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August 12, 2022

NFT Buyers Might Own Nothing More Than Metadata


As the market for non-fungible tokens (NFTs) has grown exponentially, so has the volume of questions surrounding the intellectual property rights that relate to the purchased asset. In this blog post, we look at what is really being purchased at the root of NFT transactions. 

The NFT case of actor and producer Seth Green demonstrates the risks surrounding NFT purchases. As publicized, Green received an NFT graphical ape #8398 from DJ and music producer Steve Aoki through the Bored Ape Yacht Club. On May 21, 2022, it was reported that the NFT graphical ape was stolen through a phishing scam. The Bored Ape Yacht Club is an NFT project that provides NFT purchasers with a license for personal or commercial use. Green reportedly planned to incorporate the graphical ape as a character in his new animated series “White Horse Tavern.” Green was able to recover the graphical ape by paying about $300,000 to an NFT collector, averting a lawsuit. To many in the legal community, the question remains—did Green actually acquire the rights that he expected? To help answer that question, our overview below provides a summary of the NFT terminology, technology, intellectual property, and licensing issues. 

Fungible vs. Non-Fungible 

One feature that differentiates NFTs from fungible assets is their uniqueness.

  • Fungible. Fungible assets are non-unique and are easily exchangeable commodities. Traditionally, these types of items have more than one owner or user. For example, the monkey image shown below is available at www.pixabay.com, a royalty-free stock photo website. The downloader will receive a non-exclusive license from Pixabay, subject to certain license restrictions. This means that different people can download and use the identical monkey image. 

 
Reproduced under Pixabay’s license terms (image by Bansi Patel)

  • Non-Fungible. Non-fungible items are not readily exchangeable due to their uniqueness. Consequently, the items exist as one of a kind. Non-fungible items have only one owner at a time. For example, a physical, non-fungible item is the baseball hit by Hank Aaron in his final home run because only one exists. In the digital world, a graphical, non-fungible item could be a unique graphical image of a sunset.  

Non-Fungible Tokens and Linked Assets

An NFT is a unique digital asset (referred to as a token) that is stored and managed on the applicable blockchain. Depending on the type of blockchain platform, tokens can be linked to any type of item, such as a physical painting, an audiovisual file, or a graphical item. As described below, when someone buys an NFT item on a blockchain, the blockchain stores a record of the transaction, sometimes referred to as a “smart contract.” 

What the Buyer Really Acquires 

When purchasing an NFT, the buyer acquires the metadata of the token and possibly nothing more. Depending on the terms of the purchase, the buyer might also acquire ownership of or certain rights to the linked asset. The metadata, as shown in the example below, is a string of code that specifies the particular NFT item. This typically includes properties of the NFT item, such as the item’s ID, name, description, the website address for the item (if any), and date of creation. This metadata helps establish the scarcity property of NFTs because the metadata is unique to each token. The following is an example of the metadata (15 lines of code) for an NFT graphical turtle: 

             {

                               “attributes”: [

                                              {

                                                             “trait_type”: “Character”,

                                                             “value”: “Turtle”

                                              },

                                              {

                                                             “trait_type”: “Mood”,

                                                             “value”: “Sad”

                                              }

                               ],

                               “description”: “A sad turtle.”,

                               “image”: “https://xyz.com/Rdw5N3K.jpeg”,

                               “name”: “Sad Turtle”

               }

Purchasing the NFT vs. IP Rights 

As NFT graphical items are frequently showcased in the media for selling at auction for high prices, it is easy to assume that the buyer has acquired the copyrights in the work of authorship (e.g., the artwork that depicts the graphical item). However, in the typical NFT purchase, buyers do not obtain ownership of the copyrights to the work of authorship. Moreover, depending on the terms of the purchase, buyers might receive a copyright license with undesirable restrictions or shortcomings, such as lack of exclusivity. 

This underscores the importance of carefully reviewing the purchase terms posted at the NFT marketplace before buying. A comprehensive review may involve reviewing any terms required by the author or content source, which may be incorporated into the purchase terms. This level of due diligence is especially advised for buyers paying high prices or making heavy investments in projects intended to incorporate the purchased NFT item. Otherwise, buyers could face unexpected encumbrances as well as copyright infringement claims that could cast a cloud over their NFT-related projects. 

Beware of the Right-Click Movement 

Some buyers of NFT images use the images as their social media avatars or post them in other online venues. There is a growing community of activists known to copy the images and use them as their own avatars. They are known as “right clickers” because they copy the images via the right clicking action for copying and pasting. Buyers who publicly announce their NFT purchases can draw the attention of this community and, therefore, have greater exposure to this risk. The right clickers’ copying could constitute copyright infringement. However, if the NFT buyer only acquired metadata, the buyer may have no legal recourse against the right clickers. 

Brand Owners 

Brand owners are also beginning to crack down on the selling of NFT items that incorporate their trademarks. For example, on February 3, 2022, Nike, Inc. filed a lawsuit against a shoe reseller for selling NFT items containing images of Nike’s shoes. While the outcome of the suit is still pending, it signals that businesses should consider implementing strategies to navigate the complex and evolving world of NFTs: 

  • Businesses should regularly monitor NFT marketplace platforms for the unauthorized display of their trademarks and works of authorship. 
  • Additionally, businesses seeking to market NFT items should obtain the appropriate releases and rights from the creators or sources of the items. 
  • Furthermore, businesses should work with legal counsel to put in place the appropriate terms and conditions that state the particular rights acquired by the buyer, which, depending on the business model, may or may not include a license to copyrights. 

For the reasons outlined above, buyers, sellers, and businesses should proceed with caution in the NFT space. 

If you have any questions regarding the content of this blog, please contact Renato Smith, Trademarks, Copyrights & IP Transactions Practice Area co-chair, at rsmith@barclaydamon.com; Amie Mbye, summer associate, at ambye@barclaydamon.com; or another member of the firm’s Trademarks, Copyrights & IP Transactions Practice Area. 
 

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