NFTs in the retail sphere – how best to protect your intellectual property
NTFs are rapidly growing in popularity, but what is an NFT?
An NFT, short for ‘non-fungible token’, is a unique digital token (like a digital receipt) that is linked to an underlying asset. NFTs cannot be exchanged for an identical replacement as each NFT is different and unique. NFTs are stored on a digital ledger or blockchain, most commonly as a metadata file. The underlying asset can be digital or physical, for example an autographed tweet (last sold for $2.9 million) and a picture of a rock (last sold for $1.3 million).
Whilst connected to underlying assets, ownership of a NFT does not typically equate to ownership of the underlying asset or any of the intellectual property rights subsisting in or associated with that asset. Brands may benefit from registering NFTs but there are also limitations and downsides to having them.
Creating NFTs
Brands can enhance the customer experience and increase customer loyalty by taking assets they already own and sharing them in a new way through NFTs. Adidas for example has made NFTs in partnership with Bored Ape Yacht Club and other NFT companies. The purchase of an NFT allows Adidas customers to claim exclusive physical merchandise. When claimed, the NFT is destroyed or ‘burned’ and the customer receives a physical product and a replacement NFT.
Alternatively, brands can create entirely new digital assets to share with consumers. This could include access to exclusive content, online experiences or digital only products.
Clinique launched three editions of its NFT artwork ‘MetaOpimist’ along with other exclusive perks such as early access to sold out physical products and the chance to receive free products for a decade. Selfridges’ new pop up in its Oxford Street store pairs NFTs with digital fashion, allowing consumers to view an in-person exhibition of Victor Vasarely’s abstract art and purchase NFTs which include digital versions of dresses designed by Paco Rabanne.
Although there are clear benefits to revenue streams and consumer engagement arising from the use of NFTs, brands must be careful to protect their intellectual property rights in these projects.
Protecting your intellectual property rights
If a brand creates an NFT, it will usually retain ownership of any intellectual property rights in the underlying asset, unless there is express provision to the contrary in the smart contract between the seller and the buyer of the NFT (a smart contract being a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code, which in this case is embedded in the NFT). Without such express provision, the buyer of the NFT will only have the right to claim ownership of the NFT itself, and the right to prevent third parties from claiming such ownership.
Brands creating NFTs for sale should therefore ensure that the smart contracts for the NFTs do not transfer ownership of the underlying assets or the intellectual property rights in the underlying assets.
Consumers
Due to the complex legal and technological nature of NFTs, consumers may not be clear on what they are purchasing and the associated rights.
In November 2021, the Advertising Standards Agency (the ASA) announced that advertising crypto assets such as cryptocurrencies and NFTs is a ‘red alert’ priority issue.
When creating and selling NFTs, brands need to ensure they do not mislead consumers and are clear about what rights the consumers will have in relation to the underlying assets. This is necessary in order to comply with ASA rules, but also to protect the brand and the associated intellectual property rights.
The ASA is taking action by investigating a number of crypto-asset ads where they are concerned with:
- a lack of appropriate warnings around risk;
- trivialising crypto-investments;
- taking advantage of consumers’ experience; and
- irresponsible advertising.
Intellectual property infringement
The unauthorised creation by third parties of NFTs linked to a brand’s underlying assets could be problematic for the brand. What rights do brands have to prevent or stop such exploitation?
For the creation of an NFT from a third party’s work to amount to copyright infringement:
- the NFT must take advantage of the author’s exclusive rights (including rights to reproduce, distribute, rent and lend, communicate to the public and adapt the work) without permission;
- the NFT must be derived or copied from the original author’s work; and
- the NFT must copy a substantial part of the author’s work.
Usually, an NFT is not a copy of the underlying asset but rather the creation of metadata. As the resulting file cannot be considered a copy, the reproduction or adaptation of the underlying asset arguably does not take place. However, where a digital copy of the underlying asset is included in an NFT, this could potentially infringe on the author’s exclusive rights, by comprising an unauthorised reproduction or communication to the public.
Creating a NFT associated with a brand without permission could also give rise to trade mark infringement where the NFT is offered for sale or sold using a brand’s registered trade marks. A brand should review its trade mark registrations to check whether they cover NFTs or similar goods and/or services. This will assist with preventing or stopping the creator of the NFT from using the brand’s registered trade marks in connection with the sale of the NFT.
If the brand’s trade mark registrations do not cover NFTs or similar goods/services, or if the brand does not have registered trade mark protection for its brand names, there may still be an argument that the unauthorised use of the brand’s trade marks or brand name takes unfair advantage of the reputation the brand has developed in its trade marks.
Nike has recently made a claim against online retailer StockX, which has created and offered for sale NFTs using Nike’s images and trade marks without Nike’s consent. Hermès is also pursuing a claim for alleged trade mark infringement against artist Mason Rothschild for his METABIRKINS - NFTs of the brand’s iconic Birkin bag. These claims are just two examples of the challenges brands face in the novel and expanding legal area of digital assets and rights protection.
NFT marketplaces are also taking steps to allow rights owners to deal with intellectual property infringement directly on their platforms. OpenSea, one of the largest marketplaces for NFTs, has stated that infringement of intellectual property rights violates its terms of service. On this basis, OpenSea has implemented a procedure to take down infringing NFTs in response to a successful written claim by rights holders or their representatives. It is unclear at this stage how useful this take down procedure is, but it should provide brands with some reassurance that there are avenues to take for the removal of infringing NFTs.
Whilst NFTs can be a useful tool for a brand to enhance consumer interest and engagement, there are important legal considerations to bear in mind, particularly with regards to a brand’s intellectual property rights. Much of how the legal world will navigate the technical complexity of NFTs at present remains unanswered, meaning that the outcome of disputes is uncertain. This will favour those who are willing to take risks in relation to their use of NFTs.
If you’d like to discuss any of these issues or have questions about the article, please contact Lauren Beech or Grace Astbury in the commercial services team.
Lauren Beech
Solicitor, Commercial Services
T: +44 (0) 161 393 9031 M: +44 (0) 7583 037303
Lauren works as part of our commercial services team with particular expertise in the protection, exploitation and enforcement of intellectual property and advising on data protection and GDPR compliance.
Grace Astbury
Solicitor, Commercial Services
T: +44 (0) 161 393 9062 M: +44 (0) 7949 033514
Grace is a solicitor in the commercial services team, advising and assisting a range of clients on all aspects of general commercial, non-contentious intellectual property and data protection work. She trained with a North West based law firm, handling a varied caseload of commercial, intellectual property and corporate matters.
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