Although NFTs (non-fungible tokens) have been around since around 2014, they hit the mainstream in early 2021, fetching amazing prices at auction. After Beeple’s March 2021 sale made headlines, the market remained hot for the remainder of that year. For example, the “Merge” series – a series of NFTs created by digital artist Buck – sold for $91.8 million in December 2021. The global NFT market was reported to be worth $41 billion in 2021 alone1—A figure that rivals that in the entire global fine art market. Even considering the potential slowdown in the NFT market due to saturation or the recent drop in cryptocurrency prices, there is no doubt that large sums of money (and valuable intellectual property rights) are at stake and could pose significant risks, especially given the rush-like nature of the market.
For starters, an NFT is a digital asset (think of a trusted, unique, publicly verifiable certificate) that is stored on the blockchain and usually purchased with cryptocurrency. When NFTs are created, or “minted”, they are listed on an NFT marketplace, such as OpenSea or Rarible, and are frequently sold or traded according to accompanying “smart contracts” – software cryptographically using the NFT that defines the terms of current and future transactions in that NFT. Smart contracts are self-executing, which means no middleman or central authority is required, and because they are stored on the blockchain, they provide a public and secure transaction history for the NFT. The NFT itself can be associated with an underlying digital or physical asset. In the previous example, the NFT and the smart contract are stored on the blockchain, and a digital media file—for example, a JPEG, GIF, video, or music file—can be stored separately, usually on a single central server or decentralized network.
Eighteen months since the NFT boom gained public awareness, we can now examine a large number of lawsuits and preliminary court rulings to help NFT market participants – buyers, sellers, trading platforms, investors and owners of intellectual property – assess these risks and consider whether, where and from litigation likely. These risks and considerations are heightened in the context of the current “crypto winter,” where cryptocurrency valuations have fallen significantly from previous highs. Here, then, are some of the key NFT-related litigation and intellectual property trends we’re seeing:
- Trademark issues are at the fore. Many of the early NFT-related lawsuits were from Lanham law and state law trademark cases. The number of such claims may relate to a lack of clarity, or confusion (pun intended), about the rights in the underlying business being transferred, granted or otherwise licensed in connection with the sale of NFT. The following are three typical examples of the types of trademark issues we’ve seen presented:
- in McCollum v. Opulous, et al.Grammy-nominated artist Lil Yachty has sued Opulous, a startup selling proprietary interests in musicians’ copyrighted works.2 Lil Yachty alleged that Opulous misinterpreted that she would sell his songs on its platform and used his image and trade name to raise $6.5 million in venture capital without compensation. He filed federal claims for trademark infringement and false representation of affiliation, among other things. Perhaps the most notable aspect of this NFT case is that it does not particularly raise new legal issues: but due to the fact that the products in question are NFTs, this seems like a fairly typical brand case. However, it would be useful to see how courts treat digital “goods” under federal trademark law, especially when some goods are expressive, transformative, or communicative works, and thus may involve First Amendment and copyright considerations.
- in Nike v. StockX LLCAnd the3 Nike is suing StockX, a company that operates an online secondary market platform for reselling various brands of athletic shoes and other consumer goods. Nike alleged that StockX was creating and selling NFTs using Nike trademarks without permission. In response, StockX argued that the NFTs were in fact “ticket claims” or “digital receipts” for physical shoes StockX stored in a climate-controlled, high-security vault. StockX confirmed that it was using the Nike trademarks only for descriptive purposes as permitted by the principles of first sale and nominal fair use. The case has now entered the discovery stage, and it remains to be seen whether the court will treat NFTs as products in their own right or as receipts for physical products.
- NFTs are frequently used to buy and sell digital artwork. But what is described as “technical” is up for debate, and that debate is likely to evolve rapidly as Web3 technologies advance and the metaverse expands. decision in Hermes International vs Rothschilds4 hints at what might come. There, Hermès, a luxury fashion company best known for its iconic “Birkin” handbag, sued Rothschild, who created a set of digital photographs titled “MetaBirkin” depicting an image of a blurred, faux-fur-covered Birkin bag and sold the images as NFTs. Hermès has sued for federal trademark infringement, false appellation of origin, trademark dilution, and internet takeover, among other allegations. In response, Rothschild moved to dismiss the complaint, arguing that his “Meta Perkins” are works of art and are protected under the First Amendment. The court applied Rogers Test and rejected Rothschild’s proposal, finding that the complaint sufficiently claimed that the use of the name “Birkin” lacked technical relevance to digital images and was clearly misleading.5 Accordingly, the court found that the Rothschilds’ use of NFTs to authenticate digital images did not make them a commodity without First Amendment protection.6 Important for prediction purposes, the court suggested that the analysis might be different if the MetaBirkins could be worn in a virtual world rather than just a picture of a handbag.7 Thus, there is a risk that as brands expand into the metaverse to offer wearable and usable products that more closely reflect “goods” in the physical world, the viability of First Amendment defenses may decline.
- Copyright and exploitation NFT. in Miramax, LLC v. Quentin Tarantino, et al. ,8 The film company sued Tarantino, claiming that the director’s announced plan to create NFTs for handwritten excerpts from Pulp FictionThe script and accompanying commentary would infringe Miramax’s copyright in the film. Tarantino advanced to rule the pleadings, arguing that the film was a derivative work of the script, and therefore, Tarantino reserved all rights to the latter unless expressly granted to Miramax. However, the parties have since submitted a Notice of Settlement, and dismissal papers are expected to be served soon, so the court will ultimately not have an opportunity to influence these specific issues in the context of this case. However, this case and StockX She points out that while NFTs themselves may be new, the core intellectual property concepts—the principle of first sale, nominal acceptable use, and scope of exclusive rights under 17 USC § 106—are the criteria by which such claims will be judged.
- Who owns the rights when NFT is stolen? While he hasn’t matured in litigation, actor Seth Green and Bored Ape Yacht Club NFT provide a cautionary tale for content creators, buyers and distributors. bored green monkey (Pike # 8398) is accompanied by terms and conditions that claim to grant NFT owners such as him a worldwide license to “use, copy and display” the NFT for commercial uses and to create derivative works. Green was developing an animated TV show called White Horse Pub About his monkey, he promoted the show at NFT VeeCon. But the theft of his monkey, Fred, in a phishing scheme and later sale to a seemingly reassuring third party raised a host of questions about whether Green still held the necessary intellectual property rights in Fred to go ahead with his show, and what rights the third party had been acquired. As a result of the transfer process. “I bought this Monkey in July 2021, and have spent the past several months developing and exploiting IP to make him the star of this show. Then, days before — his name is Fred, by the way — days before his world debut, he was literally hijacked,” Green said.9
- The US government takes notice. In June 2022, the US Patent and Trademark Office and the US Copyright Office agreed to launch a joint study on NFTs at the request of Senators Pat Leahy and Tom Telles, the results of which are due to be published next year and will seek to answer them. Questions about how NFTs affect rights transfers, licensing, and infringement.
As the fallout from the NFT boom continues and as the metaverse continues to expand, so will the legal and litigation risks around it. Content creators, licensors, investors, and other stakeholders will improve to continue to monitor these developments.
Learn more about the capabilities of Manatt’ NFT and the metaverse.
1 Natasha Daily NFTs swelled to a market of $41 billion in 2021 and are catching up with the total size of the global fine art marketInsider.com, Jan. 6, 2022 (Available at https://markets.businessinsider.com/news/currencies/nft-market-41-billion-nearing-fine-art-market-size-2022-1).
2 McCollum v. Opulous, et al. Case No. 2: 22-cv-00587-MWF-MAR (CD-ROM).
3 Nike v. StockX LLCCase No. 1: 22-cv-000983-VEC (SDNY).
4 Hermès International, et al. against Mason RothschildCase No. 1: 22-cv-00384-JSR (SDNY).
5 ID. in Dkt. No. 50, pp. 13-18.
6 ID. in p. 12.
7 ID. in p. 3, No. 1.
8 Miramax, LLC v. Quentin Tarantino, et al., Case No. 2: 21-cv-08979-FMO-JC (CD-ROM).
9 Sarah Emerson, Seth Green’s stolen boredom monkey has returned homeBuzzFeed News, June 9, 2022 (available at https://www.buzzfeednews.com/article/sarahemerson/seth-green-bored-ape-nft-returned).