Brands and NFTs

The popularity of NFTs continues to grow. With more entities looking to create new revenue streams from NFTs, disputes are inevitable. One battle ground concerns IP rights in NFTs.  Here, we consider what brand owners can do to protect and exploit their rights in relation to NFTs.

What are NFTs?

NFTs or "non-fungible tokens" are a new form of digital asset. Using blockchain or other distributed ledger technology, they provide clear proof of ownership for digital or physical objects. Unlike "fungible tokens" - such as the cryptocurrencies Bitcoin and Ethereum - NFTs are not interchangeable. Sell one Bitcoin for another and you have exactly the same item. Not so with NFTs - they are unique and cannot be divided. Put simply, they can be seen as digital certificates of authenticity that provide additional information about the represented object and who it belongs to.

The development of NFTs has allowed creators and others to market a new form of digital asset. Whereas an artist would previously have had the ability to sell their original artwork and any prints, NFTs now allow them to sell digital forms of the artwork as well or instead. The use cases for NFTs are numerous: works of art, digital collectibles, video clips, play-to-earn gaming, virtual accessories such as handbags and trainers, and more.

Sometimes only one NFT for an object is sold – this was the case for the well-known "Charlie bit me" video. In other cases, several NFTs are created for an object. For example, adidas, in collaboration with others, offered 30,000 NFTs of a short video sequence named “Into the Metaverse”.

For sellers, NFTs offer new revenue streams and new ways of interacting with consumers. For consumers, NFTs offer a new form of asset or collectible. But what is it that is being sold? Can IP owners stop third parties selling NFTs for their products? How can IP owners commercialise their rights through NFTs? And how can IP owners strengthen their positions? Here we consider these issues, with a particular focus on brands. First, however, we consider what brands might subsist in NFTs.

What brands might subsist in NFTs?

Trade marks can consist of any sign capable of distinguishing the goods/services of one person from those of others. They can consist of words, symbols, colours, shapes, and more. They are typically protected in respect of specific categories of goods/services and confer on their owner certain exclusivity rights. The owner can stop others from using the same/similar signs for the same/similar goods/services if there is a likelihood of confusion. In addition, where a mark has a strong reputation in the market place, the owner might be able to prevent others using the same/similar sign on any goods/services. Their function, from the perspective of the trade mark owner, is to channel the goodwill associated with successful goods/services and to build up certain quality expectations as well as brand loyalty over time.

In addition to registered trade marks, there are certain rights that come into existence without the need for registration according to each country's national laws. In the UK, for example, the law of passing off protects goodwill arising from the use of names and other types of "get up". Similar protection is provided by German unfair competition law.

There is also scope to protect the appearance of the whole or part of a product and its packaging (including logos and ornamentation) as registered and unregistered designs at UK and EU level.

The name of an NFT as well as the underlying digital asset (such as a pair of luxury sunglasses, either real-world or digital) usually contain at least some of these types of IP right (as well other types such as copyright). In addition, IP rights are often used in the marketing of NFTs. (By analogy, see our article on IP rights in the metaverse here.)

It is hardly surprising then that brand owners are increasingly seeking to protect and exploit their key brands for NFTs (and other virtual products/services) and that disputes around the use of brands for NFTs are on the rise. For example:

• Ticketmaster, Clinique, Converse, Crocs and others have all filed trade mark applications for NFTs.
• Hermès filed trade mark infringement claims in the US against the creator of the MetaBirkin NFTs that depict "furry" versions - and use the name – of Hermès famous BIRKIN handbag.
• NFTs for the so-called “Bored Ape Yacht Club” or “BAYC” were sold for over USD 2.5 million, with both names being registered as trade marks in the EU and UK.

What is being sold with an NFT?

It is important to understand that an NFT is not the same thing as the actual product, image, video, or audio file itself. That file (ie the tokenised object) is typically not stored on the blockchain but merely represented by a link to the server where it is stored. NFTs are basically digital collector's items. They can be likened to the situation where a famous distillery releases a rare edition of its whisky with a limited number of bottles available that are (generally) sold not for consumption but to be added to a curated collection. NFTs have made this phenomenon even more interesting by adding an additional digital layer to the collection. A collector may now own either a physical bottle of the precious spirit or an NFT representing an image of the whisky, or an NFT representing ownership of the whisky, or any combination of the three. Any of these can easily cost tens of thousands of US dollars.

One key takeaway is that owning an NFT is not the same thing as being the owner of the asset it represents (although see here for more on NFTs and real-world assets). Moreover, IP rights in the underlying asset are generally not transferred along with the NFT. For example, an NFT consisting of a digital artwork or tweet rarely includes the IP rights in the artwork or tweet itself. This means that it is usually not possible for the purchaser of an NFT to copy or commercially exploit the tokenised object in any way eg to sell products containing the artwork or tweet. It also means that the purchaser of an NFT generally does not have the right to prevent the owner of the IP from exploiting it or to exclude others from accessing the tokenised object. By way of example, the NFT “Into the Metaverse” mentioned above can be accessed by anyone visiting the adidas website. Sometimes, the underlying asset is removed from circulation. For example, there was a promise that the "Charlie bit me" video would be removed from YouTube with the sale of the video as an NFT. But, more often than not, the underlying asset remains readily accessible.

Before acquiring an NFT, it is therefore important to be clear what rights are included, if any, and how the underlying asset or IP might otherwise be exploited. (If IP rights are being transferred with an NFT, a written agreement is usually required (which may need to be recorded at the relevant IP Office).) Where the underlying asset is a digital file, it is also important for the purchaser of the NFT to ensure that it will be able to continue to have access to that file (assuming the file is not stored on the blockchain). This is particularly important where the NFT simply contains a URL pointing to a web page on which the digital file is stored.

This has led some to question what is actually being purchased when an NFT is acquired. The answer to this will vary on a case-by-case basis. But, in short, a new form of asset (or the right to declare oneself as the owner of the NFT) is what is being sold! These issues are considered in more detail here.

Can IP owners stop third parties selling NFTs for their products?

A number of entities have sought to create and market NFTs for products where they are not the owner of the IP in the corresponding physical product. Some are creating and marketing stand-alone NFTs; others are creating and marketing NFTs in conjunction with an underlying (genuine) physical product.

It is possible that such activity constitutes IP infringement (as well as other civil wrongs such as a breach of competition laws and publicity rights). When it comes to trade marks, there are two main areas where conflicts can arise: the name of the NFT and the marks used on the tokenised object itself.

The names of some NFTs incorporate a third party's trade mark. The lawsuit brought by Hermès against the creator of the “MetaBirkin” NFTs serves as a good example. The 100 NFTs at issue were offered on OpenSea, a platform allowing users to sell and purchase digital items. In their statement of claim, Hermès argues that the name 'MetaBirkin' infringes Hermès’ famous brand by adding the generic prefix “meta” to the well-known BIRKIN mark in a manner likely to cause confusion or to dilute the BIRKIN mark.  Although the creator claims to have merely created pieces of art (furry digital handbags), Hermès perceives this as an attempt “to get rich quick by appropriating the brand METABIRKINS for use in creating, marketing, selling, and facilitating the exchange of digital assets known as non-fungible tokens”. It might be right. Reports suggest that total sales of MetaBirkin NFTs currently exceeds US $1.1 million, with a genuine BIRKIN handbag selling for anything up to a hundred thousand US dollars.

The defendants in the MetaBirkin case have relied on arguments around the public interest in free expression in relation to expressive works. This is an area of trade mark law peculiar to the US. In other cases, there are likely to be defences based on descriptive fair use (ie that the mark is being used honestly to describe the underlying goods/services in question) and exhaustion of rights.

The courts will have to grapple with a number of issues in cases of this kind, including whether there can be infringement if there is no physical product, whether real-life goods and their virtual counterparts are similar (for trade mark law purposes), whether the presence of a genuine underlying product makes a difference, and how the honest descriptive use, exhaustion of rights, and other defences should apply.

The outcome will no doubt vary from case to case and jurisdiction to jurisdiction. However, a key factor in all cases is likely to be whether there is consumer confusion in the marketplace (ie whether consumers expect the commercial source of the NFT to be the brand owner). In practice, the courts in most jurisdictions will find infringement where there is a significant amount of consumer confusion and no counter-balancing factors. Those who have marks with a significant reputation in the marketplace should be in an even stronger position since they will potentially be able to prevent use of their marks on similar as well as dissimilar goods/services.

IP owners (and those who create and market NFTs) will be watching the outcome of pending cases carefully. Meanwhile, we are likely to see a growing number of IP disputes involving NFTs, as third parties look to try to monetise these new assets.

How can brands commercialise their IP rights through NFTs?

Although an NFT seller can sell both the NFT and the underlying asset together (in which case the NFT can then be used as digital proof of ownership) it is not the most common scenario. In fact, most companies wanting to monetise their real-life assets in the virtual world license their brands through the release of NFT packages.

Given that NFTs (and the metaverse) are recent phenomena, it is unlikely that they will be expressly dealt with in existing licence arrangements. This could lead to some uncertainty as to whether the IP rights being licensed can in fact be used in relation to NFTs or the metaverse and - if so - how. Much will depend on the wording of each licence. IP owners may well want to review key licences and agreements from this perspective, as well as to consider whether the wording of their standard licences/agreements needs amending to make clear what is (and is not) covered.

Where IP owners are looking to license use of their IP rights for NFTs, the agreement will need to be carefully drafted and should cover such issues as:

• the method by which an NFT will be minted
• control mechanisms as to the number of NFTs to be minted (so that the "limited edition" value is not lost)
• any rights being licensed
• the administration of royalty payments, including accounting for resale royalties, eg automatic royalty payment to the IP owner/original NFT seller on each onward sale of the NFT (see our article on this here)
• the consequences of a breach, eg a termination of the rights to commercialise the NFT
• the new 'virtual world' interpretation of the framework of marketing campaigns, mechanisms for resolving disputes etc.

The licence agreement can either be specific for each sale or can be presented in the terms and conditions which are provided to the NFT purchaser on the brand owner's website (in the footer of the website, on the minting page for the NFT, on the marketplace the NFT is being sold etc). If no licence is in place, a licence might be implied (at least under English and German laws) but its terms would likely be very narrow. It goes without saying that an express licence covering all these issues is preferable.

How can IP owners strengthen their positions?

One obvious way in which IP owners can strengthen their positions is to apply to register their key brands for virtual products and services (as trade marks and, in appropriate cases, designs). This is considered in more detail in our article here. This will be important both in terms of trying to prevent third parties using their brands and making sure they are able to use and licence their brands themselves for NFTs.

IP owners should also consider policing online environments, including NFT marketplaces, for infringements. There might be a need to extend existing 'watching' services to incorporate NFTs and other virtual world uses.