Move fast and do (breach?) things: IP-related NFT law trends

Although NFTs (non-fungible tokens) have been around since about 2014, they exploded into the mainstream in early 2021, fetching eye-popping prices at auction. After Beeple’s March 2021 sale made headlines, the market remained red-hot throughout the rest of the year. For example, “The Merge” – a series of NFTs created by digital artist Pak – sold for $91.8 million in December 2021. It has been reported that the global NFT market was worth $41 billion in 2021 alone¹– a figure that rivals it for the entire global art market. Even considering a possible slowdown in the NFT market due to saturation or recent falls in crypto prices, there is no doubt that significant sums of money (and valuable intellectual property rights) are at stake and can pose significant risks, especially given the gold rush-like nature of the market.

For the uninitiated, an NFT is a digital asset (think publicly verifiable and unique certificate of authenticity) that is stored on a blockchain and usually purchased with cryptocurrency. Once NFTs are created, or “minted”, they are listed on an NFT marketplace, such as OpenSea or Rarible, and often sold or traded according to accompanying “smart contracts” – software coded with NFTs that set the terms for current and future transactions in that NFT. Smart contracts are self-executing, meaning there is no need for an intermediary or central authority, and because they are stored on the blockchain, they provide a public and secure transaction history for NFTs. An NFT itself can be linked to an underlying digital or physical asset. In the former case, the NFT and smart contract are stored on the blockchain, and the digital media file – such as a JPEG, GIF, video or music file – can be stored separately, usually on a single central server or a decentralized network.

18 months since the NFT boom captured the public consciousness, we can now examine a series of lawsuits and initial court decisions to help NFT market participants – buyers, sellers, trading platforms, investors and IP holders – assess such risks and assess whether and where litigation is likely. These risks and considerations are all the greater in the context of the current “crypto winter”, where cryptocurrency values ​​have fallen significantly from previous highs. Here are some of the key NFT-related litigation and IP trends we’re seeing:

• Trademark matters are paramount. Many of the early NFT-related lawsuits have been Lanham Act and state trademark cases. The number of these claims may have to do with the lack of clarity, or confusion (pun intended), about which rights in underlying works are actually transferred, granted or otherwise licensed in connection with the sale of an NFT. The following represent three paradigm examples of the types of trademark cases we have seen filed:
• IN McCollum v. Opulous, et al.Grammy-nominated recording artist Lil Yachty filed a lawsuit against Opulous, a startup that sells interests in musicians’ copyrighted works.² Lil Yachty alleged that Opulous misrepresented that they would sell his songs on the platform and used his image and trademarked name to raise $6.5 million in investment capital without compensating him. He brought federal claims for trademark infringement and false representation of affiliation, among others. Perhaps the most notable aspect of this NFT case is that it does not raise particularly new legal issues: but because the products involved are NFTs, this looks like a fairly typical trademark case. However, it will be worth watching to see how courts treat digital “goods” under federal trademark law, particularly where certain goods may be expressive, transformative, or communicative works and therefore may implicate First Amendment and copyright considerations.
• IN Nike, Inc. v. StockX LLC,³ Nike sued StockX, a company that operates an online secondary market platform for the resale of various brands of sneakers and other consumer goods. Nike alleged that StockX created and sold NFTs that used Nike’s trademarks without authorization. In response, StockX claimed that its NFTs were actually “claim tickets” or “digital receipts” for physical shoes that StockX stored in a climate-controlled, high-security vault. StockX argued that it therefore used Nike’s trademarks solely for descriptive purposes as permitted by the doctrines of first sale and nominative fair use. The case has now entered the discovery phase, and it remains to be seen whether the court will treat the NFTs as products in themselves or as receipts for physical products.
• NFTs have been commonly used to buy and sell digital artistic works. But what qualifies as “artistic” is up for debate, and that debate is likely to evolve rapidly as Web3 technologies advance and the metaverse expands. A decision in Hermès International v. Rothschild⁴ tips about what may come. There, Hermès, a luxury fashion company known for its iconic “Birkin” bag, sued Rothschild, who created a collection of digital images titled “MetaBirkin” showing an image of a blurry faux-fur Birkin bag and sold the images as NFTs. . Hermès sued for, among other things, federal trademark infringement, false designation of origin, trademark dilution and cyber-squatting. In response, Rothschild moved to dismiss the complaint, arguing that his “MetaBirkins” are works of art and protected under the First Amendment. The court sought Rogers tested and rejected Rothschild’s motion, finding that the complaint sufficiently alleged that the use of the “Birkin” name lacked artistic relevance to the digital images and was explicitly misleading.⁵ The court therefore found that Rothschild’s use of NFTs to authenticate the digital images did not render them a commodity without First Amendment protection.⁶ Importantly for prognostication purposes, the court suggested that the analysis might be different if MetaBirkins could be used in a virtual world rather than just being an image of a purse.⁷ Thus, there is a risk that as brands expand into the metaverse to offer wearable and wearable products that more closely mirror “goods” in the physical world, the viability of First Amendment defenses may diminish.
• Copyright and NFT exploitation. IN Miramax, LLC v. Quentin Tarantino, et al.,⁸ the film company sued Tarantino, alleging that the director’s announced plan to create NFTs from handwritten excerpts of Pulp Fictionhis script and accompanying commentary would infringe Miramax’s copyright on the film. Tarantino sought judgment on the suit, arguing that the film was a derivative work of the script, and thus that Tarantino retained all rights to the latter unless expressly granted to Miramax. However, the parties have since filed a notice of settlement, and dismissal papers are expected soon, so the court will ultimately have no opportunity to rule on these specific issues in the context of this case. Nevertheless, this case and StockX suggests that while NFTs themselves may be novel, the underlying IP concepts—the first sale doctrine, nominative fair use, and the scope of exclusive rights under 17 USC § 106—are the standards by which such claims will be judged.
• Who has the rights when an NFT is stolen? Although not ripe for litigation, actor Seth Green and his stolen (since returned) Bored Ape Yacht Club provide NFT with a cautionary tale for content creators, buyers and distributors. Green’s Bored Ape (BAYC #8398) came up with terms and conditions purporting to grant NFT owners like him a worldwide license to “use, copy and display” the NFT for commercial use and to create derivative works. Green developed an animated television program called White Horse Tavern around his monkey, and had even promoted the show at the NFT conference VeeCon. But the theft of his monkey, Fred, in a phishing scheme and its subsequent sale to an apparently unsuspecting third party raised a number of questions about whether Green still had the necessary IP rights in Fred to move forward with his show, and what third-party rights acquired as a result of the transfer. Green said: “I bought that monkey in July 2021, and have spent the last few months developing and leveraging the IP to be the star of this show. So, days before — his name is Fred, by the way — days before he’s going to get world debut, he is literally kidnapped.”⁹
• The US government is taking notice. In June 2022, the US Patent and Trademark Office and the US Copyright Office agreed to begin a joint study of NFTs at the request of Senators Pat Leahy and Thom Tillis, the results of which are scheduled to be published next year and will seek to answer questions about how NFTs affect transfers of rights, licensing and infringement.

As the fallout from the NFT boom continues and the metaverse continues to expand, so will the legal risks and litigation surrounding it. Content creators, licensors, investors and other stakeholders would do well to continue to monitor these developments.

Learn more about Manatt’s NFT and metaverse features.

_{¹ Natasha Dailey, NFTs surged to a $41 billion market by 2021 and overtake the total size of the global art marketInsider.com, 6 January 2022 (available at https://markets.businessinsider.com/news/currencies/nft-market-41-billion-nearing-fine-art-market-size-2022-1).}

_{²McCollum v. Opulous, et al., Case No. 2:22-cv-00587-MWF-MAR (CD Cal.).}

_{³Nike, Inc. v. StockX LLCCase No. 1:22-cv-000983-VEC (SDNY).}

_{⁴Hermès International, et al. v. Mason RothschildCase No. 1:22-cv-00384-JSR (SDNY).}

_{⁵ID. on Dr. No. 50, pp. 13-18.}

_{⁶ID. on p. 12.}

_{⁷ID. on p. 3, n.1.}

_{⁸Miramax, LLC v. Quentin Tarantino, et al., Case No. 2:21-cv-08979-FMO-JC (CD Cal.).}

_{⁹ Sarah Emerson, Seth Green’s stolen boring monkey is back homeBuzzFeed News, 9 June 2022 (available at https://www.buzzfeednews.com/article/sarahemerson/seth-green-bored-ape-nft-returned).}