What NFT project creators need to know about intellectual property rights

The first article in this series looked at the current regulatory landscape for NFTs. This article considers what NFT project creators need to know about intellectual property (“IP”) rights.

IP rights can be the most valuable asset that a business, or an individual owns; they provide for the protection and commercialisation of knowledge, information, identity, technology, and creativity.

In the context of an NFT project, IP rights also protect the hard work, time and considerable financial resource invested in launching a project. An NFT project risks failure if it fails to enforce its IP rights against a competitor that attempts to copy its essential and ingenious features. Future outside investment in an NFT project is also potentially jeopardised if it is not seen to actively protect its valuable rights.

However, an NFT project also needs to be aware of IP rights belonging to third parties, because if those are overlooked, there is a considerable risk of:

• an infringement claim being brought against the NFT project (and its creators) by a third-party IP rights owner;
• a mis-selling and breach of consumer law claim being brought by each NFT purchaser against the project and its creators (because the NFT does not convey the rights it claims, and infringes a third party’s rights);
• the NFT project and its tokens can be de-listed from hosting platforms (because they are infringing or misleading tokens); and
• the project and its creators can suffer considerable reputational damage as a result.

Understanding IP rights in NFT projects is therefore important to both value protection and risk mitigation.

What IP rights arise in NFT projects?

Whilst IP rights encompass a broad spectrum, the type of IP rights most likely to arise in the context of (most, if not all) NFT projects are copyright, moral rights and trade marks.

Copyright protects “original literary, dramatic, musical or artistic works”, together with “sound recordings, films or broadcasts”. In the context of an NFT project, copyright will tend to protect aspects such as:

• the coding of the smart contract;
• the subject of the NFT, whether it is an image, a media file, or other work; and
• promotional and associated materials, such as the whitepaper, website, Discord content including text, animation, graphics, music, and video media.

Moral rights protect the integrity and ownership of copyright works, such as those listed above (in an NFT context), e.g. the right to be recognised as the author of a work (so-called ‘paternity right’) and the right to object to unauthorised editing and adaptation of a work.

Trade marks protect identity: they are a badge or mark of origin, distinguishing the goods and/or services of one trader from another, and commonly take the form of words, graphics (logos), strap lines, shapes, sounds and even colours. In the context of an NFT project, trade marks owned by the project can protect its branding, and third-party trade marks may be used or referenced in project content.

Other types of IP rights, such as registered designs, design rights, patents, or database rights, may also arise in the context of an NFT project; each project will have its own unique content and technical features, affecting the type of IP rights that arise.

To identify the type of IP rights arising in a particular NFT project, a strategic review of a project’s current and future content is recommended, commonly referred to as an ‘IP audit’.

Who owns the IP rights in an NFT?

Once an IP audit has identified the type of IP rights arising in a particular NFT project, the next step is to determine the likely owner of those rights. Ownership is relevant because if the IP rights in question are owned by the NFT project itself, there may be no restrictions on their use, but if they are owned by a third party, it will be necessary to secure permissions to allow for their use. The use by an NFT project of a third-party IP right without permission will likely constitute an infringement of that right, exposing the project to the risk of expensive and embarrassing litigation.

In respect of the ownership of IP rights commonly arising in NFT projects:

Copyright has no requirement for registration in the UK, as it arises automatically upon creation of a particular work, for example, in the drawing of a digital artwork, or the taking of a photograph. The first owner of copyright will normally be the author of the work in question, so in these examples, that will be the digital artist and the photographer.

The above rule is subject to an important exception: where work is created in the course of employment, the employer will be the first owner of copyright. The lesson for an NFT project here is that where it relies on employees to create works, it is important to ensure that employment contracts are up to date and comprehensive, to ensure that all rights are captured (that nothing could be said to fall outside of “the course of employment”).

Where works are created for an NFT project by a third party (not an employee), it is important to ensure there is (ideally) an assignment of the ownership of the IP rights from the first author (e.g. the digital artist) to the project, or at least, an adequate licence is in place.

Something NFT projects should also be aware of is that where a work of content is jointly created, it can lead to a joint ownership of copyright between two or more parties, and absent a clear contractual agreement, this can lead to use restrictions. Ideally, terms should be put in place to address this before the creation of content.

Some NFT projects dismiss the human aspect altogether, choosing to use computer generated content as the subject of the NFT, and in such circumstances, the first owner of copyright is traditionally taken to be the company owning or directing the use of the IT systems concerned. Artificial intelligence (“AI”) generated works (language and/or art) have also raised further questions recently, as to whether they can attract any copyright protection at all if they cannot satisfy an essential element of copyright subsistence: being “the authors own intellectual creation”. The position is largely still untested by the courts, and it can be complex, so if a project is planning to use computer/AI-generated works, it is recommended that specialist legal advice is sought.

Moral rights arise automatically, and the first owner will be the author of a work. These rights cannot be transferred and can only be waived.

Trade marks are commonly registered, and so a reference to the domestic and international trade mark registries can normally determine both the ownership and the extent of protection enjoyed by a mark (the goods/services it covers). However, a trade mark does not need to be registered to enjoy certain protections, and rights in an unregistered trade mark can arise through use over time. Initial searches and checks for existing trade marks usually encompass searches outside of registries and are commonly carried out by experts.

In respect of IP rights “owned” by the NFT project itself, it is recommended that those are held by a specific corporate entity, such as a limited company (rather than by the individuals behind the project). The reason for such a recommendation, and a more detailed consideration of appropriate corporate and commercial structures within NFT projects, will be the subject of a future article in this series.

Protecting IP rights in NFTs

It is also necessary to consider the protection and enforcement of IP rights in NFT projects:

Copyright in general terms, is infringed when a third party does something with a substantial part of a work – for example, copies or adapts it – without the permission of the copyright owner. The principal civil remedies available against an infringer include:

• a claim for general damages to either financially compensate the loss caused by the infringement, or to divest the infringer of their profits;
• a claim for enhanced damages to reflect the ‘flagrancy’ of the infringement (if calculated and deliberate); and
• an injunction to require the infringing materials be delivered up or destroyed.

The infringement of copyright can also constitute a criminal offence, which can result in prosecution and in some cases, a custodial sentence.

Moral rights are infringed when there is a breach of the rights of the holder, and remedies against the infringer also include seeking an injunction and/or damages.

Trade marks are principally infringed if another mark that is identical or similar (to the registered mark) is used in the course of trade in respect of goods or services that are identical or similar to those of the registered mark, without the permission of the registered trade mark owner. A trade mark may also be infringed if a third party uses a mark that is the same or similar to a registered mark, and that use seeks to take unfair advantage of (or is detrimental to) the reputation of the registered mark. The remedies available against a trade mark infringer commonly include a claim for damages and/or an injunction. As with copyright, the infringement of trade marks rights may also constitute a criminal offence, which can result in prosecution and in some cases, a custodial sentence.

Whilst there are potentially some effective remedies that are available to a rights holder, if an NFT project is seeking to enforce its own IP rights (when an infringement is suspected), it is recommended that legal advice is first sought before any contact with the infringer because (for example):

• there are risks that come with enforcing IP rights, for example, with trade mark rights there are so-called, ‘groundless threats’ provisions to be aware of, where if an unjustified threat of infringement proceedings is made by a trade mark owner, it can leave them exposed to the risk of litigation themselves;
• it is necessary to ensure the preservation of evidence of infringement, and tipping off the infringer can jeopardise that; and
• litigation in the courts comes with risk and can also be expensive, so rather than launching into litigation, there may be more effective strategic alternatives that can be deployed.

Third-party IP rights in NFTs – the risks

An NFT project should not overlook (and thereby potentially infringe) the IP rights of third parties.

Where third party IP rights are identified as being used in an NFT project, to mitigate the risk of infringement, it may be possible either to bring those rights within the ownership of the project (through an assignment), or to secure a licence for their use.

It is not uncommon for content to be commissioned from a third-party (designer/writer/producer) without any agreed contract terms in place providing for the assignment of, or permission to use, the IP rights arising from that commission. It is often assumed that because the NFT project has paid the content creator, it then owns the IP rights in the work that is created; however, the amount of money paid to the content creator does not matter. The IP rights arising in the work (copyright) will continue to vest in the first author unless there are contractually agreed terms in place that say otherwise. The risk to the NFT project in these circumstances is potentially being held for ransom by that third party in the future if the project becomes successful.

There are also recent examples of when third-party IP rights have been overlooked:

• In respect of copyright, a claim was made in respect of an NFT featuring and purporting to assign rights in the artist Jean-Michel Basquiat’s 1986 mixed media work on paper, ‘Free Comb with Pagoda’. The NFT was created without the permission of the copyright owner (the late artist’s estate) and was removed from its hosting forum.
• In respect of trade marks, Hermès was successful in an infringement case in the US courts against an artist, Mason Rothschild, in respect of his NFT project/collection ‘Metabirkins’.

Brands large and small commonly have a ‘watching service’ and other online monitoring in place to quickly identify infringers, so swift legal action be taken. Whilst the decentralised space may on the surface appear to have a more ‘relaxed’ approach to the use of third-party content, the brands with real value, and those who rely on IP as a source of revenue, commonly do not.

Understanding and dealing with IP rights

IP rights are a complex consideration for NFT project creators; however, when approached in a methodical and logical way they can be identified and properly addressed.

IP rights are the second of several essential legal elements for NFT creators to consider when launching an NFT project. Future articles will look at additional issues such as smart contract drafting, corporate structure, terms and conditions, and third-party agreements in more detail.

If you would like to discuss an NFT project or find out more about an IP audit, please contact Will Charlesworth.