The burgeoning world of non-fungible tokens (NFTs) is rapidly evolving, captivating various sectors including art, collectibles, games, insurance, and real estate. However, technological advancements often surpass existing legal frameworks, creating a host of challenges for both buyers and sellers. Therefore, it is crucial to understand key legal nuances surrounding NFTs. This detailed guide on “What Lawyers Want You to Know About NFTs” will explore these critical aspects.
One of the primary legal questions is: who has the right to mint an NFT? While the technology allows anyone to mint NFTs, legally, only the holders of the underlying intellectual property (IP) should do so. This usually involves owning the copyright or trademark.
“People often dispute over intellectual property rights, leading to disagreements about ownership and rights associated with NFTs. Additionally, fraud is a significant concern, with many unsuspecting buyers falling victim to counterfeit or misrepresented NFTs,” warns Jamie E. Wright, founder of
The Wright Law Firm.
“Sellers must be transparent about what they offer, outlining ownership and usage rights explicitly to prevent misunderstandings and avert legal issues. Adhering to intellectual property laws is crucial since regulations vary across jurisdictions, affecting NFT rights and value.”
Understanding Copyright Issues with NFTs
A common misconception among buyers is overestimating what an NFT entails. Jamie E. Wright emphasizes that the primary concern revolves around distinguishing between owning an NFT and possessing the intellectual property rights related to the NFT’s content.
“In many instances, owning an NFT does not translate to owning the associated intellectual property,” Wright explains. For instance, in the
Dufoe v. DraftKings Inc.
case, the court highlighted that NFT owners do not inherit the IP rights of the content linked to the NFT. Instead, they are granted a limited, non-exclusive, and revocable license to view the content.”
To better understand, consider buying artwork from a gallery. Usually, you leave with both the artwork and a certificate of authenticity. In the NFT space, you might only walk away with the certificate, not the actual artwork.
“For instance, while paint arranged on canvas can be copyrighted, minting it as an NFT merely encodes data on the blockchain, serving as an electronic certificate of authenticity,” explains William Scott Goldman, managing attorney and founder of
Goldman Law Group.
“This does not entail copyright protection for the NFT itself. Buyers essentially own a link to the artwork, devoid of any underlying copyrights unless specifically included in the sale.”
Occasionally, case law takes precedence, such as in the
Miramax v. Tarantino
case, where Miramax sued Quentin Tarantino for breach of contract among other issues.
According to Tyler Ochoa, professor of law at Santa Clara University School of Law, Miramax sued Tarantino, who sought to sell NFTs of excerpts from his
Pulp Fiction screenplay. The issue revolved around an interpretation of rights. Though Tarantino sold one NFT for $1.1 million, no additional NFTs were produced after the market downturn, and the lawsuit was eventually settled.
“To avoid legal hassles, those selling NFTs should ensure they own the copyrights to the associated artwork, or have proper licensing,” advises Ochoa. Clarity about rights and responsibilities among partners is crucial, along with avoiding the incorporation of externally owned trademarks or art pieces.
Navigating Trademark Infringement in NFTs
Trademark infringement is another pressing issue. The Wright Law Firm highlighted the case of
Hermès Int’l v. Rothschild,
where the creation of “MetaBirkins” NFTs, depicting faux-fur versions of Hermès’ Birkin bags, led to claims of trademark infringement.
“This case illustrates potential trademark issues within the NFT space, particularly when replicating established brands without authorization. Likewise, in
Yuga Labs, Inc. v. Hickman,
counterfeit NFTs used the plaintiff’s trademarks to mislead customers.”
Buyers should validate the authenticity of NFTs by:
-
Checking the token tracker and contract information to verify the creator
-
Using the blockchain to confirm the unique digital signature and ledger
-
Ensuring the initial minting was done by an authorized and legitimate creator
Sellers must articulate what their NFTs encompass. According to Yuriy Brisov at
D&A Partners,
cases like Hermès v. Rothschild and
Nike v. StockX
underscore these legal complexities.
“A jury found Rothschild liable for damages and issued a global injunction,” notes Brisov. “This reflects the severe legal ramifications of unauthorized use of trademarks in NFTs. Similarly, Nike v. StockX involves trademark infringement, highlighting the ongoing legal discourse around NFTs.”
Sellers need to navigate the NFT legal landscape carefully, ensuring they possess the rights to mint and sell while remaining vigilant about IP disputes and staying informed about evolving regulations.
“Cases like Hermès and Nike showcase the necessity of thorough due diligence before launching NFT collections,” Brisov elaborates. “It’s also crucial to implement robust security measures. For instance, an NFT linked to special rights can’t be simply replicated if lost. Sellers need to secure their digital assets.”
Are NFTs Considered Securities?
The intersection of NFTs and securities law has become increasingly prominent. A key question is whether NFTs qualify as “securities” under U.S. law.
“Identifying an NFT as a security requires it to be registered with the SEC or fall under an exemption,” says Jon Mechanic, partner at
Rimon Law.
“Recent SEC developments classify certain NFTs as securities. Hence, navigating compliance with securities laws is essential to avoid future issues.”
Beyond intellectual property, NFT creators must adhere to various laws including securities, tax, advertising, and privacy laws, especially when gathering personal information.
Mechanic remarks, “NFTs offer creators the unique advantage of benefiting from subsequent sales, not just the initial transaction. Ensuring downstream royalties is something NFT creators should prioritize.”
For instance, Kings of Leon released their album as an NFT called
When You See Yourself in NFT Form
in 2021. Hollywood follows suit, indicating NFTs might become a crucial distribution medium much like streaming technology.
“Distribution agreements from two decades ago possibly accounted for NFTs in their ‘all media now known or hereafter devised’ clauses,” says Mechanic. “Producers and distributors should evaluate whether these clauses cover NFT distribution.”
Bottom Line
While NFTs present fresh opportunities for digital ownership and commerce, they also introduce complex legal challenges, especially concerning the rights to associated content and the potential for copyright and trademark
Discover more from Make Money Online and Work From Anywhere
Subscribe to get the latest posts sent to your email.
