Welcome to the 4th Industrial Revolution (4IR). If you aren’t familiar with NFTs, you’re not alone. A non-fungible token (NFT or token) is a unique digital certificate registered on a blockchain that is minted and used to record the ownership of a one-of-a-kind asset, digital or real, that has value. Most commonly, NFTs record ownership of digital assets such as photographs, drawings, videos, 3D animations, audio files, and video game items. However, NFTs can also record the ownership of practical assets like physical artwork, real estate, or cars.
While NFTs are still an emerging digital asset class, they have demonstrated the potential to be highly lucrative, capturing the attention of consumers and investors globally. As of January 2022, eight years after the minting of the first NFT in 2014, the total market capitalization of NFTs was about $31.4 billion. Minting is the process through which artwork, collectible, music, film, domain, or other items are added to the Ethereum blockchain. With continued interest on the rise, the NFT market cap could expand to more than $35 billion for 2022 and over $80 billion for 2025.
Due to the lack of direct regulations for creating and selling non-fungible tokens, NFTs have succeeded partly due to the ease associated with creating and selling them. Anyone with access to one of many blockchain networks ERC-271 standard, can mint a new NFT. The Ethereum ERC-721 standard is the primary Non-Fungible Token Standard that allows for the implementation of a standard API for NFTs within smart contracts. The standard provides basic functionality to track and transfer NFTs. After choosing a blockchain, selecting a platform that operates on the chosen blockchain network is the next step. The final step is to upload the image, video, or music file and name and describe it. Thereafter, the newly minted NFT may be listed for sale on the platform’s marketplace.
Nonetheless, while NFTs present several lucrative opportunities for those involved in the digital marketplace, they also present novel legal issues. Here, we examine two cases brought forth by Hermès and Roc-A-Fella Records. They present unprecedented intellectual property issues in the NFT space and provide guidance for those seeking to navigate this digital space.
It’s Not a Birkin. It’s a Trademark Infringement
Given the enduring appeal of NFTs, coupled with ease of minting and selling them, NFTs have opened an avenue of endless earning potential for individual artists and multi-national corporations. In October 2021, Dolce & Gabbana entered the intersection of technology, fashion, and video games. The luxury fashion house made over $6 million after auctioning off a nine-piece collection of fashion and couture NFTs. In a tweet following the online auction, the brand called the event “the most successful digital fashion drop ever.”
Other brands and companies including, Visa, Nike, and Walmart, have joined the potential earning digital space. Visa bought an NFT for $150,000 stating it wanted to collect an NFT that symbolizes the excitement and opportunity of this cultural moment. On December 13, 2021, NIKE, Inc. announced the acquisition of RTFKT, as another step that accelerates Nike’s digital transformation which allows them “to serve athletes and creators at the intersection of sport, creativity, gaming and culture.” In other cases, it has become a legal and branding nightmare, particularly when an NFT is a derivate work based on preexisting trademarked work.
Generally, a trademark protects the specific, unique name, logo, and symbols pertaining to your products or business brand. Throughout the business world, a trademark serves to identify the source of goods and services, provides legal protection, and guards against counterfeiting. With respect to NFTs, a trademark infringement occurs when an unauthorized party mints an NFT linked to the underlying asset without the owner's permission, then advertises, offers for sale, and/or sells the NFT using the asset owner's registered trademark as is the case in Hermès International, et al. v. Mason Rothschild (MetaBirkin).
The MetaBirkin case has become the first major example of a brand acting against the unauthorized use of its trademarks in the virtual world. The case involves the sale of MetaBirkins NFTs which feature furry interpretations of the ultra-exclusive Birkin bag and are valued at near real-Birkin levels, with some selling for as much as $42,000. Hermès International and Hermès or Paris, Inc. (Hermès) brought the case against Mason Rothschild (Rothschild), claiming Rothschild’s widespread use of the MetaBirkins mark constitutes trademark infringement and dilution of the famous Birkin mark. Hermes argues, the MetaBirkins NFTs feature the distinctive design of the Birkin handbag, which in conjunction with the use of the MetaBirkins, adds to the likelihood of confusion and brand dilution. In the complaint, Hermès sets out claims including trademark infringement, trademark dilution, cybersquatting, and injury to business reputation and dilution under New York General Business Law.
In an open letter to Hermès, Rothschild contends that the MetaBirkins NFTs are shielded from Hermès’ trademark claims, asserting “the First Amendment gives him every right to create art based on my interpretations of the world around him. Rothschild reasons, his appropriation of Hermes’ famous trademarks immunizes him because he is an artist. The basis for Rothschild’s defense may be a result of the Court’s findings in Rogers v. Grimaldi. In Rogers, the Court found the application of the Lanham Act may be precluded from works of artistic expression where “the use of the mark has no artistic relevance to the underlying work whatsoever” so long as the artistically relevant use of the trademark did not “explicitly mislead as to the source or the content of the work.”
In response, Hermes argues that Rothschild’s rampant use of the MetaBirkins mark was commercial in nature, which conflicts with Rothschild’s claims of fair use and constitutes trademark infringement and dilution of the Birkin mark. Hermes cities Rothschild operation of e-commerce stores for the sale of his NFTs under the Metabirkin trademark, adoption of @METABIRKINS handle for Rothschild’s social media account in addition to his ownership of the MetaBirkins.com website that advertises and promote the sale of the MetaBirkin NFTs. While Hermès has not yet minted and sold its own NFTs, they assert that consumers see a wide variety of brands, including luxury fashion brands exploiting the NFT space; consequently, consumers would expect that NFTs featuring famous brands are affiliated with those brands, or wonder why the famous brands are permitting such dilutive use of their valuable assets and think less highly of them.
Though the Court has not delivered a judgment for the MetaBirkin case, it stands to be a landmark case that would provide guidance for those in the artistic, business, and legal communities. Until then, individuals and brands should take the steps necessary to protect themselves from future trademark infringements.
To start, those with existing trademarks should ensure their trademarks cover usage in the digital space, especially on the blockchain. They should also determine whether their brands would benefit from authenticating their goods as trademarked NFTs. Much like a traditional trademark, an NFT trademark is for a non-fungible token that represents digital media, virtual goods, digital collectibles, and other cryptoassets that can be bought, sold, exchanged, and transacted using blockchain technology. Ultimately, given the many uncertainties, those looking to create NFTs should be cautious and consider the legal challenges they may face when using a trademarked work as part of their NFT projects. Most importantly, creators should consult with a trademark attorney for guidance on navigating the ever-changing digital space
99 Problems and Copyright Infringement is One of Them
A common misconception is that when an NFT is purchased, the buyer is acquiring the copyright in the digital artwork. If a creator is also the seller, the buyer may enter into an agreement assigning the copyright from the creator (assuming they are the current copyright owner) to the buyer. Absent such an agreement, the original creator retains the copyright, giving the buyer only the right to use and display the NFT for personal purposes. The buyer does not have the right to distribute or sell subsequent copies of the NFT’s content or create derivate work based on the NFT’s content.
The Roc-A-Fella Records (RAF, Inc.) case highlights another legal challenge that NFT creators and sellers should consider when operating in the digital space. RAF, Inc. was founded by Shawn Carter (Carter), also known as Jay-Z, Dame Dash (Dash), and Kareem Burke. In 1995, Carter signed a record deal with RAF, Inc. where RAF, Inc. would own, among other things, “[t]he Masters and the LP, from the inception of the recording thereof, and all Phonograph Records and other reproductions made therefrom, together with the performances embodied therein and all copyrights therein and thereto (excluding the copyright in the underlying compositions) throughout the world, and all renewals and extensions thereof. ...” Pursuant to that agreement, Carter released the album Reasonable Doubt the following year. In 2005 the trio cut business ties, with each co-founder retaining a one-third share in RAF, Inc.
In 2021, Dash minted an NFT of Reasonable Doubt and set up an auction in preparation to sell the NFT. Dash claimed the NFT would prove ownership of the album’s copyright, transferring the rights to all future revenue generated by the album from Dash to the auction winner. RAF, Inc. immediately filed a complaint seeking to stop Dash from auctioning the NFT. RAF, Inc. argued that Dash, as a shareholder, had no direct ownership of Reasonable Doubt or its copyright and, therefore, had no right to sell the album or any rights attached to it.
The Court agreed, finding RAF, Inc. owned the copyright and all rights, title, and interests in Reasonable Doubt. Accordingly, Dash was enjoined from selling, recording, reproducing, broadcasting, transmitting, exhibiting, distributing, advertising, and exploiting the album. Consequently, Dash was ordered to transfer to RAF, Inc., any NFT or other asset in his possession, custody, or control reflecting rights to Reasonable Doubt.
The RAF, Inc. case offers a valuable lesson for NFT creators and sellers: minting and selling these tokens requires close consideration of the legal rights owned by the original artist(s) in the underlying work. In doing so, creators may find that a work of art requires approval from a copyright holder before minting, for example. Thus, creators and sellers should seek competent legal advice by consulting with an intellectual property attorney to fully understand the possible ownership rights attached to a specific work of art.
The Future of NFTs
The registration of intellectual property, including trademarks and copyrights, is highly recommended since it would enable owners to enforce and monitor the use of their intellectual property on the blockchain and avoid unwarranted legal action. While the future of NFTs is not set in stone, their innovation, popularity, and the value are signs of possible legitimization as a class asset. Regulators have already begun taking steps towards offering users a compressive framework. For instance, the US Patent and Trademark Office (USPTO) put out a request for comment on design patent protection for images that “do not require a physical display screen or other tangible article to be viewable.” The USPTO stated that due to certain new and emerging technologies, such as projections, holographic imagery, or virtual/augmented reality do not require a physical display screen or other tangible article to be viewable, the USPTO is exploring whether its practice should be revised to make design patent protection available for these digital designs in new technologies.
In the meantime, anyone seeking to take advantage of the opportunities presented by NFTs should pay attention to the myriad legal issues and protect themselves and their brands from infringement while still possible.
Reprinted with permission from the April 8, 2022 issue of the New Jersey Law Journal. ©2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.