This piece was co-authored by Nick Breen, partner, and Heather Stewart, trainee solicitor, at Reed Smith LLP.
Now that they have unquestionably entered the vernacular, it is hard to believe that the rise to popular appeal of Non-Fungible Tokens (NFTs) only took place just over a year ago with the sale of Beeple’s NFT at Christie’s, for $69.3 million.
Early last year, the majority of NFT projects that launched were principally digital artworks and avatar collectibles. The rights attaching to these NFTs were, at best, a right to display digital content or to reproduce it for personal use.
Since then, NFT projects have evolved immeasurably with brands, creators and artists each finding new uses for them. Commercial usage rights developed alongside this innovation, with the Bored Ape Yacht Club (BAYC) being one of the first collections to grant
NFT holders the right to create and monetise derivative works, such as printing the digital artwork on t-shirts and other products. This trend shows no signs of slowing down with BAYC’s parent company, Yuga Labs, only this month acquiring the seminal NFT collectible
project, CryptoPunks, and announcing that it would grant commercial usage rights to all holders.
But with some consumers now expecting to be granted IP rights when they buy an NFT, and inconsistent and inaccurate messaging by NFT commentators and influencers about what these rights mean for holders, we are beginning to see a lot of confusion in the
market and some expensive mistakes being made.
By way of example, earlier this year, a decentralised autonomous organisation called ‘Spice DAO’ won an auction at $3 million to buy a copy of a rare book that detailed film-maker Alejandro Jodorowsky’s failed adaptation of the Frank Herbert novel, ‘Dune’.
It transpires that the DAO had plans to digitize and sell the book as NFTs, produce an animated series based on the book for a streaming service, and support derivative projects for the benefit of the DAO members. Either the DAO mistakenly thought it was acquiring
copyright to the book or had not appreciated that these activities would require the approval of the rightsholders.
Examples like this underscore a general lack of understanding by consumers of the rights they obtain on becoming NFT holders – are such rights limited to bragging rights, or are they obtaining the right to exclusive usage or even an assignment of copyright
in the digital asset?
Licences and assignments of copyright
This depends on the terms attached to the NFT. Many projects operate using EULA-style terms and conditions that apply to each NFT holder. Under these terms and conditions, typically NFT holders are granted limited usage rights. These rights can vary significantly
from project to project, with the most common licences being limited to non-commercial rights to display or use the associated digital asset.
As already explained, there is a growing trend to offer broader, commercial usage rights to holders and, in rare cases, we have even seen projects assign ownership of the copyright to the digital asset itself. With such significant disparity between the
rights granted to holders across each project, and with inaccurate and reductive reporting being perpetuated by NFT influencers on social media, it is critical for buyers to read the terms on which they acquire their NFTs and for brands and project leaders
to be as clear as possible in all marketing and product descriptions for the NFT.
The legal implications of NFT ownerships rights
The average consumer is not used to acquiring or exploiting commercial IP rights. While the majority of NFT purchasers will likely never take advantage of these rights that have been granted, for those that do, there is a steep learning curve.
For a start, typically when IP rights are bought and sold, the buyer conducts a reasonable level of due diligence. This is to make sure they are acquiring all the rights they are expecting, to check for any encumbrances that may have been attached to the
IP and to ensure the seller has the right to make the sale. This process often involves lawyers, takes a fair amount of time and is not without complexity. This entire process does not currently exist for the vast majority of NFT sales; typically conducted
using basic third party open marketplaces like OpenSea, the only deal point that is negotiated is the price and there is no ability for buyers and sellers to even communicate with each other, let alone conduct legal diligence.
For those that do decide to take advantage of the commercial rights granted to them, they will need to take great care to ensure they do so in a manner that is compliant with the project’s terms of use. Going beyond the scope of the licence can expose the
NFT holder to liability for breach of contract or copyright infringement.
This leads us to question whether acquiring IP rights through NFTs can be a poisoned chalice for the average consumer. In theory it sounds attractive and an example of the promise of Web3. However, consumers may unwittingly be exposing themselves to liability
if they fail to carefully check what they are buying and what rights they have been granted.
Brands would be wise to take the lead and assume the role of educating their consumers in relation to the terms associated with their NFT projects. Being clear and transparent about exactly what they are selling should be a key priority if they wish to avoid
complaints and potential future claims.
With regulators watching the space carefully, with consumer protection being top of the agenda and with projects exploring more sophisticated use cases, we can expect to see many more disputes as the technology and marketplaces continue to mature.