Introduction
Non-fungible tokens (NFTs) have revolutionised the way we establish ownership of digital and tangible assets. Though they have been around since 2017, NFTs have recently gained massive popularity, with sales skyrocketing to nearly $25 billion in 2021 alone. With such enormous sums being invested in the NFT market, it is essential for buyers to understand the nature of their purchase and the rights that come with it. This article will delve into the topic of intellectual property rights, specifically copyrights and trademarks, and their implications for the NFT industry.
What is blockchain technology?
Before diving into NFTs, let’s first explore the revolutionary blockchain technology that underpins them. At its core, blockchain is a distributed ledger that anyone can access, allowing for secure and transparent record-keeping. Data is stored in blocks that are linked together in chronological order, forming an unbreakable chain. If any changes are made to the information recorded in a particular block, the block is not rewritten. Instead, the change is stored in a new block, indicating that a particular data point has changed from x to y at a particular date and time. Unlike traditional databases, which can be vulnerable to tampering, blockchain is decentralised and distributed across a vast network of computers, ensuring the integrity and immutability of the data.
What are NFTs?
To fully grasp the complexities of intellectual property rights in the realm of NFTs, it is crucial to first understand what an NFT is and how it works. NFTs are unique digital assets that possess a unique identification code that cannot be replicated or copied. These assets can exist on any blockchain that has an NFT standard, such as Ethereum, and can be publicly authenticated through the use of blockchain technology, effectively certifying ownership of the asset.
NFTs can represent a wide range of digital and tangible assets, including art, music, videos, virtual real estate, collectibles, and can even “tokenise” certifications like land ownership and university degrees.
The process of creating an NFT is known as “minting”, where a unique token is generated in compliance with the standards set on the blockchain being used. To create and trade NFTs, users require a crypto wallet containing the necessary cryptocurrencies to pay for the transaction. For instance, if a user wishes to create an NFT on the Ethereum network, they will need to pay with Ether, the native token used by Ethereum for verifying transactions.
NFTs are usually traded on NFT marketplaces, such as OpenSea, as it is highly inefficient for users to seek out buyers and sellers of NFTs on an ad hoc basis. Users link their crypto wallets to the specific marketplace, and payment is made using cryptocurrencies. The purchaser of the NFT receives it in their digital crypto wallet.
Distinction between cryptocurrencies and NFTs
At this point, it is important to make a distinction between cryptocurrencies and NFTs. Cryptocurrency, simply put, is an ownership stake in an underlying network. Cryptocurrencies are fungible tokens, meaning that one unit of a cryptocurrency, such as Bitcoin, is fundamentally the same as any other unit of the same cryptocurrency. On the other hand, NFTs are unique digital assets and are not interchangeable. An NFT consists of a unique token identifier stored inside a smart contract, which governs aspects such as the verification of ownership of the NFT and management of NFT transferability. The combination of the token identifier and the address code of the smart contract is unique, making the NFT a unique original- “non-fungible”.
Smart Contracts
NFTs are created using smart contracts, which are self-executing contracts with terms of the agreement between the buyer and seller directly written into lines of code. When an NFT is created, the smart contract is utilised to establish the characteristic of the digital asset, including its name, description, and ownership regulations. The smart contract is then stored on the blockchain, enabling transparency and verification of the NFT’s terms. Additionally, smart contracts can facilitate the automatic payment of royalties to artists when their work is resold, offering them the opportunity to earn revenue from their creations beyond the initial sale.
In Cyprus, the legal enforceability of smart contracts is uncertain due to the lack of a legal framework and court rulings concerning their use. Notably, the Distributed Ledger Technology Law of 2021 includes provisions on smart contract capacity, applicable law, and their use as proof. Although this law has not been adopted yet, it may provide guidance on various definitions related to blockchain and smart contracts.
NFTs and Copyrights
There are currently no specific laws in Cyprus or the EU regarding NFTs and copyrights, therefore, the analysis is based on the application of general principles of copyright law. Copyright protection in Cyprus is governed by the Copyright and Related Rights Law of 1976 and its amendments, which comply with EU law.
Copyright protection in Cyprus is granted automatically, without any registration formalities, to original works of authorship, including literary, artistic, and musical works, as well as computer software and databases, as soon as they appear in some material form, such as written, audio recorded, or recorded in any way by electronic means. The copyright holder is granted a number of exclusive rights, including the right to reproduce, distribute, and communicate the work to the public.
The concept of intellectual property and asset ownership is frequently misunderstood. Many people assume that owning a physical or digital asset automatically grants them intellectual property rights, but this is could not be further from the truth.
In the real world, when someone purchases a physical artwork, the author of the work, unless otherwise agreed upon, remains the owner of the copyright. The same holds true for NFTs. In fact, although NFTs are often associated with digital assets, such as images, they function as digital certificates of ownership over those assets and are not the assets themselves. Buyers of NFTs often mistakenly believe that they have acquired the underlying work of an NFT and all associated rights. However, in most cases, what they have really purchased is the metadata associated with the work and simply the right to hold the NFT in their digital wallets and the right to sell it
The rights that come with the purchase of the NFT, also depend on an eventual license agreement, which can either be included in the smart contract or in the terms and conditions of a specific NFT project or the terms and conditions of the NFT sales marketplace, or from an individual agreement between the author of the artwork that constitutes the underlying asset and the owner of the NFT.
A key issue with NFTs and copyright lies in the potential for unauthorised distribution of copyrighted content. For instance, an NFT representing a digital artwork that is protected by copyright may lead to copyright infringement if someone creates an identical copy of the artwork without authorisation. Additionally, creating an NFT using copyrighted material, such as an image, without the copyright holder’s consent, would also amount to copyright infringement.
To protect their copyright, creators should exercise caution when creating and selling NFTs. They must ensure that they have the requisite rights to use any copyrighted content that is included in the NFT and should consider incorporating a licensing agreement with the sale of the NFT. Such an agreement would enable the buyer to use the digital content in specific ways while also safeguarding the copyright of the creator.
Buyers should exercise due diligence to ensure that they are not infringing on the copyright holder’s rights when purchasing an NFT. It is important that the buyers also carefully read the terms and conditions to understand the rights that come with the purchase, including whether the copyright to the underlying work is being transferred to them.
NFTs and Trademarks
Over the past few years, there has been a remarkable surge of interest in the metaverse and NFTs, leading to a substantial increase in NFT-related trademark filings both at the EUIPO and internationally.
The 12th edition of the Nice Classification, an internationally recognised system used to classify goods and services for trademark registration, now explicitly includes the term NFT in class 9 as “downloadable digital files authenticated by non-fungible tokens” effective as of 1 January 2023.
In its 2023 draft Guidance, the EUIPO has outlined its approach to NFT classification. According to the EUIPO, NFTs are unique digital certificates registered on a blockchain that authenticate digital items while being distinct from them. The EUIPO confirms that NFTs are proper to class 9, but notes that the term “NFT” alone is not acceptable. Instead, the type of digital item authenticated by the NFT must be specified. For example, “downloadable music authenticated by non-fungible tokens” would be an acceptable classification in class 9.
According to EUIPO’s Guidance, services related to NFTs will be classified in line with the established principles of classification for services. This implies that services will be classified according to the branches of activities outlined in the service class headings and their explanatory notes. Typical classes in which NFTs are filed, in addition to class 9, include class 35 (“provision of an online marketplace”) and class 41 (“entertainment services, providing online, non-downloadable virtual goods for the use in virtual environments”).
Landmark cases
Juventus FC vs Blockeras
Since NFT technology is still relatively new, there have been very few cases in Europe, as well as in other parts of the world, to test the limits of trademark protection in relation to NFTs.
A first-of-its kind decision on a European level regarding the use of NFTs and trademark infringement is the recent decision of the IP Chamber of the Court of Rome to grant a preliminary injunction in favor of Juventus FC over alleged trademark infringement.
In this case, Juventus FC discovered “Coin of Champion,” an NFT project launched by the blockchain-based platform Blockeras, during its monitoring activities. This project involved minting and marketing trading cards in NFT format that portray famous past and present sports players. One of the NFT trading cards was dedicated to the Italian football player Christian Vieri. On one of the NFT cards in the series, the player was depicted in his early stages of his career wearing the official uniform of Juventus FC and reproduced the club’s distinctive signs.
Juventus FC, as the holder of word trademarks “Juve” and “Juventus,” as well as a figurative trademark consisting of the signature black and white jersey with the straps, claimed that Blockeras’ conduct constituted trademark infringement because the NFTs reproduced the club’s trademarks without authorisation.
Blockeras argued that the injunction should not be granted because the trademarks in question had not been registered for virtual downloadable products and did not expressly claim “NFT” in the Nice classes for which they were registered. However, the Court disagreed with this argument and pointed out that the trademark registration, particularly for class 9, also covers goods not included in the Nice Classification and that are inherent to downloadable electronic publications.
Considering the above, the Court of Rome ruled that the NFT cards infringed the well-known trademark of Juventus FC and granted a preliminary injunction ordering Blockeras to stop minting and marketing the NFTs reproducing the trademarks of Juventus and to withdraw such NFTs from the market.
One possible interpretation of the inclusion of the term “downloadable digital files authenticated by non-fungible token” in the 12th edition of the Nice Classification might be that trademarks that do not include this in their current description may not be enforceable against NFTs. The ruling of the Court of Rome could provide brand owners with some reassurance regarding the interpretation of the scope of current specifications.
Hermès International vs Rothschild
Making a jump across the Atlantic Ocean, on 8 February 2023, a New York District Court reached a landmark decision at first instance and ruled in favour of Hermès in its trademark infringement lawsuit against the artist Manson Rothschild.
The case concerned the minting by Rothschild of a collection of NFTs titled MetaBirkins. Each of these NFTs features a unique image of a Birkin bag (one of Hermès’ most popular products) made of faux fur in a variety of colours and graphics. In response, Hermès brought an action against Rothschild asserting, among other things, trademark infringement, arguing that the unauthorised use of its intellectual property by Rothschild would cause consumer confusion regarding the origin of the MetaBirkin and the Birkin brand.
Rothschild argued that the NFT collection was a work of art and therefore protected by the First Amendment of the Constitution of the USA (right to free speech) and did not qualify as trademark infringement. Although there is protection afforded to artists, it was determined that the “free speech” defense did not allow Rothschild to give the impression that the NFTs were originating from Hermès.
Although this case originated in the United States, its result will probably influence the way upcoming trademark issues regarding NFTs are approached and settled. The most notable aspect of this case is how the traditional aspects of trademark law were successfully applied to this new technology. It is worth noting that this case may be appealed to the Court of Appeals, and the decision could potentially be overturned. All parties interested in NFTs should keep an eye on the situation.
How can you protect your trademarks in the NFT space?
Due to the growing number of NFT marketplaces, it is a significant challenge for trademark owners to continuously monitor and identify instances of unauthorised use. Additionally, the minting, sale, and trading of NFTs often occurs outside of traditional regulatory frameworks, and transactions are recorded on a public decentralised database that typically does not reveal the identities of the participants beyond their wallet addresses. This makes enforcement and tracking activities even more complicated for rights holders.
To reduce the burden and increase the likelihood of successful enforcement, trademark owners seeking to enter the NFT market should take proactive steps to strengthen their brand protection by promptly filing new trademark applications in key jurisdictions that cover NFTs.
Final Observations
NFTs and intellectual property are intertwined, and since NFTs are a relatively new technology, intellectual property law is required to adapt to this new landscape and come up with innovative solutions to address the challenges that come with it. Staying updated on future court decisions addressing intellectual property rights and NFTs is crucial. Such decisions can have significant effects and serve as guidelines for the industry.
In the meantime, creators, and brands, prior to entering the world of NFTs, should establish a clear delineation of what is permitted and what is not with respect to intellectual property rights. This, in turn, should be set out clearly in the terms of sale of the NFTs and/or in the smart contract. Brands should also evaluate whether their existing trademark registrations provide adequate protection for virtual goods and services associated with NFTs.