NFTs, IP, and Commercialization: Key Lessons NFT Creators and Buyers Need to Know
One of the most common questions that come up in an NFT project’s Discord server or Twitter feed is: What intellectual property (IP) rights are attached to my NFT? Can I use it for commercial purposes or just personal use?
The answer to this question doesn’t only impact the legal rights of the NFT holder, it may very well impact the project’s floor price, the overall sale volume, and the level of trust placed by the community in the project’s overall success and future.
In general, there has been much confusion surrounding traditional IP laws and NFTs. Many in the community, especially in its early days, were under the impression that the transfer of ownership (i.e. sale) of an NFT meant also the transfer of the IP rights of the underlying asset. This is not necessarily the case. When it comes to the purchase of NFTs, much like the sale of traditional artwork, unless the terms of the sale stipulate otherwise — the creator retains the IP rights even after the artwork is sold. This means that unless stated otherwise in the terms governing the NFT sale, buying an NFT gives the collector the right to hold, sell and transfer the NFT only.
Many NFT projects, especially earlier ones, didn’t have legal Terms and Conditions or had terms that did not specify what (if any) are the permissible uses NFT owners can make with the underlying asset. One such example is Larva Labs’ popular NFT collection, CryptoPunks. When the project first launched back in 2017, Larva Labs’ site for the project didn’t discuss any IP rights assignment, license, or permissible uses granted to the buyer in the underlying CryptoPunks artwork associated with their purchased NFT.
It appears that this omission might have been made by mistake initially. In a blog post from 2018 (that was since deleted), attorney Eric Adler, who registered CryptoPunks’ copyright, recalled that Larva Labs’ co-founder “wanted each Crypto-Owner of a punk to also be the Copyright-Owner”. It appears that a straightforward assignment would have been impossible as the NFTs were already in circulation. Under the U.S. Copyright Act (17 U.S. Code § 204), the assignment of copyright can only be done in writing and must be signed by the owner of the rights (or its authorized agent). Ideally, this could have been achieved by incorporating the copyright assignment as a clause in the smart contract, but unfortunately, the CryptoPunks collection was already in circulation, so editing the smart contract was impractical. Further, to complete such copyright assignments, the consent of each assignee (i.e. owner) was needed, and Larva Labs wasn’t able to identify all of the CryptoPunks’ owners. That meant that the only solution available to CryptoPunks was a copyright license agreement, which, to quote Adler, “is an adequate legal solution, but it’s not crypto and it’s not punk”.
Unsurprisingly, lately, some CryptoPunks NFT holders have shown frustration with Larva Labs over the lack of communication, licensing guidance, and community engagement. Further, some are attributing CryptoPunks’ recent decline to this lack of transparency vis-à-vis the owners’ permissible uses and/or commercialization rights.
In contrast, recent NFT projects are becoming more and more transparent about collectors’ IP and commercialization rights. The Bored Ape Yacht Club (BAYC) collection by Yuga Labs is (currently) the most popular and successful example of such a project. BAYC was one of the first NFT projects to grant each buyer a broad license to make commercial use of the specific BAYC character associated with their NFT, whilst retaining the exclusive copyright for the BAYC brand and collection as a whole with the author (Yuga Labs). Notwithstanding, as detailed in the Project’s Terms & Conditions, under the BAYC model, Yuga Labs still retains some control over the use of the copyright, as the Copyright License is ultimately revocable and subject to the owner’s “continued compliance with the Terms”. In any event, BAYC’s transparency and broad licensing rights may be one of the reasons for BAYC’s meteoric success (its current floor price is 83 ETH) as BAYC-holders have gotten very creative with their IP rights. For example, Adidas bought a BAYC and used it to roll out an entire line of exclusive merchandise; one BAYC-holder cut his BAYC into 10,000 copies and is selling them with certain limited IP rights (non-commercial use rights of the original and commercial use rights of any derivative); and yet another BAYC-holder opened up his own micro-brewery, using his BAYC as the brand mascot.
Another example is Yam Karkai’s project, Woman of the World (WOW), which was not initially clear on its IP rights. However, just a few weeks ago it announced that it amended its IP rights to offer commercial use rights to its NFT holders, driving WOW’s trading volume up more than 1,000% in 24 hours and its floor price up to 8 ETH.
A third IP model has been rising in popularity recently — the Creative Common Zero (CC0) movement. A Creative Commons license is a public copyright license through which creators can allow others to make use of their works, and set restrictions on such use (e.g., limit or prohibit commercial use). The CC0 is a version of the Creative Commons public license which acts essentially as a legal tool for waiving as many rights as possible (and as a fallback, to license these rights under a public-domain-equivalent license, which allows for the unconditional usage of the copyright by anyone). This is essentially an open-source version for IP rights.
As the debate around IP and commercialization rights is gaining traction, it is important to note that there are many voices in the NFT community who hold that the value of IP and commercialization rights for the vast majority of NFT buyers is theoretical and abstract at best, as the average owner will find it difficult to execute those rights in practice.
NBA Top Shot by Dapper Labs is one such example, where the NFT owners are given very limited IP rights. The Terms and Conditions explicitly state that the owners are given a non-exclusive license “to use, copy, and display” the NFTs (mostly still images and short video clips of NBA games and players), solely for “personal, non-commercial use”. Whilst there is currently a pending class-action lawsuit against Dapper Labs alleging that the sale of NBA Top Shot NFTs violates U.S. Securities laws, this didn’t stop Dapper Labs from securing additional NFT project partnerships with the WNBA, NFL, and UFC, and closing its most recent investment round with a valuation of US$ 2.6 billion.
In any event, one thing is clear — namely, the growing demand for transparency within the market. Following RTFKT Studios’ (the virtual sneaker brand recently acquired by Nike, Inc.) recent NFT drop, prominent voices in the NFT community complained that RTFKT announced the accompanying IP restrictions only after the NFTs were sold. Dorian Banks, CEO of Looking Glass Labs, an NFT design company, said it best: “In the NFT community if you’re not transparent you’re in trouble. The whole community is about transparency. It’s about people taking control, not corporations taking control”.
Transparency, however, will not be sufficient when it comes to involvement in NFT projects. Proficiency in intellectual property laws and solid legal terms and conditions are just as important.
Copyright laws are exceedingly unforgiving. In the U.S. (17 U.S. Code § 504), the sale of an infringing work, even if made by an innocent buyer who was unknowingly violating the author’s copyrights, makes that seller automatically liable for actual and/or statutory damages of up to $30,000 per infringement. That means that if a collector unknowingly bought an NFT that is infringing upon someone’s copyright, and then sold that NFT on the secondary market — that collector is automatically liable for damages. If that infringement is found to be willful (i.e. the copyrights’ owner notified the NFT owner of its IP rights and of the infringement, but the NFT owner went ahead with a sale anyway) then the actual and/or statutory damages can amount to $150,000 per infringement.
To conclude, while the crypto and NFT markets are new and fast-developing, the legal framework within which they operate is still, in most cases, that of the traditional laws. Whatever the IP right model you may want to adhere to in your NFT project, it’s always best to consult with a lawyer who is familiar with these issues. As evident from the CryptoPunks case, when it comes to IP and commercialization rights, turning for legal advice only after the project was launched, narrowed down the list of possible solutions and caused a rift between some of the NFT holders and Larva Labs.
NFT projects, much like many other blockchain projects, present numerous potential IP rights, commercial and regulatory minefields. To mitigate the risk, we strongly advise using the services of an experienced lawyer when approaching any new project or opportunity.
