Lawyer Monthly - November 2021 Edition

71 NOV 2021 | WWW.LAWYER-MONTHLY.COM INTELLECTUAL PROPERTY - WHAT IP CHALLENGES DO NFTS FACE? underlying intellectual property (IP) rights associated with NFTs can be analogised to existing IP legal frameworks. For example, Section 106 of the US Copyright Act provides copyright owners with exclusive rights to reproduce, display, copy, prepare derivative works and distribute copies of the underlying work. NFTs have two components: the ownership of the token itself and the ownership of the IP rights to the underlying content linked to the NFT. For NFTs that may contain unauthorised elements in the underlying media, the analysis of fair use would be applicable, including the transformative nature of the work and other established fair use factors. One of the challenges will be how the traditional IP “bundle of rights” is defined in relation to NFTs and who has the right to create (i.e. “mint”) NFTs containing such IP. This is especially relevant for holders of large IP portfolios and for works with multiple authors. What are the legal obstacles to the creation and sale of NFTs? IP rights holders should undertake a legal analysis to ensure that all associated rights are clear before moving forward with minting and selling NFTs. In the case of a single artist creating an original work of art for example, the analysis is straight forward. However, if the underlying asset is comprised of many different rights contractually acquired, for example a clip from a feature film, the analysis must take into account all the various rights embodied in the clip and applicable guild/union considerations. Rights of publicity and likeness as well as moral rights of authors are also potential legal considerations that should be made depending on the underlying content of the NFT. It is also important to make sure the NFT sale and incentive structure – as well as the marketing of the NFT – is not deemed an unlicensed security. Generally, if the NFT features completed artwork and its value is inherent in the completed work, this should not be considered a security under US law. If the NFT is marketed as an investment opportunity or is incomplete with additional work to be done by third parties to increase the value of the NFT, this could be deemed a security and subject to US securities laws. Who owns the IP rights of a piece of art or other content attached to an NFT and what proprietary rights are transferred upon a sale of an NFT? This depends primarily on the nature of the NFT being sold and the rights that the underlying IP owner wants to convey via the NFT. Typically for NFTs associated with art or digital media, the author of the original IP retains the underlying copyright and the NFT holder only owns the digital representation associated with the NFT along with personal rights to display the media. Just like when a buyer acquires a physical artwork from a gallery, the buyer may display the physical work in a personal manner, but does not acquire the underlying rights to commercial If the NFT is marketed as an investment opportunity or is incomplete with additional work to be done by third parties to increase the value of the NFT, this could be deemed a security and subject to US securities laws. reproductions or to make derivative works of the purchased piece. The terms of the license associated with the sale of the NFT usually determines what IP rights the purchaser acquires. Bored Ape Yacht Club (BAYC) is an example of a top NFT project (10,000 artwork collectibles with over $250 million in sales trading volume for September 2021) that granted its NFT owners the right to create derivative works and commercialise the artwork associated with their respective NFT. In at least one instance, a Hollywood agency represents the underlying IP of a BAYC NFT and is shopping opportunities in film, television and podcasting based on the ape character associated with the NFT. NFTs are written with software code (aka “smart contracts”) that help govern: 1. the ownership and transferability of the NFT; 2. where the linked content file is located (e.g. content files often reside “off-chain” via third-party decentralised file storage services such as IPFS or Arweave), and; 3. royalty streams (e.g. creator receives a percentage of all secondary market sales of the NFT). Currently, each individual NFT platform implements its own creator royalty standard, thereby creating a lack of compatibility; a cross-platform NFT royalty token standard will ensure creators receive