• Decasonic

Buying & Selling NFTs—What property and rights are you receiving?

By Maddie Fosberg, contributing author to Decasonic

Cameron Robinson, Partner, Croke Fairchild Morgan and Beres


In the last decade, the marketplace has undeniably metamorphosed with various new niches, innovations, and technology being developed and created every day. Digital assets are just one of the many developments that we have seen emerge in several different industries as many take steps towards embracing blockchain technology and exploring its benefits.


Seemingly, everything is being “tokenized.” Particularly, non-fungible tokens (“NFTs”) are creating quite the buzz among these industries and even the legal community. The novelty and usefulness when paired with digital creative works is exactly what has compelled collectors to flock to NFT marketplaces, some spending millions of dollars in recent years. Indeed, the marketable worth of an NFT is engrained in its capability to simultaneously evidence both ownership and authenticity of the represented asset.


When an NFT is “minted,” the smart contract establishes both the terms of the contract for the NFT transaction and maintains the record for all prior transactions. The distinct code of the smart contract, the terms of an affiliated website, or a separate grant or agreement from the copyright owner often detail the scope of ownership rights encompassed in the NFT, which generally do not include underlying intellectual property rights to the digital work contained in the NFT. Similar to purchasing a painting, you cannot reproduce the artwork contained in the painting without the permission of the copyright owner (often the painter who first fixed the painting on the canvas). Thus, absent additional terms included in the smart contract conveying the underlying intellectual property in the NFT to you as the purchaser, in order to reproduce the digital works or use trademarks contained in your NFT, you will still need the permission of the relevant owner of the applicable intellectual property rights or you risk infringement and possibly breach of contract claims. There have recently been several copyright and trademark disputes involving NFT creations appearing in U.S. courts, so it is important that a smart contract is established with transparency and a clear understanding of the rights you are receiving in the transaction, including intellectual property rights, if any.


Trademarks & NFTs


To date, despite the technologically advanced nature of NFTs, the application of trademark law to NFTs has seemingly been applied in a relatively traditional fashion. For example, in November of 2021, a preliminary injunction was granted in a suit 1 brought by Playboy Enterprises, Inc. in the U.S. District Court of Southern District of New York requesting that the defendants be precluded “from counterfeiting the Playboy Marks in connection with the unauthorized sale of fake Playboy Rabbitars non-fungible tokens… on www.playboyrabbitars.app and www.playboyrabbit.com.” The court ultimately ruled in favor of Playboy because the defendant’s websites featured “identical versions of the Playboy trademark” which were also “almost identical” to the authentic Rabbitar NFTs being sold by Playboy Enterprises, Inc. Thus, the injunction was granted requiring the defendant to cease production of the infringing Playboy Rabbitars NFTs and remove them from the defendant’s website. This case provides a foundational example for the methods of applying trademark principles to this novel crossover between technology and art.


Something to consider is that, as with traditional trademark litigation, the First Amendment can be a defense to theories of liability with NFT-trademark disputes. If the First Amendment is raised as a defense to allegations of NFT-related infringement, false designations of origin, or dilution, courts will likely weigh the intellectual property rights with those of the First Amendment’s free expression interests through the test established in Rogers v. Grimaldi. 2 The Second Circuit in Rogers held that the Lanham Act’s protection did not extend to “artistic works” when the use of the mark by the defendant was both “artistically relevant to the work” and not “explicitly misleading” regarding the material contained in the work or its origin. With the expressive attributes associated with many NFTs and the assets which they represent, the suitability of this defense is seemingly strong, and has even been raised by an artist being sued by the luxury brand and creator of the “Birkin” handbag, Hermès.


In Hermès v. Rothschild, 3 the defendant, Rothschild, is alleged to have infringed, created false designations of origin, and diluted the trademark rights associated with Hermès’ “distinctive design of the BIRKIN handbag” and the registered trademarks “BIRKIN” and “HERMÈS”. According to Hermès, Rothschild has subsequently attempted to “immunize himself from legal consequences of his appropriation of Hermès’ famous trademarks by proclaiming that he is solely an artist.” Hermès asserts that Rothschild is attempting “to get rich quick by appropriating the brand METABIRKINS for use in creating, marketing, selling, and facilitating the exchange of digital assets” specifically because the “BIRKIN handbag is a highly valuable asset in the physical world.”




The defendant’s website even displays one of Hermès infamous advertising slogans “NOT YOUR MOTHER’S BIRKIN”.


Rothschild filed a motion to dismiss the claims, asserting the First Amendment as a defense and arguing that his “MetaBirkins” series is simply a “unique, fanciful interpretation of a Birkin bag”, and that “trademark law does not give Hermès control over [his] art.” In a footnote, the court stated that the Rogers’s First Amendment arguments would not be applicable if the NFTs were attached to a digital file of a virtually wearable Birkin handbag in which case the “MetaBirkins” mark would refer to a non-speech commercial product. However, the court indicated that there was no evidence that Rothschild was actually selling virtually wearable bags under the MetaBirkin mark, nor that he would do so in the immediate foreseeable future. This is especially important for brand owners seeking to enforce trademark rights against virtual products (i.e., that are wearable and usable by avatars in the metaverse) bearing confusingly similar marks. Ultimately, the motion to dismiss was denied by U.S. District Judge Jed Rakoff, so the case is still ongoing. However, the outcome of this case could have significant implications for artists as well as trademark owners, including the steps taken by brands to police unauthorized use of valuable trademarks.


Copyright & NFTs


Generally, the purchase of an NFT only provides the purchaser with rights to that particular NFT itself, not the underlying copyright to the work in the NFT. Thus, an artist can create an NFT using their artwork and sell the NFT to you, but they can retain the copyrights to the artwork contained in the NFT. For example, if you were to purchase an NFT of a digital piece of artwork created by Banksy, while you would own that specific digital representation, absent terms in the smart contract to the contrary, Banksy would remain the owner of the copyright to the artwork. Although, this entirely depends on what rights are given in the smart contract.


An example of a smart contract which included the NFT’s intellectual property rights is

that of Andy Nguyen who purchased Bored Ape #6184 and two additional Mutant Apes including the NFTs’ underlying intellectual property. Using the intellectual property, the food entrepreneur took steps to capitalize off of his purchase further by opening the “Bored & Hungry” pop-up restaurant in Long Beach, California—the first ever Bored Ape Yacht Club restaurant. Nguyen advocates for the Web3 community and promotes the marketing potential for NFTs stating, “[o]ur job is to educate the public about this new future world. And show people that you can create a brand/business out of this IP. Taking away the stigma of, ‘It’s just a jpeg.’”


Here, blockchain technology enabled Nguyen and his team to easily obtain the rights they needed to commercialize the NFT that he had initially purchased, while also providing the copyright owners of the Bored Ape with the ability to more efficiently police and monitor who is using their intellectual property, both properly and illegally. This is just a small example of how the tokenization of intellectual property through NFTs for the purposes of licensing will be a massive growth sector in the global licensing market, already nearing $300B after a significant 4.5% increase from 2018 to 2019. An additional consideration is that, as we see more transactions move on-chain, often expensive and contentious items such as royalty payments, could become automatic and frictionless thanks to the unique benefits of blockchain technology.


Conclusion


Today, NFTs are making their way into nearly every field including music, art, film, and athletics. NFTs are being used to represent many kinds of assets, with even tangible assets, such as handbags and real estate, being tokenized. Vogue Business describes fashion NFTs as the “digital ‘twin’ of a real-life garment” and illustrates the hype which has persuaded many well-known brands to “join the NFT party.”


Whether you are a buyer or seller of NFTs, you are going to want to evaluate the terms of the smart contract governing your transaction which typically is found on the affiliated website hosting the transfer. With the rise of new technology and platforms, including Web3, NFTs, and the metaverse, practicing intellectual property attorneys in the digital age will need to be familiar with the mechanics of this evolving technology, its interaction with the law, and developments relating to its use to ensure adequate protection of their clients’ works and marks as the marketplace continues to evolve and expand. Finally, it is also recommended that those holding rights in trademarks and copyrights be cognizant of NFT developments and any potential unauthorized reproductions or uses of their marks and works in order to properly protect and exercise their rights.


1 Playboy Enterprises Int'l, Inc. v. www.playboyrabbitars.app, No. 21 CIV. 08932 (VM), 2021 WL 5299231, at *1 (S.D.N.Y. Nov. 13, 2021).

2 Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989). 3 Complaint, Hermes International et al v. Rothschild, (S.D.N.Y. Jan. 14, 2022).




Maddie Fosberg is a crypto-native compliance professional specializing in tech and entrepreneurship. More about Maddie, contributing author to Decasonic and recent graduate of Loyola University New Orleans College of Law, can be found here.


Cameron Robinson, Partner at Croke Fairchild Morgan and Beres, specializes in technology transactions, intellectual property licensing, and trademark law. More about Cameron's experience and pieces of work can be found here.