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Purchasing NFTs? Watch Out for These IP Issues

May 23, 2022, 8:00 AM

You created your crypto wallet account, joined an exchange, linked the two, and you are ready to start purchasing NFTs, or non-fungible tokens. But what does buying an NFT really give you, and does it transfer any intellectual property rights?

You can purchase an NFT of the Mona Lisa, but will you own anything more than a piece of digital art without any proprietary value? The short answer: It depends on the seller, the platform, the listing, and the terms of the smart contract (e.g., electronic instructions created when minting the NFT) that governs the sale of the NFT.

The rights that a token can convey range from mere ownership of the token itself, to a license to use and even monetize a creative work in a certain way, to full ownership of a work and the copyrights thereto, or a grant of other privileges. Buyers should understand what they are getting before making a purchase.

There have been well-publicized examples of NFT purchasers not doing so. For instance, a group purchased, for $3 million, an NFT displaying a book used in the failed development of a film adaptation of the novel “Dune” in the 1970s.

The group believed purchasing the NFT would give it the right to create derivative works, including a Dune animated series, and described its plans online. Only after the group completed the purchase did it discover that it owned nothing more than a tokenized version of the book, which transferred no intellectual property rights at all.

Don’t Presume Buying a Token Grants All Rights

To avoid the “Dune” scenario, unless a smart contract is created when the token was minted includes an intellectual property license or assignment—or the listing itself includes such an agreement—a buyer should not presume that purchasing a token grants more than the ability to display or resell it.

Like a reprint of an Andy Warhol painting, buying that reprint from a museum shop does not give its owner the right to create derivative works or claim copyright ownership over the original, but its owner is free to hang it on a wall or resell it. The same is true of most NFT purchases. If intellectual property rights are not expressly granted, typically through a smart contract, when purchasing an NFT, do not assume otherwise.

On the other hand, NFTs may be a great way to record intellectual property assignments, because the transaction is recorded on the blockchain, mitigating the chances of disputes over the terms of the agreement.

A related issue is how to know whether the seller of an NFT is really authorized to use the brand shown in the NFT or to sell the digital art or digital music on which the NFT is minted. Counterfeiting runs rampant online.

One platform called Cent—the same platform that sold Jack Dorsey’s first Tweet as an NFT for nearly $3 million dollars—has suspended trading temporarily while it revamps operations due to concerns regarding potential rampant minting of unauthorized or counterfeit NFTs. Similarly, OpenSea, the largest NFT marketplace, said in January that over 80% of the items minted for free on its system were “plagiarized works, fake collections, and spam.”

And this is not to mention the millions of NFTs that are minted based on an independent artist’s digital creation without the artist’s or brand’s knowledge. For example, designer Mason Rothschild recently created a “MetaBirkins” NFT series, which French luxury design house Hermès has alleged in a federal lawsuit infringes its trademarks for its Birkin bags.

Best Practices for NFT Buyers

As a best practice, an NFT buyer should consider the selling platform and seller. If one wants to purchase an NFT of a well-known brand or content creator, it is unlikely the brand or content creator is selling through an anonymous username on a major open platform like OpenSea.

In most instances, the brand or creator sells directly on its own closed platform or is likely to advertise on its own website or social media pages the name of the platform with which it has partnered. If that NFT of an image of a favorite movie character is not offered by the studio, the seller may not have rights to mint and sell the NFT, meaning it is worth little (at best) and may end up being deleted by the platform. To that end, brand owners and copyright holders should be aware that platforms are often willing to comply with valid trademark and copyright takedown requests.

There are additional difficulties when dealing with an independent artist or small brand, as one might have no way of knowing whether the NFT found on an exchange is offered by the original artist or is merely a copycat. In such a case, more diligence is often helpful.

For instance, artists’ profiles on NFT platforms often link out to their webpages or social media pages, which link back to their NFT listings, providing a way to attempt to confirm authenticity. For an NFT that does not do so, a reverse image search on a search engine may reveal the original source and help determine whether the copyright holder is selling the NFT. If all else fails, one can attempt to reach out to the artist directly for confirmation or retain an attorney to help.

The NFT marketplace continues to evolve, and with it, the legal landscape remains undefined in a lot of ways. Make sure to manage expectations and ensure understanding of all terms of the purchase before making a purchase.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Bobby Ghajar, an intellectual property litigation partner at Cooley LLP, counsels leading companies in trademark, trade dress, copyright, right of publicity and false advertising litigation. He handles high-stakes litigation matters for top brand owners around the world.

Marcus Peterson, a litigation associate at Cooley LLP, offers clients a full-range trademark, copyright, and advertising practice. He advises well-known brands in industries including software, social media, blockchain and NFTs, fintech, biotech, consumer products, gaming, and television and film.

Alexander Galicki, a litigation associate at Cooley LLP, focuses on complex business and intellectual property litigation, and governmental investigations. He represents companies, investors, and entrepreneurs in litigation in industries including software, biotech, consumer products, apparel, and television and film.