Kristen Corpion
More posts from Kristen Corpion
Non-fungible tokens may be revolutionizing the way we own and transact with digital assets in the 21st century, but they’re no different than old-school physical assets in one important way: They’re governed by a legal framework which, in many respects, is rooted in the 20th century.
One area, in particular, rife with uncertainty is the intersection of NFTs and intellectual property law. Federal copyright and trademark laws were not written with NFTs in mind, which means that it’s up to the courts to adjudicate disputes pursuant to existing laws until revised federal statutes are enacted.
In the meantime, let’s review some of the most interesting and important IP legal issues that are currently impacting the creation, transfer and use of NFTs.
Trademark infringement and NFTs as artistic expression
One of the most closely followed IP and NFT cases currently being litigated involves a lawsuit brought by Hermès against artist Mason Rothschild over a collection of 100 “MetaBirkin” NFTs — handbags for the digital world — he created that Hermès alleges violate its trademark.
Rothschild sought dismissal of the case, arguing that the NFTs he minted and sold (for tens of thousands of dollars) were merely a form of artistic expression protected under the First Amendment to the U.S. Constitution — like Andy Warhol’s use of Campbell Soup labels in his art.
While this case still has a long way to go until a final resolution — provided it doesn’t settle in the interim — the U.S. District Court presiding over it recently gave us a glimpse into how courts may interpret trademark claims and defenses involving NFTs.
In denying Rothschild’s motion to dismiss Hermès’ lawsuit, the court explained that while Rothschild’s creation of the bags could constitute a form of artistic expression, there was not sufficient cause to dismiss Hermès’ lawsuit. The case marches on, possibly to trial.
The court relied upon a well-established body of prior cases — not involving NFTs — to reach its decision. It noted that “Rothschild’s use of NFTs to authenticate the images,” as opposed to merely selling a digital image not minted as an NFT, doesn’t change the way the artistic expression defense should be analyzed under existing law.
Practical takeaway: While we’re still in the early stages of courts analyzing IP and NFTs, the court, in this case, has done nothing to suggest that the nature of NFTs will lead to an analysis that deviates from existing trademark legal frameworks. Brands will continue to watch this case closely, as an outcome that goes in Hermès’ favor will almost surely be cited in future cease and desist letters sent in connection with NFTs that allegedly infringe on trademarks.
NFT trademark infringement and the first sale doctrine
In February 2021, Nike filed a lawsuit against StockX, which resells sneakers and other goods. In part, Nike alleges that StockX is engaging in trademark infringement by minting and selling NFTs that use Nike’s trademarks. Other claims asserted by Nike include counterfeiting and false advertising. StockX countered that the relevant NFTs aren’t digital sneakers — merely digital listings for physical sneakers.
This case is significant, because, among other reasons, it involves the assertion of the “first sale doctrine” as a defense by StockX. The first sale doctrine allows marketplaces to resell goods and display images of goods that include protected trademarks without a license. Without the first sale doctrine, a site like eBay, for example, could not exist. StockX also argues that its minting and sale of the NFTs at issue constitutes non-trademark-infringing “fair use.”
This case is also in its early stages. Nike filed an amended complaint, and in early June 2022, StockX filed an amended answer to Nike’s complaint.
Practical takeaway: At the heart of this case is the question of whether StockX’s NFTs are, for purposes of trademark law, a separate, distinct product or a digital representation of a physical product that it is entitled to market and sell.
To the extent a ruling goes against Nike on issues related to the first sale doctrine and fair use, brands will be forced to take aggressive action to ensure that their trademark rights to digital representations of their physical goods are protected.
NFTs and copyrights (the case of the celebrity’s stolen Bored Ape)
In July 2021, actor Seth Green purchased a “Bored Ape” profile picture NFT, part of the popular Bored Ape Yacht Club created by Yuga Labs, and began creating an animated series that was going to feature his Bored Ape #8398, as well as other characters from his NFT collection.
One of the unique features of Bored Ape ownership is that owners are granted a license to make commercial use of their Bored Ape. This licensing scheme is distinct from how things work from an IP standpoint with most physical creatives. In the physical world, when, for example, a collector buys a sculpture, what they own is a physical object, not the underlying IP. The IP stays with the artist unless rights are specifically transferred or licensed to a buyer.
Accordingly, Green was well within his rights to develop a series featuring his Bored Ape. The problem is that prior to the series’ release, Green fell victim to a phishing scam by which several of his NFTs, including his Bored Ape, were stolen, and the Bored Ape was swiftly resold to a third party. If the purchaser had bought it in good faith (i.e., without knowledge of the theft), Green may be out of luck, as the law generally protects such “bona fide purchasers.”
Green, however, has a different point of view. He tweeted, “A buyer who purchased stolen art with real money and refuses to return it is not legally entitled to exploitation usage of the underlying IP.” He added that, “It’ll go to court.”
Ultimately, the dispute did not go to court. Green bought his Bored Ape back at a steep price. Apparently, he paid about $300,000 for it, $100,000 more than he originally paid.
While this situation was resolved, it likely won’t be the last of its kind. At some point, there will come a case that requires a court to weigh in on what is required to put a party on notice that an NFT is stolen such that its IP won’t transfer to the owner.
Green was right in pointing out that “possession” and “ownership” of an asset are two distinct legal concepts. When this issue is litigated, the outcome will depend on a number of factors, including which state’s law applies to questions such as whether the party in possession of the NFT was a bona fide, good faith purchaser.
Practical takeaway: For NFT creators, it’s important to think through and document what, if any, IP rights they want transferred as part of the sale. For NFT owners, this case demonstrates the need to remain vigilant against scams, which could put their cryptocurrency and/or NFTs (and their underlying IP) at risk.
NFTs and IP: An unsettled legal landscape
For both individuals and corporate brands who create and sell NFTs, as well as for those who buy them, the legal landscape related to IP protections for NFTs, such as copyright and trademark rights, is shaky.
Web3 may feel like the Wild West, particularly when it comes to six- or seven-figure sales of NFTs, but unless and until new legislation is passed, NFTs and IP will be evaluated under a legal framework developed in a pre-web3 world. The outcome of the cases cited above may help establish helpful legal precedents that give NFT creators and collectors more certainty about their rights and obligations.
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