NFTs, blockchain and IP – part 2: the IP rights of NFT owners

About the authors: 

Robert Cumming: Robert is a partner, dual-qualified trade mark attorney and solicitor, and manages large international portfolios and complex multi-jurisdictional disputes for market-leading businesses.

Robert’s expertise lies in the strategic positioning of a brand. His experience managing international trade mark portfolios and complex cross-border litigation, complements his background working on large corporate transactions. 

Chris Hoole: Chris is a partner, dual-qualified solicitor and chartered trade mark attorney, experienced in contentious and non-contentious intellectual property (IP) matters, including trade marks, designs, copyright and patents.

Working closely with a range of businesses, from blue-chip multinationals to SMEs, Chris provides tailored strategic and commercial advice to help IP-conscious businesses better protect and police their IP rights. 

Vishal Dattani: Vishal is a trainee trade mark attorney. Vishal’s background in law means that he can decipher the key legal components in potentially complex situations. He is therefore able to raise issues, identify opportunities and offer creative solutions in an objective way.

Vishal works with a variety of clients ranging from SMEs to large corporations across a range of sectors, including food & beverage start-ups to large fashion retailers.

In part 1 of this series, we explored the basic definitions of non-fungible tokens (NFTs), the blockchain and provided a brief overview of the wider practical implications in the metaverse. In this article, we look at the interplay between NFTs and specific intellectual property (IP) rights that subsist in the UK.

Copyright

Under UK law, copyright arises automatically when an original literary, dramatic, musical or artistic work is recorded.[1] The work must be original in the sense that it is the “author’s own intellectual creation”[2]. The threshold is low. The author of a copyright work is also generally the owner, unless they are an employee. The copyright owner has the exclusive right to reproduce a substantial part of the work.

An important distinction to be drawn is that owning an NFT does not automatically mean you own the copyright to the associated asset. One of the most common misconceptions of owning an NFT is that the NFT buyer has the proprietary right to stop others using the underlying asset, or making copies/versions of the work.

In our experience, we have observed that many NFT market-places result in the underlying copyright remaining with the seller, whilst the buyer has a right to display the underlying asset. In other words, a non-exclusive and non-sublicensable licence to use, copy and display the creative work is generally granted in consideration for a fee in the form of a crypto payment. When reviewing a smart contract, terms and conditions or terms of sale relating to the NFT and underlying asset, it is important to understand which IP rights are protected and transferred or licenced as part of the agreement. We will look at this point in more detail later in this series.

In reality, there is no “standard” regime for the ownership or licencing of NFTs. For now, it is therefore important to be aware that there is a wide variance in rights associated with owning an NFT and the contractual terms should be carefully reviewed.

Moral rights

Tangential to copyright, which protects economic rights in the works, moral rights protect non-economic interests. Moral rights relating to the digital asset should equally be respected, to avoid the risk of an infringement. However, unlike economic rights, moral rights cannot be sold or otherwise transferred. The rights holder can nonetheless choose to waive these rights.

Trade marks

A trade mark is essentially an indication of origin, which protects the brand.

An NFT may infringe a registered trade mark where the NFT (or digital asset which the NFT “points to”) is used in relation to certain goods or services for which the registered mark protects, without the proprietor’s consent, resulting in a likelihood of confusion for the consumer.

The NFT may also infringe a mark if the business has a reputation in the relevant territory. It may be possible to also protect goods or services which aren’t similar, where the use of the NFT leads to an unfair advantage or dilution of the earlier mark. This may be particularly relevant where the ‘infringing’ asset is a digital item, but where the registered mark is only protected in relation to physical goods.

The EUIPO has published guidance notes[3], since it has recognised a spike in the number of applications which contain the terms “virtual goods” and “non-fungible tokens (NFTs)”.

The approach taken by the EUIPO is summarised below:

– Virtual goods (digital content or images) should be applied for in class 9. However, “virtual goods” on its own lacks clarity and precision and so the Applicant must specify the digital content the virtual goods seeks to protect. For example, downloadable virtual goods, namely, [insert items EG virtual shoes, virtual alcoholic beverages etc].

– The 12th Edition of the Nice Classification will incorporate the term downloadable digital files authenticated by non-fungible tokens in Class 9.

– NFTs will be treated as unique digital certificates registered on a blockchain, which can authenticate digital items but are distinct from those digital items. Efforts must be made to specify the type of digital item.

– Services relating to virtual goods and NFTs will be classified in line with the established principles of classification for services.

Designs

Designs protect the look and feel of products and can be beneficial for rights holders because they are not limited to a certain class of goods and services. The Registered Designs Act 1949, section 1 states:

design” means the appearance of the whole or a part of a product resulting from the features of, in particular, the lines, contours, colours, shape, texture or materials of the product or its ornamentation”; and

– “product” means any industrial or handicraft item other than a computer program; and, in particular, includes packaging, get-up, graphic symbols, typographic type-faces and parts intended to be assembled into a complex product.

In the context of virtual designs and the metaverse, it is difficult to say definitively whether a digital design is a “product”. The EUIPO office has taken a proactive approach and its definition states:

Designs of screen displays and icons and other kinds of visible elements of a computer program are eligible for registration (see Class 14-04 of the Locarno Classification).[4]

Designs are very much an unexplored territory in the NFT sphere and key stakeholders recognise this issue. The European Commission are currently undergoing a public design consultation which concerns a review on the law of designs. From a UK perspective, the Government’s response in this years’ “calls for views” with respect to design rights is that it recognises advancements in technology and that the legislative framework needs to be flexible enough to support those developments in technology.

Conclusion

To conclude, businesses should remember that existing unregistered and registered IP rights still apply in the same way to digital content. Given that NFTs are very much an unchartered territory but have drastically risen in interest, IP offices and governments are seeking to ensure the legal framework does not lag behind innovation. Stay tuned.

To follow in Part 3, keep an eye out for an update on some of the key court disputes in the context of NFTs in an IP infringement action, that we have been closely monitoring.

[1] Copyright, Designs and Patents Act 1988 (CDPA)

[2] Infopaq International A/S v Danske Dagblades Forening [2009] ECR I-6569 [37]

[3] https://euipo.europa.eu/ohimportal/en/news-newsflash/-/asset_publisher/JLOyNNwVxGDF/content/pt-virtual-goods-non-fungible-tokens-and-the-metaverse

[4] EUIPO Guidelines, Design Guidelines, paragraph 4.1.3 – https://guidelines.euipo.europa.eu/1803372/1785348/designs-guidelines/4-1-3-icons

NFTs, blockchain and IP 

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