Protecting Non-Fungible Tokens (NFTs) Under Intellectual Property (IP)

A metadata file that has been encoded using an artwork that may or may not is covered by copyright protection, or it may even be a work in the public domain, makes up the majority of non-fungible tokens. An NFT can be created from anything that can be converted into a digital format, so the original work is only required during the initial step of the process to produce the distinct combination of the tokenID and the contract address. NFTs, therefore, have very little to do with copyright in theory.

Although Non-Fungible Tokens (NFTs) have existed since 2014, the domain of digital assets has recently become more prominent. Both Fungible and Non-Fungible Tokens are built and reside on blockchain technology. But NFTs are peculiar in the sense that they are not made to have equivalent fractional values and instead represent a unique and individualized character. Fungible tokens, on the other hand, have equivalent fractional values to one another. To know more about NFTs and the interesting facts revolving around them, read our blog “What is a Non Fungible Token?”

NFTs have opened new arenas for discussion in the legal world, particularly concerning copyright, ownership, and moral rights of artists. Today NFTs are being seen as a mechanism to authenticate ownership of not only the asset they represent but also physical assets. For example, to certify its high-end timepieces, the premium watchmaker Breitling offers digital certificates encoded in an NFT.

Anything that can be digitized can be turned into an NFT, practically making the possibilities endless!

Why Do People Want to Own Digital Art or NFT?

An NFT is the creator’s signature on the content, similar to an autograph on a baseball card, making it rare, special, and expensive. Any digital work that is owned might be a financial investment, have sentimental worth, and establish a connection between the creator and the buyer or collector.

In the Ethereum ecosystem, the NFT standard was initially applied to a group of pixelated cartoon characters named Cryptopunks, which was published in June 2017. Memes, music albums, and digital art are just a few of the numerous types of works that have evolved into NFTs in the intervening years.

NFTs come in many forms, but the most typical is a metadata file containing data encoded with a digital copy of the work being tokenized. The second type involves uploading the complete piece of work to the blockchain; these are less typical because doing so is expensive.

NFTs and Copyright

“Copyright (or author’s right) is a legal term used to describe the rights of creators over their literary and artistic works. Copyright work includes books, music, paintings, sculpture, and films, computer programs, databases, advertisements, maps, and technical drawings.” — (WIPO)

NFT, as we know, is used to represent an underlying asset. So the underlying asset should be a literary or artistic work for it to be eligible to be copyrighted. Having said that, buyers should be aware that copyright in NFTs is not necessarily assigned at purchase. The tokens/NFTs that the buyer has in their digital wallet are theirs to keep, but not necessarily the artwork linked to the NFT. It’s critical to carefully review the selling platform’s relevant NFT agreements before purchasing an NFT. These differ between platforms and even amongst NFTs. Additionally, anyone thinking about purchasing an NFT should keep in mind that this is a young, speculative market with several unknown dangers, including the chance of a 100% loss. NFTs are only worth what someone else would pay for them; they have no intrinsic value.

A metadata file that has been encoded using an artwork that may or may not is covered by copyright protection, or it may even be a work in the public domain, makes up the majority of non-fungible tokens. An NFT can be created from anything that can be converted into a digital format, so the original work is only required during the initial step of the process to produce the distinct combination of the tokenID and the contract address. NFTs, therefore, have very little to do with copyright in theory.

However, there is growing interest in NFTs from a copyright standpoint. This is partly due to the fact that many of the works being traded as NFTs, like paintings or art, are covered by copyright, but it is also due to the fact that it is unclear what you precisely get when you purchase an NFT.

One potential application for these tokens is perhaps in a system for digital rights management. While most NFTs don’t involve a transfer of rights, the seller occasionally offers to convert the token into a real copyright ownership transfer of the original work.

Copyright Infringement of NFTs

There have currently been many instances of copyright violations in the NFT sector. A potential breach of this kind occurred in February 2022. After attempting to produce a minted NFT collection of cards from Magic: The Gathering cards, owned by Wizards of the Coast, a group of cryptocurrency and NFT enthusiasts faced criticism and a solid backlash. These people may have loved the game and possessed the cards they intended to mint, but they undoubtedly didn’t understand their legal obligations. In an email to these fans, they admitted that they had been “working on the false idea that the project would be legal.” As you might have guessed, this flagrant plagiarism of another person’s work is illegal, and MTG’s attorneys quickly intervened to put a stop to this attempt.

The statement that followed said that “the copyright owner has the sole right to reproduce the copyrighted work, such as a MAGIC card, in any format.” Therefore, it is safe to assume that this particular set of people won’t be involved in the sale of MAGIC NFTs any time soon.

Another example is DC Comics, which recently sent a letter to all its creators (even independent freelancers) advising that the unauthorized use of their characters and intellectual property in NFTs is forbidden. This arose after a creator generated $1.85 million from the sale of NFTs that included characters he had previously created for DC Comics.

The Hermès Lawsuit

Hermès, a leading name in high fashion, sued NFT designer Mason Rothschild in January 2022 for using images of bags that were strikingly similar to Hermès’s renowned Birkin bag. Even Rothschild’s collection’s name, “MetaBirkins,” makes it evident that Hermès’ style influenced him. Hermès claimed that Rothschild’s MetaBirkins NFTs violate the luxury company’s 1984-established Birkin mark in its 47-page case. Hermès asserted that Rothschild’s NFT collection is “likely to induce consumer confusion and error in the minds of the public” as defined by the Lanham Act due to the enormous power of its Birkin mark. Hermès further claimed that Rothschild used its Birkin logo without its consent and that by selling and reselling the NFTs, the company made a clear profit from doing so.

On May 6, U.S. District Judge Jed Rakoff rejected a Motion to Dismiss filed in March by Rothschild, allowing for Hermès’ lawsuit to move forward.

The defense

In response, Rothschild argues that the MetaBirkins are hairy rather than fuzzy. In response to Hermès, the artist claims that his photos are “created with pixels, yet the bags are depicted as fur-covered,” a visual criticism of the animal cruelty involved in creating a Birkin. Rothschild claims that unlike expensive bags, which “are produced from the tanned hides of slain animals,” MetaBirkins “carry nothing but meaning.”

According to him, it is irrelevant legally that his images are associated to NFTs. The First Amendment ensures his “freedom to reply in the marketplace of ideas to the inescapable corporate brand messaging by which we are inundated every day, nearly wherever we turn,” which is what matters. (The First Amendment to the United States Constitution prohibits the government from making laws respecting the establishment of religion, prohibiting the free exercise of religion, abridging the freedom of speech or the press, preventing citizens from peacefully assembling, or interfering with citizens’ ability to petition the government for redress of their grievances. The First Amendment is one of the most sacred aspects of the American legal tradition and has spawned a vast body of jurisprudence and commentary.)

The outcome

The opposition to Rothchild’s request to dismiss was submitted by Hermès on April 4, 2022. In it, Hermès claimed that Rothschild was a “opportunistic infringer, trading upon Hermès’ enormous brand to sell digital handbags he describes as “commodities.” Hermès further reiterated its arguments that the Rogers test did not apply and that Rothschild’s use of the term “METABIRKINS” violated and devalued Hermès’ trademark. The dismissal motion is still pending.

So what are the reasons for such petty infringements? Are these infringements intentional? Or are they due to some other reason or just because of confusion?

The Confusion About NFTs

Some buyers believe they are purchasing the underlying work of art together with all of its rights. They only purchase the metadata related to the item, not the work itself. The amount of money spent on the tokens may be somewhat to blame for the confusion. It’s simple to presume that the buyer has gotten more than just a piece of code when pixel art can be purchased for over USD $1 million.

People frequently believe that the concerned work (like a painting or an art) has been sold while covering the sale of NFTs, but this is not the case, which adds to the growing confusion in the mainstream media and among people at large.

Possible Remedies to Protect NFT

  • Cryptographic hash

A simple adjustment to the cryptographic hash associated with NFT would result in a very different collection of codes. A mathematical operation known as a hash function compresses one input numerical value into another. The hash function accepts arbitrary-length inputs, but the output is always predetermined in length. The underlying asset and the platforms that offer NFTs should be hashed. Buyers must check to see if the purchased NFTs have been hashed, and artists must request that the platforms hash NFT. This can help determine whether the NFT is genuine.

  • License agreements for NFTs

By incorporating the NFT licence agreements into their smart contracts, which automatically carry out the licence conditions in all subsequent resales of the NFTs, the creators may safeguard their intellectual property rights and economic rights. The rights of the original owner and the purchaser should be outlined in these licence agreements.

  • Additional ways to obtain genuine NFTs

Buyers must determine whether the NFTs they are purchasing are confirmed or listed under “verified collections” on online markets like OpenSea. The confirmed ones guarantee that the NFTs exhibited are from the authors and artists who originally created them.

  • Awareness

The best remedy is to understand the scope of your rights and take into consideration what amounts to infringement.

Conclusion

An NFT creator may be liable for intellectual property (IP) infringement when using someone else’s creations without their consent. Selling artwork that incorporates characters protected by copyright is illegal without the owner’s consent.

Although NFTs are popular now, many critics think they will soon lose popularity. One of the causes of this doubt is that no one is certain how long the NFT model of copyright ownership and protection will last.

There are very few rules that regulate NFTs, particularly when it comes to the copyrights that are used in NFTs. No international or exclusive law applies exclusively to NFTs, even though there ought to be at least a global protocol or agreement to prevent such infringement. Given the wide scope of NFTs, an international community and legal system should govern and uphold the moral, legal, and just rights of the original inventor, the new owner, and the purchaser.

NFTs and copyright will inevitably interact in actuality. However, most disagreements will be resolved at the platform level. By promoting the existence of a space where artists may sell the tokens they have created, the market is already serving as a gatekeeper, reducing potential infringement. The NFT space may still see a significant number of copyright infringements, though, due to the structure of the NFT market and the motivation for high returns. It will be interesting to see how ownership claims and disputes play out in the early stages of this potentially revolutionary technology.

References

  1. https://amplify.nabshow.com/articles/do-copyright-and-ip-laws-apply-to-blockchain/
  2. https://www.wipo.int/wipo_magazine/en/2021/04/article_0007.html
  3. https://www.makeuseof.com/nfts-copyright-law-explained-simply/
  4. What are the copyright implications of NFTs? | Reuters. https://www.reuters.com/legal/transactional/what-are-copyright-implications-nfts-2021-10-29/
  5. The Nifty Affair of NFTs and Copyright https://sc-ip.in/2021/07/15/the-nifty-affair-of-nfts-and-copyright/
  6. https://www.wired.com/story/nfts-cryptocurrency-law-copyright/

The original blog was published here:- https://www.copperpodip.com/post/protecting-non-fungible-tokens-nfts-as-intellectual-property-ip-asset

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Copperpod is one of world's leading intellectual property research and technology consulting firms.