Will intellectual property issues sidetrack NFT adoption?

The rapidly growing but loosely regulated nonfungible token (NFT) industry already touches many areas of human endeavor “from academia to entertainment to medicine, art, and beyond,” wrote recently two United States senators in a letter to the U.S. Patent and Trademark Office (USPTO) and the U.S. Copyright Office. The legislators were requesting a study to explain how this emerging technology fits into the world of intellectual property (IP) rights, including copyrights, trademarks and patents. 

It is an area that some say is marked by ambiguity and inconsistent application of the law, and sometimes indifference from the courts. “Many feel it is time for Congress to step in and provide the predictability needed for innovation to flourish,” Michael Young, partner at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, told Cointelegraph.

The joint study that senators Patrick Leahy and Thom Tillis requested from the agencies, due June 2023, has as background a recent slew of high-profile lawsuits — Nike v. StockX, Hermès v. MetaBirkins and Miramax v. Quentin Tarantino — that raise some sticky questions about NFT creation, ownership and dissemination.

In one case, an NFT was minted — without permission — featuring sneakers with a Nike Swoosh. In another, NFT-related digital images were created of Hermès’ Birkin handbags, covered in fur, not leather, but also unlicensed. In a third, a famed movie director created NFTs from a film he directed but didn’t own. 

A “wave of litigations has already begun for trademarks and copyrights, and courts are grappling with applying principles crafted long before the NFTs existed,” Anna Naydonov, partner and co-chair with Young of Finnegan’s Blockchain, NFTs, and Other Digital Assets industry group, told Cointelegraph.

“The lack of clarity surrounding patent subject matter eligibility for software remains a top concern for NFTs and other crypto-based innovations in both the U.S. and abroad,” said Young. Much the same could be said about trademark and copyright issues, especially the secondary liability of marketplaces like OpenSea, as well as metaverse virtual worlds and similar platforms where copyright infringement can occur, added Naydonov.

Still, not all agree that new legislation is needed. Some believe that government intervention in the U.S. and elsewhere would be not only superfluous but could stifle NFT adoption and innovation.

Is current law sufficient?

The real problem, as Gina Bibby, partner at Withers Bergman LLP, told Cointelegraph, could simply be “a lack of education about what NFT ownership really means.” A key thing that people seem to overlook is that: 

“Absent a contractual agreement — e.g., smart contract — that expressly includes intellectual property (IP) rights, purchasing an NFT does not convey any copyright, patent or trademark rights or even ownership interests in the physical world asset on which the NFT is based.”

Are there, arguably, some false ideas out there about NFT ownership and puzzlement over who can do what?

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“Yes,” Eric Goldman, associate dean for research and professor at Santa Clara University School of Law, told Cointelegraph. “In the offline world, the buyer of a painting or sculpture doesn’t automatically buy the associated copyrights.” That is unless the copyright is separately transferred, the artist or sculptor “can commercialize depictions of the art/sculpture and prevent the chattel owner from doing the same.” Even if the average consumer isn’t always aware of this, the U.S. Copyright Act expressly states:

“Ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied.”

Goldman sees “a lot of erroneous claims” being made these days to the effect that “that owning one piece controls the other,” i.e., the NFT owner controls the IP or the IP owner controls the NFT. People often fail to recognize that, just as in the physical world, a piece of art and the item’s copyright are often owned by two different people, so too “an item of IP and its NFT can and often will be owned by two different people.”

Growing pains of a new industry?

But, every new technology brings with it novel questions, and maybe the current debate is just another example of technology moving faster than the law. Will regulators and lawmakers struggle to keep pace with changes?

“It’s the opposite,” Joshua Fairfield, a professor of law at Washington and Lee University, told Cointelegraph. “The law is already in place and has been for hundreds of years. Property is one of the oldest disciplines of law. There is no reason at all that someone cannot own an NFT like we own cars, houses, stocks, or the money in our bank accounts — after all, each of those property interests is also an entry in a database of who owns what.”

The problem here, Fairfield continued, is that intellectual property law grew to overshadow personal property interests online, telling Cointelegraph:

“If I own a book, I own the copy, despite the fact that the book contains copyrighted material. But online, I don’t own an e-book because too many courts only recognize the intellectual property interest.”

That is beginning to change now, however, as courts recognize that intangible assets like domain names or NFTs are no different from any other kind of personal property interest that we want to own, added Fairfield.

In Goldman’s view, the problem here “is similar to the issues about domain name ownership we wrestled with a quarter-century ago.” A domain name can be a piece of personal property even if it’s not protected by trademarks, he said, predicting that “the non-IP rules developed to protect those domain name owners will help resolve NFT ownership disputes.”

Bibby, for her part, doesn’t agree that intellectual property law has grown to overshadow personal property interests online. “When intellectual property laws are applied in a thoughtful and measured way, other interests including personal property interests are likely to be respected.”

Confusion along these lines isn’t restricted to NFTs, of course. A decentralized autonomous organization (DAO), SpiceDAO, recently paid over $3 million at auction for the unpublished manuscript for the Dune film, intending to make an animated limited series about the book for a streaming service.

We won the auction for €2.66M. Now our mission is to:

1. Make the book public (to the extent permitted by law)

2. Produce an original animated limited series inspired by the book and sell it to a streaming service

3. Support derivative projects from the community pic.twitter.com/g4QnF6YZBp

— Spice DAO (@TheSpiceDAO) January 15, 2022

Then it learned, too late, that in the U.S. and Europe, buying a manuscript of creative work does not grant the buyer its copyright too. SpiceDAO was ridiculed on Twitter, among other places, for its oversight. As Andrew Rossow, a technology attorney and Ohio law professor, told Cointelegraph in February:

“The Spice DAO and Dune fiasco was a landmark in its own right that sends a very powerful message to everyone involved in the NFT space — creator or owner. The $3-million mistake that was made proved that intellectual property’s dominion in digital fine art is essential to its success and longevity.”

Asked about needed clarifications, whether through laws or other means, Fairfield answered that people need to know the owner of an NFT owns the copy of the photograph or artwork, “just like we own a car or a painting or a book, and can sell it and capture its rise in value regardless of attempted restrictions hidden in license agreements.” 

“Right now, when people put millions of dollars into an NFT, they’re being told they don’t even own the right to capture the rise in value. That makes investment unsustainable,” he said. What is needed is “recognition that ownership of an NFT is an ordinary everyday ownership of personal property,” added Fairfield, further explaining:

“It means NFTs pass to heirs after death. If an NFT is stolen, the owner can go to court to get it back. If an NFT is damaged or destroyed the owner can get its value from the person who did it. An owner knows that they will be able to capture the rise in value of the NFT if it turns out to be a good investment.”

Rising fraud could prompt a crackdown

Some believe that there are risks if governments get too aggressive with regulatory and legislative reforms in emerging technologies. “Government intervention into new technological arenas always creates a risk of misregulation that harms or hinders the development, especially when the technology is rapidly evolving or the government regulators don’t understand the technology,” noted Goldman. 

But, the status quo may not be sustainable here because at present, “NFTs are being used to perpetrate consumer fraud,” added Goldman. “When the fraud numbers are large enough, the government must intervene to protect consumers.”

This, in turn, could lead to over-regulation. “Unfortunately, the fraudulent angles of NFTs have a real risk of overshadowing the activities of the legitimate NFT players. The legitimate players are potentially going to be hurt by government crackdowns even though they were doing the right thing all along,” Goldman said.

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“Such risks always exist, which is why intellectual property and marketing lawyers in this space hope that the U.S. Patent and Trademark Office, the U.S. Copyright Office, the Federal Trade Commission and/or legislators work closely with key industry stakeholders to understand the main legal challenges and the technology behind NFTs, and come up with workable solutions,” said Young. Naydonov added that “regulation and legislation without input from the industry could set the U.S. back as compared with other jurisdictions.”

“People need to be educated”

Bibby, however, sees no need for wholesale legal reform. What is required instead is “a discussion about what we currently know about NFT ownership,” she told Cointelegraph. People need to be educated and understand that a basic NFT purchase brings with it no copyright, trademark or patent rights — unless express language declares otherwise. She added:

“Throughout modern history, laws have been tested by innovation and survived. The U.S. Constitution is a perfect example. The real need is to understand how existing intellectual property laws apply to recent innovations like virtual assets, including NFTs, virtual goods and the like.”

Moreover, decisions in several pending court cases, including Nike v. StockX and Hermès v. MetaBirkins, will probably be sufficient to “resolve many of these outstanding questions,” Bibby told Cointelegraph.

Meanwhile, the senators gave the USPTO and Copyright Office until June 9, 2023, to complete their study, but given the breathtaking speed at which NFTs and digital assets are being created and disseminated, the market itself might provide some answers before the agencies’ joint work ever sees the light of day.