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NFTs & Brands: Licensing Considerations

NFTs & Brands Licensing Considerations

In 2021, nearly $3 million was paid to purchase a copy of a “story bible” by an online crypto group. The story bible was for Dune (1970), by director Alejandro Jodorowsky, which was a famously unfinished film adaptation of the sci-fi novel.

Shortly thereafter, the crypto collective tweeted its plan to adapt the story into a movie, but there was one problem: even with owning a copy of the book, the collective did not have rights to the actual intellectual property, which was needed to produce the film. The group was, in fact, no closer to owning any rights to produce a movie based on the intellectual property Dune than it was to owning the rights to produce other movies featuring famous characters.

When looking into the aforementioned story, one thing is clear: there are inherent IP and legal issues when it comes to working in the Web3 world. In the last year, the Web3 space has been controlled by the obsession with Non-Fungible Tokens or NFTs. Although Non-Fungible Tokens have been around since 2014, they really began growing in popularity in early 2021. NFTs hit an inflection point when a digital piece by the artist Beeple sold at Christie’s auction House for $69.3 million. Following the sale, the NFT craze seemed to take hold of the headlines more than ever. A video clip of LeBron James was also sold for over $200,000. Additionally, brands from Dolce & Gabbana and Adidas dropped NFT collections, which sold out in just minutes and made millions in sales. All in all, the NFT industry garnered over $23 billion in transactions in 2021 alone, which was up $100 million from the previous year.

Non-Fungible Tokens represent an overlap between creative intellectual property and blockchain technology. While NFTs represent newfound opportunities for many, particularly for those in the art industry, NFTs are not risk-free.

What You Own When Purchasing an NFT

When looking to invest in NFTs, it is very important to differentiate between owning an NFT, which is an individualistic token on the blockchain, vs. the ownership of an actual asset, which may have been associated or linked to the NFT. When an NFT linked to an asset is bought, the buyer has not necessarily bought the intellectual property rights to the underlying asset. Instead, intellectual property (IP) is still governed by traditional IP laws. For example, based on the Copyright Act, copyright owners have exclusive rights to reproduce, distribute, display, perform, and prepare derivative works of their copyrighted work. When purchasing an art form that is safeguarded by copyright, such as the Dune book, this does not automatically give the buyer access to any underlying rights.

The ownership or rights to the asset underlying the Non-Fungible Token will transfer to the buyer only when the owner of the underlying asset explicitly transfers their rights in a licensing agreement when the NFT purchase was made.

Licensing a Non-Fungible Token

In assessing the terms and conditions in licenses granted by brands that release NFT collections, much is revealed in the spectrum of methods to licensing rights in the underlying intellectual property. Although this list is not comprehensive, the following are three categories of NFT licensing approaches:

  1. The traditional approach, in which the purchasing of the NFT does not grant the buyer rights to the underlying intellectual property.
  2. The middle ground approach, in which certain rights are given in the intellectual property.
  3. The crypto native approach, in which the purchase of the NFT has granted the buyer with full rights over the underlying intellectual property.

Much of the promise and potential of NFTs and Web3 centers on the ability to endorse creators and the art community. Through tokens, the rights of artists and creators can be safeguarded. The spectrum of the aforementioned approaches demonstrates how even brands have an opportunity to harness the opportunities harnessed by NFTs while still protecting the intellectual property.

The Commercialization of NFTs

The commercial rights provided by an NFT can be classified into the following categories:

  1. Unlimited commercial rights, where as long as the NFT buyer abides by the licensing agreement’s terms and conditions, then they are able to create derivative works based on their NFT.
  2. No commercial rights, where the NFT purchase did not grant the buyer any commercial rights. Here, the licensing agreement resembles what would be found on a movie, album, art collection, or music. Although someone can own a Prince album, this does not mean the album owner has the legal right to trademark the album.
  3. Limited commercial rights, where rights are granted similar to those under unlimited commercial rights, however, the license has a cap on the amount of money that can be made from the NFT.

NFT Purchasing is Not a Risk-Free Transaction

When an NFT is purchased through the crypto native or middle ground approach, increased brand protection risks also come with the purchase.

Firstly, companies do not have the traditionally licensee-licensor relationship with those who buy their Non-Fungible Token collections, particularly when a larger collection is dropped. The size of the collection can make it harder to police the projects and potential derivative works made.

When licensing the IP rights in an NFT so that derivative works can be made or the NFT can be commercialized, it is very important to clearly define what the scope of permissible uses is and possible restrictions are in the terms and conditions of the agreement.

Discuss NFT Sells and Acquisitions With an Experienced IP Attorney

Web3 and the recent boom of Non-Fungible Tokens, newfound opportunities are presented for companies to leverage their intellectual property in new and exciting methods. Although a traditional approach to IP adapted to the world of NFTs presents major risks that should not be ignored, it is possible to enter the metaverse in a manner that sets out to expand a company’s horizons. In order to experiment with the different approaches to buying or selling NFTs, companies and buyers alike must adopt efficient strategies in order to mitigate potential risks associated with intellectual property rights.

Milligan, Beswick, Levine & Knox, LLP has many years of combined legal experience in the field of intellectual property rights and disputes. Schedule an initial consultation with an attorney who has a track record for successful business litigation cases. Consider speaking to an attorney from Milligan, Beswick, Levine & Knox, LLP by completing the contact form found here.

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Stephen Levine, is a Board Certified Specialist in Criminal Defense — an honor achieved by only the top criminal law attorneys in California. Mr. Levine has over 40 years of experience in criminal defense and family law serving Southern California, and is a highly regarded Super Lawyer as well as AV Rated attorney.