Emerging technologies like non-fungible tokens (NFTs) have inspired new and very lucrative methods of creating and selling art within the metaverse. But the legalities of this form of trade remain in flux. A person’s legal relationship to the file associated with the NFT is commonly undefined and unregulated. Despite the current lack of legal precedence or guidance, investors are doubling down, acquiring these expensive digital assets for eye-popping numbers.
Elon Musk’s approximate purchase price for Twitter is $40 billion. It’s what British Petroleum spent cleaning up the Deepwater Horizon oil spill. And it’s reportedly the sales volume of NFTs in 2021. Big numbers indeed.
Even if NFT sales fall by half in 2022, the numbers remain provocative. Most savvy businesspeople know about NFTs, but if you don’t there are plenty of articles that explain the basics of these blockchain-based virtual products that can be collected, sold, and traded.
This article speaks to the serious investor’s questions: Should I be concerned if NFTs incorporate famous trademarks, or are these assets even “real” goods for the purpose of claiming trademark and copyright protection? If I have an NFT, what do I really have?
Litigation Follows Value
With so much value in NFTs, litigation was inevitable, such that lawyers are intermediating the real world and virtual worlds. The growing caseload of NFT litigation is producing legal precedent in relation to NFTs. Consumer goods companies, already battling counterfeiters selling and advertising online, have expanded their battle lines to NFTs.
Nike sued marketplace StockX in February 2022 for selling NFTs of images of Nike footwear tied to an actual shoe stored securely by StockX. This is akin to corporate stock certificates held by a broker, rather than shares held in street name. Nike’s lawsuit complains, among other things, that StockX is infringing Nike’s trademarks by free-riding off Nike’s famous trademarks and goodwill. However, StockX and Nike aren’t industry competitors in the traditional sense, and the benchmark of trademark infringement is consumer confusion.
Applying the consumer confusion test to this case, the court must question whether Nike can show that consumers of StockX NFTs are or will be confused into thinking they are buying something from Nike. On its website, StockX describes its NFTs as “readily tradable digital tokens that track ownership of the physical product,” and goes on to state that the company is “not affiliated or associated with, sponsored by, or officially connected to any third-party brand or any brand subsidiaries or affiliates.” Nike has its own line of NFTs, so it sees StockX as a competitor, and Nike also complains that StockX trades in fake Nike shoes. Since Nike only recently entered the NFT market, StockX could argue that its customers know that its NFTs are not from Nike, especially considering its disclaimers.
Another famous consumer goods company, French luxury brand Hermès, sued artist Mason Rothschild over the sale of Birkin bag NFTs. Hermès alleges trademark infringement, false designation of origin, trademark dilution, cybersquatting, and injury to business reputation.
The art world, too, sees tremendous potential in NFTs. One great allure to an artist of NFTs: commissions on resales of their works, forever. In his lifetime, Vincent Van Gogh barely sold a single painting. Paintings by Van Gogh now fetch tens of millions of dollars, so an NFT tied to these works could produce fantastic returns to Van Gogh’s heirs. Thus, artists, too, litigate to control NFTs tied to their names and work.
Another player, rapper Lil Yachty, filed his own NFT lawsuit. In his California federal complaint, he claims that defendant Opulous committed trademark infringement by using Lil Yachty’s name and image without permission. According to Opulous’ website, “Opulous is the only platform to mint Music Fungible Tokens (MFTs).”
As stated in Lil Yachty’s complaint, “Defendants utilized the name, trademark, and photography of Plaintiff, all without Plaintiff’s consent. Defendants then collectively and maliciously utilized the alleged affiliation and involvement of Plaintiff as their flagship artist partnership to successfully raise substantial capital funds (represented as over $6.5 million), yet never remitted any monies to Plaintiff.”
Film director Quentin Tarantino jumped at an NFT opportunity in his old scripts even though he’d long past sold the scripts. This led to Miramax suing Tarantino for auctioning NFTs of “exclusive scenes” from the Pulp Fiction script. Certainly, the 1994 contract rights related to this iconic film did not contemplate then-nonexistent NFTs.
NFT Legal Status TBD
In any event, how the courts apply current intellectual property and contract laws to these cases may shed some light on the status of NFTs. The lawsuits mentioned here are all in US courts, but the easy portability of NFTs and the distributed nature of blockchains guarantee that disputes crossing the real world and virtual worlds will also cross borders. And as NFT litigation continues, we will ultimately see how courts balance First Amendment rights and intellectual property.
NFTs are no fleeting trend, and the outcomes of these cases are poised to affect the rights of many, including the rights of artists and their freedom of expression and creativity in the metaverse, the rights of those with business concerns who seek market entry in the digital frontier, and the rights of collectors who have invested significant money into ownership over limited digital collectibles. Soon, courts or lawmakers will have to answer these foundational questions about the legal status of NFTs.