The Risks and Rewards of Adding NFTs to Your IP Portfolio

• Author: Linda J. Thayer, Anna B. Naydonov, Rosie Norwood-Kelly, Matthew C. Berntsen, John Mulcahy
• Pages: 12-59

Published in Landslide, Volume 14, Number 4, 2022. © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion

thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the

American Bar Association.

12

Images: Getty Images; image manipulation: Jill Tedhams

Published in Landslide, Volume 14, Number 4, 2022. © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion

thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the

American Bar Association.

13

The Risks and Rewards

of Adding NFTs to Your

IP Portfolio

By Linda J. Thayer, Anna B. Naydonov, Rosie Norwood-Kelly,

Matthew C. Berntsen, and John Mulcahy

Linda J. Thayer is a partner in the Boston oce of Finnegan,

where she guides clients on patent portfolio oensive and

defensive strategies in multiple complex technologies. She can

be reached at linda.thayer@f‌innegan.com. Anna B. Naydonov

is a partner in the Washington, D.C., oce of Finnegan, where

her practice focuses on trademark and false advertising

litigation. She can be reached at anna.naydonov@f‌innegan.

com. Rosie Norwood-Kelly is an associate in the Washington,

D.C., oce of Finnegan, where she focuses on trademark

litigation and prosecution as well as advertising counseling

and litigation. She can be reached at rosie.norwood-kelly@

f‌innegan.com. Matthew C. Berntsen is of counsel in the

Boston oce of Finnegan, where his practice focuses on

all aspects of complex intellectual property disputes. He

can be reached at matthew.berntsen@f‌innegan.com. John

Mulcahy is a partner in the Reston oce of Finnegan, where

his practice focuses on patent litigation and prosecution. He

can be reached at john.mulcahy@f‌innegan.com.

It is said that a picture is worth a thousand words, but in the

digital age where emojis, GIFs, and “likes” have replaced tradi-

tional forms of conversation, it may come as no surprise that

digital assets are being valued as worth more than a thousand

words—some have price tags in the millions of dollars. Although

we are nding it tricky to nd the right words to describe Nyan

Cat—the animated ying space cat with a Pop-Tart for a body—

the remastered GIF sold for 300 ETH, or about $590,000, in

February 2021.1

The total sales volume of non-fungible tokens (NFTs) in 2021

surpassed $14 billion,

2

with Christie’s auction house sales exceed-

ing $150 million3 and Sotheby’s sales reaching $100 million.4 But

it’s the peer-to-peer NFT marketplaces like Rarible, Nifty Gate-

way, and OpenSea spearheading the jaw-dropping NFT sales.

Rarible tokens have racked up $27 million in sales over the past

two years.5 Between May 2020 and September 2021, Nifty Gate-

way recorded roughly $409 million in NFT sales.6 And, since its

founding in 2017, OpenSea has established itself as one of the

largest marketplaces for NFTs, handling more than $10 billion in

sales and trading volume over the period.7

Seeing the massive potential in the NFT market, artists, brands,

and companies alike have taken to minting NFTs and participat-

ing and pushing the bounds of the NFT market in various ways.

For example, Taco Bell made its NFT debut by selling taco-themed

animated GIFs and images.8 In December 2021, Nike purchased

a virtual shoe company to sell digital kicks and NFTs in the meta-

verse.

9

Luxury brands have jumped on board, too; in August 2021,

to commemorate the 200th birthday of the brand, Louis Vuitton

launched its adventure-based game, Louis the Game, through

which users venture into different worlds searching for items to

collect.

10

Also embedded in the game are 30 NFTs designed by

artist Beeple, which are accessible only through playing the game.

But What Exactly Drives and Dictates the Value of

NFTs?

As with most goods, value is tied to several factors, such as exclu

-

sivity and rarity of the item, the fame or notoriety of the issuer

or creator, and the ownership history.

11

Even more than these,

though, the narrative for the NFTs and the community access

conferred to purchasers often dene their value. For example,

through purchasing certain NFTs, owners are afforded access to

an online community and/or club membership that comes with

additional benets. These can include exclusive events or experi-

ences, access to online forums,12 or other content or items made

accessible only to NFT owners, such as new music releases or

signed jerseys.13

Published in Landslide, Volume 14, Number 4, 2022. © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion

thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the

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14

But value can also be driven by whether the sale grants intel-

lectual property (IP) rights in the underlying work. Certain NFTs

(including Bored Apes, which are some of the most popular and

highest valued NFTs) come with rights in the underlying artwork

(including the right to commercialize the artwork through deriva-

tive works).14 Generally, however, those rights are not conferred

through the sale of an NFT; and the accompanying license and/

or terms and conditions impose restrictions on commercializing

the underlying IP.15

This misconception and the general lack of legal framework

in the NFT marketplace have resulted in recent IP disputes, with

some IP owners experiencing their works being used and offered

for sale in the form of an NFT without their consent.

16

These

disputes, some of which are discussed below, give rise to several

NFT-specic IP issues and questions regarding ownership, contract

drafting, trademark registration considerations, and even fair use

and First Amendment rights.

Recent Disputes Involving Trademarks and

Copyrights

Because of the unique properties of NFTs, they can be used to

represent and authenticate ownership, with ownership and

other information recorded and secured on the blockchain.17 But

although there can be only one ofcial and authenticated NFT

owner, the ownership of the underlying property is not always as

clear. And, unfortunately, the blockchain cannot tell the purchaser

if the good sold is an unauthorized copy of a copyrighted work or

if the seller has the legal right to sell an NFT tied to existing assets.

A recent example of this type of snafu is the pending litigation

between Miramax and Quentin Tarantino in the U.S. District

Court for the Central District of California.18 At the NFT.NYC

conference in November 2021, Tarantino announced his plans

to auction off seven “exclusive scenes” from the 1994 lm Pulp

Fiction in the form of NFTs, which would contain previously

unknown behind-the-scenes secrets from the American classic.

The plans, however, were kept secret from Miramax, which

sued Tarantino, alleging breach of contract, copyright and trade-

mark infringement, and unfair competition. In its complaint, the

movie giant argues that Tarantino assigned all rights in Pulp Fiction

to Miramax in 1993 and thus cannot legally sell the NFTs and

accompanying content.19 Although the 1993 agreement between

the parties does not reference rights to the production and sale of

Pulp Fiction-related NFTs, Miramax argues that its rights include

“all rights . . . now or hereafter known . . . in all media now or

hereafter known,” and Tarantino’s limited “reserved rights” do not

contain forward-looking language such that they would encom-

pass any rights to create or sell NFTs tied to Pulp Fiction assets.20

The U.S. District Court for the Southern District of New York

addressed a different ownership issue in June 2021 and granted

the copyright owner a temporary restraining order to prevent

an NFT sale.21 Roc-A-Fella Records (RAF) sued one of its three

joint owners, Damon Dash, seeking an order enjoining him from

making any sale of the copyright in the master recording of Jay-

Z’s album, Reasonable Doubt. RAF is owned equally by Shawn

Carter (Jay-Z), Kareem Burke, and Damon Dash and is the record

label under which Jay-Z released his debut album in 1996. Under

the impression his one-third ownership of RAF gave him a joint

interest in the copyright of the musical recording of Reasonable

Doubt, Dash announced plans in June 2021 to sell his share as

an NFT and has been exploring outlets through which to offer it

up. RAF sued, arguing that Dash has no right to sell what he does

not own.22

Specically, RAF argues that the 1995 agreement between Jay-Z

and RAF concerning the album states that RAF would own “[t]he

Masters and the LP, from the inception of the recording thereof,

and all Phonograph Records and other reproductions made there-

from, together with the performances embodied therein and all

copyrights therein and thereto (excluding the copyright in the

underlying compositions) throughout the world, and all renew-

als and extensions thereof.”

23

Based on this language, RAF insists

that Dash holds no individual ownership interest in Reasonable

Doubt and cannot legally sell the underlying copyright.

Besides questions of ownership, issues of First Amendment

and fair use defenses have arisen in the context of NFTs that

feature brand logos, designs, and trademarks. For example, digi-

tal artist Mason Rothschild received a cease and desist letter from

Hermès in December 2021 after he debuted his MetaBirkins

NFT collection at Art Basel.

24

Hermès claimed that the NFTs

were marketed using the Birkin name without its authorization

or consent. In addition to bearing a strong resemblance to their

real-world namesake, the MetaBirkins have been highly lucra-

tive in the virtual marketplace, with the rst MetaBirkins NFT

selling for about $40,000.25

Rothschild took to social media to respond, arguing that his

collection is protected by the First Amendment, which gives him

the right to create artistic commentary on the fashion world and

to use Hermès’s Birkin bags as inspiration for his work. Hermès

led suit in the U.S. District Court for the Southern District of New

York in January 2022, and Rothschild’s motion to dismiss was

denied.26 This case should be interesting to follow as the dispute

gives rise to questions regarding the merit of Rothschild’s First

Amendment defense, particularly where the goods in question

are both luxury and/or collectible pieces and where the classes of

goods are different and do not overlap.

NFTs and Patents

In some industries, such as high tech and biotech, the IP portfolio

derives a signicant portion of its value from patents, whether util-

ity or design. A strong portfolio comprises patents on key aspects

of a company’s products that provide defensive assets in a particu-

lar space or provide revenue through licensing. Many believe that

the existence and illiquidity of patents stymies product develop-

ment and critical research in biopharma.

NFTs seem poised to affect the patent sphere in a number of

different ways. First, it remains to be seen what types of NFT-

related patents may be obtained. So far, fewer than 20 U.S. patents

have issued claiming a “non-fungible token” (or similar),27 and

under 60 mention such tokens in their specication.

28

Because

patent applications typically remain unpublished for 18 months

after ling, there is no way to reliably predict how many are in

the pipeline, and it is difcult to conduct due diligence. If history

repeats itself, however, we should expect many patents on vari-

ous uses for NFTs. Nike, for example, has obtained a patent on

tokenizing the ownership of shoes.

29

If a Nike customer purchases