United States: The Risks And Rewards Of Adding NFTs To Your IP Portfolio

It is said that a picture is worth a thousand words, but in the digital age where emojis, GIFs, and "likes" have replaced traditional forms of conversation, it may come as no surprise that digital assets are being valued as worth more than a thousand words—some have price tags in the millions of dollars. Although we are finding it tricky to find the right words to describe Nyan Cat— the animated flying space cat with a Pop-Tart for a body—the remastered GIF sold for 300 ETH, or about $590,000, in February 2021.¹

The total sales volume of non-fungible tokens (NFTs) in 2021 surpassed $14 billion,² with Christie's auction house sales exceeding $150 million³ and Sotheby's sales reaching $100 million.⁴ But it's the peer-to-peer NFT marketplaces like Rarible, Nifty Gateway, and OpenSea spearheading the jaw-dropping NFT sales. Rarible tokens have racked up $27 million in sales over the past two years.⁵ Between May 2020 and September 2021, Nifty Gateway recorded roughly $409 million in NFT sales.⁶ And, since its founding in 2017, OpenSea has established itself as one of the largest marketplaces for NFTs, handling more than $10 billion in sales and trading volume over the period.⁷

Seeing the massive potential in the NFT market, artists, brands, and companies alike have taken to minting NFTs and participating and pushing the bounds of the NFT market in various ways. For example, Taco Bell made its NFT debut by selling taco-themed animated GIFs and images.⁸ In December 2021, Nike purchased a virtual shoe company to sell digital kicks and NFTs in the metaverse.⁹ Luxury brands have jumped on board, too; in August 2021, to commemorate the 200th birthday of the brand, Louis Vuitton launched its adventure-based game, Louis the Game, through which users venture into different worlds searching for items to collect.¹⁰ Also embedded in the game are 30 NFTs designed by artist Beeple, which are accessible only through playing the game.

But What Exactly Drives and Dictates the Value of NFTs?

As with most goods, value is tied to several factors, such as exclusivity and rarity of the item, the fame or notoriety of the issuer or creator, and the ownership history.¹¹ Even more than these, though, the narrative for the NFTs and the community access conferred to purchasers often define their value. For example, through purchasing certain NFTs, owners are afforded access to an online community and/or club membership that comes with additional benefits. These can include exclusive events or experiences, access to online forums,¹² or other content or items made accessible only to NFT owners, such as new music releases or signed jerseys.¹³

But value can also be driven by whether the sale grants intellectual property (IP) rights in the underlying work. Certain NFTs (including Bored Apes, which are some of the most popular and highest valued NFTs) come with rights in the underlying artwork (including the right to commercialize the artwork through derivative works).¹⁴ Generally, however, those rights are not conferred through the sale of an NFT; and the accompanying license and/or terms and conditions impose restrictions on commercializing the underlying IP.¹⁵

This misconception and the general lack of legal framework in the NFT marketplace have resulted in recent IP disputes, with some IP owners experiencing their works being used and offered for sale in the form of an NFT without their consent. These disputes, some of which are discussed below, give rise to several NFT-specific IP issues and questions regarding ownership, contract drafting, trademark registration considerations, and even fair use and First Amendment rights.

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Footnotes

1. See Grace Kay, "Nyan Cat" Flying Pop-Tart Meme Sells for Nearly $600,000 as One-of-a-Kind Crypto Art, Bus. Insider (Feb. 23, 2021), https://www.businessinsider.com/ethereum-nft-meme-art-nyan-cat-sells-for-300-eth-2021-2.

2. See Madana Prathap, CryptoPunks, Bored Apes, Decentraland and Others—These Are the Most Valuable NFT Projects of 2021, Bus. Insider India (Dec. 30, 2021), https://www.businessinsider.in/investment/news/the-most-valuable-nft-projects-of-2021/slidelist/88592907.cms.

3. See Carla Mozée, Christie's Sold $150 Million of NFTs in 2021, with the Auction House on Track for $7.1 Billion in Sales for the Year, Mkts. Insider (Dec. 21, 2021), https://markets.businessinsider.com/news/currencies/christies-nft-sales-total-beeple-auction-crypto-cryptopunks-2021-12.

4. See Tanzeel Akhtar, Sotheby's NFT Sales Reach $100M in 2021, CoinDesk (Dec. 15, 2021), https://www.coindesk.com/business/2021/12/15/sothebys-nft-sales-reach-100m-in-2021 .

5. Rarible, NonFungible, https://nonfungible.com/market-tracker/rarible (last visited May 19, 2022).

6. Total Monthly Sales of Non-Fungible Tokens (NFTs) on Nifty Gateway Worldwide from May 2020 to September 2021, Statista (Sept. 2021), https://www.statista.com/statistics/1243853/nifty-gateway-nft-monthly-sales-worldwide.

7. See Sean Dickens, More than $10Bn in Volume Has Now Been Traded on OpenSea in 2021, Yahoo (Nov. 8, 2021), https://www.yahoo.com/now/more-10bn-volume-now-traded-155716114.html; Jamie Redman, Leading NFT Marketplace Opensea Surpasses $10 Billion in All-Time Sales, Bitcoin (Nov. 8, 2021), https://news.bitcoin.com/leading-nft-marketplace-opensea-surpasses-10-billion-in-all-time-sales.

8. See Garett Sloane, Tacos for $187,336 and Digital Basketballs for $69,000 . . . the Crypto-Bubble Comes to Marketing, AdAge (Mar. 16, 2021), https://adage.com/article/media/tacos-187336-and-digital-basketballs-69000-crypto-bubble-comes-marketing/2321851.

9. See Richard Lawler, Nike Just Bought a Virtual Shoe Company That Makes NFTs and Sneakers "for the Metaverse," Verge (Dec. 13, 2021), https://www.theverge.com/22833369/nike-rtfkt-nft-sneaker-shoe-metaverse-company.

10. See Tora Northman, Louis Vuitton's New Game Is Better than "Fortnite," High Snobiety (Aug. 11, 2021), https://www.highsnobiety.com/p/louis-vuitton-nft-game.

11. See Mitchell Clark, NFTs, Explained, Verge (Aug. 18, 2021), https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq.

12. See, e.g., Kevin Roose, I Joined a Penguin NFT Club Because Apparently That's What We Do Now, N.Y. Times (Aug. 12, 2021), https://www.nytimes.com/2021/08/12/technology/penguin-nft-club.html.

13. See Benjamin Pimentel, Stream It. Own It. DJ Justin Blau Sees Music's Future in Crypto, Protocol (Oct. 7, 2021), https://www.protocol.com/fintech/royal-nft-music-3lau; Holly Hunt, How NFTs Are Monetizing Sports Teams and Athletes' Fanbases, Insider Sport (June 14, 2021), https://insidersport.com/2021/06/14/how-nfts-are-monetising-sports-teams-and-athletes-fanbases.

14. See, e.g., Terms & Conditions, Bored Ape Yacht Club, https://boredapeyachtclub.com/#/terms (last visited May 19, 2022). Bored Ape's terms and conditions specify, with respect to ownership: "When you purchase an NFT, you own the underlying Bored Ape, the Art, completely. Ownership of the NFT is mediated entirely by the Smart Contract and the Ethereum Network: at no point may we seize, freeze, or otherwise modify the ownership of any Bored Ape." Bored Ape also grants purchasers an unlimited, worldwide license to use, copy, and display the purchased art for commercial use.

15. See Harrison Jordan, No, NFTs Aren't Copyrights, TechCrunch (June 16, 2021), https://techcrunch.com/2021/06/16/no-nfts-arent-copyrights.

Originally Published in Landslide, Vol. 14, No. 4, June/July 2022, by the American Bar Association.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.