, and displaying NFTs.

1 Daniel Van Boom, NFTs Explained: Why People Spend Millions of Dollars on JPEGs, cnet (Jan. 13, 2022), https://www.cnet.com/culture/nfts-explained-why-people-spend-millions-of-dollars-on-jpegs/.

2 Peter Allen Clark, Report: NFT Sales Exceeded $17B in 2021, Axios (Mar. 10, 2022), https://www.axios.com/nft-sales-17b-2021-report-de0c573c-7165-4a03-9266-dc441e34d28b.html.

3 Paul Bain et al., What You Need To Know: Intellectual Property and Non-Fungible Tokens, JDSUPRA (May 10, 2021), https://www.jdsupra.com/legalnews/what-you-need-to-know-intellectual-2201399/

[hereinafter What You Need To Know].

4 Id.

5 See Mitchell Clark, How To Create An NFT—And Why You May Not Want To, The Verge (Dec. 8, 2021), https://www.theverge.com/22809090/nft-create-opensea-rarible-cryptocurrency-ethereum-collectibles-

how-to [hereinafter How to Create An NFT].

6 See Mitchell Clark, NFTs, Explained, The Verge (Aug. 18, 2021), https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq [hereinafter NFTs, Explained].

7 The History of NFTs & How They Got Started, Portions: Perspectives https://blog.portion.io/the-history-of-nfts-how-they-got-started/ (last visited Apr. 3, 2022).

8 Id.

9 See Carly Chatfield, Move Over Ethereum: 5 Blockchains That Support NFTs, MUO (Dec. 23, 2021), https://www.makeuseof.com/ethereum-alternative-blockchains-that-support-nfts/ for an explanation of

new platforms breaking into the NFT market.

10 How To Create An NFT.

11 See Anil Dash, NFTs Weren’t Supposed to End Like This, The Atlantic (Apr. 2, 2021), https://www.theatlantic.com/ideas/archive/2021/04/nfts-werent-supposed-end-like/618488/ (“When someone buys an

NFT, they’re not buying the actual digital artwork; they’re buying a link to it.”).

12 See NFTs, Explained.

13 See What You Need To Know.

14 Andrew Hayward, The Biggest Celebrity NFT Owners in the Bored Ape Yacht Club, Decrypt (Mar. 27, 2022), https://decrypt.co/86135/biggest-celebrity-nft-owners-

bored-ape-yacht-club

15 Id.

16 Renuka Tahelyani, Top 11 Most Expensive Bored Ape Yacht Club NFTs, The Crypto Times (Apr. 4, 2022), https://www.cryptotimes.io/most-expensive-bored-apeyacht-

club-nfts/. Prices can change daily, but the average price as of April 2022 hovers around $700,000.

17 David Van Boom, Bored Ape Yacht Club NFTs: Everything You Need to Know, cnet (Feb. 8, 2022), https://www.cnet.com/culture/internet/bored-ape-yacht-clubnfts-

everything-you-need-to-know/.

18 See Mark Conrad, Non-Fungible Tokens, Sports, and Intellectual Property Law Issues: A Case Study Applying Copyright, Trademark, and Right of Publicity Law to

a Non-Traditional Ownership Vehicle, 32 J. of Legal Aspects of Sports 132, 137–43 (2022) (discussing copyright related issues regarding NFTs).

19 17 U.S.C. § 102(a).

20 17 U.S.C. § 106.

21 Conrad, supra note 18, at 137–38; see also Andreas Guadamuz, Non-Fungible Tokens (NFTs) and Copyright, WIPO Magazine (Dec. 2021),

https://www.wipo.int/wipo_magazine/en/2021/04/article_0007.html [hereinafter NFTs and Copyright].

22 Ghyo-Sun Park et al., NFTs and Their Copyright Implications, Lexology (Mar. 28, 2022), https://www.lexology.com/library/detail.aspx-

?g=58989db4-8e71-43db-97c4-d45b095ddf3d.

23 Annick Mottrt et al., What Are the Copyright and Trademark Implications of NFTs?, Lexology (Mar. 7, 2022), https://www.lexology.com/

library/detail.aspx?g=f4d3980f-d63c-464f-b1b7-e21f184e4584; see also 17 U.S.C. § 106A(a) (granting rights of attribution and integrity to

certain authors which allows an author to prevent others from using his or her name to depict visual art which they did not create).

24 Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 579 (1994). Courts have differed in their application of what constitutes a transformative

use, which would result in no legal liability, and it is usually an extremely fact specific inquiry.

25 NFTs and Copyright.

26 See Complaint, Nygard v. Whitley, No. 8:22-cv-00425 BL, (filed in C.D. Cal. Mar. 20, 2022); Complaint, Whitley v. Maguire, No. 2:22-cv-

01837 BL, (filed in C.D. Cal. Mar. 18, 2022).

27 Statutory damages can range anywhere from $750–$30,000 per infringement, and can reach up to $150,000 for willful infringement;

thus, copyright infringement can have a major impact for individuals financially. 17 U.S.C. § 504(c).

28 ee Bijan Stephen, NFT Mania Is Here, and so Are the Scammers, The Verge (Mar. 20, 2021), https://www.theverge.

com/2021/3/20/22334527/nft-scams-artists-opensea-rarible-marble-cards-fraud-art.

29 See 17 U.S.C. § 512.

30 See 15 U.S.C. § 1127.

31 Blake Brittain, StockX Strikes Back at Nike in NFT Lawsuit, Reuters (Mar. 31, 2022), https://www.reuters.com/legal/litigation/stockxstrikes-

back-nike-nft-lawsuit-2022-03-31/; see also Complaint, Nike v. Stockx, No. 22-cv-983, 2022 WL 340664 (filed in S.D.N.Y. Feb.

3, 2022).

32 Complaint, supra note 30, at 4.

33 Id. at 44–45.

34 Answer to Complaint at 3, Nike v. StockX, No. 22-CV-983-VEC (filed in S.D.N.Y. Mar. 31, 2022) (emphasis omitted).

35 Id.

36 Id. at 6–8.