NFTs: how will 2023 compare with the story so far?
Ask a lawyer to give you their predictions for the future and they might say: “If I knew what the future holds, I’d be in a different job.”
Well, despite that, we at WIPR like to know what lawyers would at least wager when it comes to future developments in IP law.
One area that we’re keeping our beady eyes on is the world of non-fungible tokens (NFTs)—a market IP tech lawyers and digital entrepreneurs have watched eagerly since it ballooned in 2020. That year, its value tripled to $250 million; in 2021 it surpassed $40 billion—but by 2022, things for the ‘crypto-collectibles’ were looking shaky.
Since the first ever NFT was released in 2014 (a video clip, which was sold by Sothebys in 2021 for $1.47 million) the market has expanded alongside the rise of blockchain technology, and the concurrent growth of cryptocurrency such as Bitcoin and Ethereum.
Digital gold rush
To date, the year of the NFT was 2021, a sort of ‘gold rush’ when the new digital assets took the metaverse by storm and began popping up in the art, sport, fashion, music, films and entertainment sectors.
Countless transactions took place, often high-value, with notables including the first tweet by Twitter founder Jack Dorsey, which sold for $2.9 million.
The unprecedented sale of a digital collage by an artist named Beeple, was auctioned for almost $70 million by Christie’s and beat most physical artworks’ value by well-known artists.
And then there was actor Seth Green’s Bored Ape Yacht Club (BAYC)—a collection of 10,000 NFTs depicting cartoon-like ape images—which he launched in 2021. BAYC remains an NFT success story, ranking among the most expensive NFTs; that said, even its sales have dipped recently in a continuing freefall for NFTs overall.
There were also a series of rights disputes over NFTs during 2021. In May, Nike escalated its NFT lawsuit against StockX, alleging that the online reseller has also been marketing counterfeits of its footwear products.
In June 2021, Roc-A-Fella Records secured a temporary restraining order against its co-founder Damon Dash, halting his plan to sell an NFT of musician Jay-Z’s debut album “Reasonable Doubt”.
And in November that year, Miramax sued film director Quentin Tarantino over his intention to auction off “Pulp Fiction” NFTs, and the ongoing case is seen as a key test for NFT IP disputes.
Short-circuits
As well as scrapping between parties, the wider picture for NFTs has not been so rosy of late. A nosedive during 2022 on the back of a broader cryptocurrency crash saw NFT sales drop from a high of $12.6 billion in January 2022 to little more than $1 billion by the following June, according to crypto research firm Chainalysis.
Even the planned resale of Dorsey’s tweet flopped due to lower bids offered than expected, at $14 million instead of the hoped-for $25 million.
A report released in August 2022 revealed that the “vast majority” of NFTs convey “zero” IP rights, with many issuers appearing to have misled NFT purchasers as to the IP rights for the content they sell.
The recent collapse of cryptocurrency exchange FTX (in November 2022 ) saw it plunge from $32 billion in value to bankruptcy within days, sending shockwaves throughout the NFT industry.
This was followed swiftly (whether coincidentally or not) by the announcement of a joint US study into the laws and policies surrounding NFTs and IP rights, after Congress in June had urged the US Patent and Trademark Office ( USPTO) and the US Copyright Office ( USCO) to undertake the work.
In Europe, the EU Intellectual Property Office (EUIPO) announced that since it is “increasingly receiving applications containing terms relating to virtual goods and non-fungible tokens, it would clarify the classification of those terms.
Later in 2022, Europe passed the first known judgment decreeing that reproductions of a third-party’s trademarks on NFTs without authorisation are infringing. The case, announced in November, saw Italian football club Juventus score a victory for NFT owners, in a landmark trademark infringement case in which an online seller of NFTs (Blockeras) used its trademarks on fantasy football playing card NFTs.
And the high-profile Hermès v Rothschild case, in which French fashion designer Hermès is suing artist Mason Rothschild for allegedly copying its Birkin handbag via his MetaBirkin NFTs, will finally be heard by jury trial.
A trial date of January 30 was announced after Christmas and the world watches with bated breath over its potential to clarify how trademark law applies to NFTs—putting Rogers to the test.
Controlling the 'Wild West'
Sarah Conley Odenkirk, partner at Cowan DeBaets Abrahams & Sheppard, described the boom period for NFTs as “a really wild ride with the explosion of NFTs”.
Speaking at the latest International Association for the Protection of Intellectual Property ( AIPPI) World Congress, she warned that not everyone who has invested money in NFTs has been successful, and that there has been “little concern for IP protection”.
“[In 2021] I would have likened the landscape to a Vegas casino where everyone's hearing the dinging of the machines and seeing the lights flashing, and assuming that everybody in the space is making a lot of money,” she said.
“Many people have invested a lot and have not done well. So it's really important to understand what was happening. There was initially a huge content grab…without any regard for the underlying rights.”
A downturn of the wider crypto market in 2022, however, brought “a little more sanity to the marketplace and a great deal more awareness of the pitfalls”, prompting people to do more due diligence.
Odenkirk added that despite the initial “frenzied cash and content grab”, the key issues of contracts, IP securities, and anti-money laundering regulations are now finally being addressed by brands and the legal sector.
“We're seeing some moves within this space to bring some control to the Wild West,” she said, envisaging this to be in the form of protocols that will emerge over the coming months and years, which will be “crucial” to secure a long-term future for NFTs.”
NFT predictions
But what of 2023? Given this tumultuous history in their relatively short life thus far, we have rounded up a few IP lawyers’ ‘predictions’—observations if you prefer—of the year ahead for NFTs from key jurisdictions.
Drew Schulte, partner, Perkins Coie (US)
“I expect the IP landscape for NFTs and online environments to remain active in the coming year and into the future.
“I think what we are seeing with NFTs, blockchain, and other emerging technologies at the moment is similar to what happened with the internet during the late nineties. Everyone could see the potential, but the practical applications of that technology (and what companies would be the eventual winners and losers in implementing it) were still being worked out.
“The capabilities, volatility, and uncertainty surrounding this technology that we are currently seeing is thus to be expected as companies chart the path forward.
“Legal issues and cases being heard that feature this technology will likewise grow, and I already see a maturing in the manner in which this technology is being handled by the courts. For example, only recently courts were grappling with issues such as ‘do’ existing copyright and trademark laws apply to NFTs?
“Courts have moved past this and are instead focusing on ‘how’ copyright and trademark laws apply to NFTs. This shift, while subtle, already shows the level to which these emerging technologies have become accepted and commonplace in our society.”
Ron Dreben, partner, Morgan Lewis (US)
“A key NFT case in 2023 will be Hermès International v Mason Rothschild.
Hermès filed a lawsuit in January 2022 for trademark infringement and related claims against artist Mason Rothschild, who minted and sold digital versions of Hèrmes’s ‘Birkin Bag’ as NFTs under the name ‘MetaBirkins’.
“The case should provide helpful guidance about how trademark rights in the real world carry over to the metaverse, and whether First Amendment protection may be available to NFTs that purport to make some type of statement about the underlying work or product.
“Rothschild’s defence (based on the Rogers test) is that use of a trademark in an artistic work is not an infringement if it (1) is relevant to the underlying message of the work; and (2) does not explicitly mislead as to the source or content of the work.
“The jury will decide if his NFTs are artistic works, and if so, whether Rothschild explicitly misled anyone as to source in marketing them. Given that NFTs are expected to be widely used in the metaverse, the outcome of this case may be very important to brand owners.”
Rebecca O’Kelly-Gillard, partner at Bird & Bird (UK & Europe)
"While the market for NFTs as digital collectibles (for example, to verify ownership of digital artworks) may be in flux, NFTs as tokenised assets—such as branded skins in blockchain-based games—are likely to increase in 2023, as more brands look to explore new ways of engaging with consumers in crypto-based metaverses and Web3 begins to emerge.
"Therefore, we're likely to see more companies filing applications to the EUIPO (and UK IPO) to ensure they have the right trademark protections in place to protect their IP [across this region].
"Additionally, companies will be further investing in technology to battle the unlawful use of their IP in crypto assets. However defending infringements and enforcing judgments across EU member states and the UK will still throw up difficulties, given the pseudonymity of infringers and the jurisdictional complexities regarding online and blockchain-based infringements."
Jian Xu, head of IP prosecution and MD, Gowling Beijing (China)
“In terms of technical areas that China is keen to develop and promote in 2023 and onwards, it will be centred on digital twins, human-computer interaction, , and AR/VR/MR [augmented reality, virtual reality, and mixed reality].
“As regards to business models that China is eager to explore, it will focus on the industrial metaverse, the digital virtual human, and NFT transactions.
“Hot intellectual property issues arising out of China’s increasing adoption of NFTs and the metaverse will be:
- How to determine the nature of NFT rights and its transactions, which is illustrated by China’s first NFT court case (see below);
- How to determine copyright ownership brought about advanced technology such as generative AI and digital virtual human; and
- How IP rights owners can enforce their rights in the metaverse space and deal with the challenges such as anonymity of the users and the sheer volume of potential individual infringers.
“It will be important to see whether and how the ruling of China's first NFT court case can be adopted and developed by future litigation cases in the NFT and metaverse space.
“On April 20, 2022, China's Hangzhou Internet Court held a public hearing and made a ruling for Shenzhen Qice Diechu Cultural Creativity Co v Hangzhou Yuanyuzhou Technology Co, which is credited as China's first NFT court case. [Shenzhen Qice Diechu Cultural Creativity Co is the copyright owner of the ‘Fat Tiger’ illustration series.]
“The court held that the NFT transaction business model essentially belongs to a business relationship with digital content as the transaction content. What the buyer obtains is a property right, not a licence to use a digital property, nor an assignment or licence of an intellectual property right.”
This article has been updated since publication to incorporate additional comments.
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