The NFTs clause: are licensors waking up to digital use?
While the ink may be well and truly dried on an IP licensing deal, the potential for disputes concerning non-fungible tokens (NFTs) related to that IP is forcing rights owners to look at the small print.
Few developments have presented as many intriguing questions for IP in recent times as the promise of the metaverse and the emergence of NFTs.
And while debate rages over exactly what rights are transferred in the sale of an NFT, and those accorded by laws protecting freedoms of expression, the role played by licensing agreements is still ripe for discussion.
Increasingly, cases have presented questions over whether licensing deals allow for the creation of NFTs including their minting and distribution based on licensed work.
Tarantino v Miramax
The most high profile of such disputes involved the case between director Quentin Tarantino and the studio, Miramax, the resolution of which many had hoped would offer a clear precedent.
The row arose when Tarantino created NFTs using some of the copyrighted works from the cult film, “Pulp Fiction”.
But the crux of the issue was that the licensing agreement between the director and the studio was created before the existence of NFTs.
Consequently, the contract did not expressly state which party had the explicit rights to create NFTs based on the work.
According to Knobbe Martens partner Mauricio Uribe, this dispute highlights the dilemma when each party focuses on different definitions in the existing agreement referring to disputed ‘new’ technology.
A contract nightmare
“Without explicit coverage for NFTs, this became a battle of terms with different outcomes—a contract nightmare. This case was being closely watched as there are likely thousands, or more, of contracts for films made with similar clauses. The settlement means that we will not receive greater guidance/resolution,” he says.
While the eventual settlement may be perceived as a missed opportunity, Finnegan partner Anna Naydonov believes that it is inevitable that cases in a similar vein will emerge.
“We are likely to see more cases where defendants allegedly make infringing uses of IP assets, in violation of a prior licence to create unauthorised NFT projects,” she says.
“And we’ll see cases similar to the Tarantino litigation where courts are called to decide whether contractual provisions assigning or licensing certain IP assets encompass uses of those IP assets as NFTs.”
And as more cases emerge, she predicts that the courts will struggle to provide definitive judgments.
“Courts are currently grappling to apply legacy doctrines, for example the Rogers test, nominative fair use in the web3 and NFT context. We are likely to see these legacy concepts evolve and new precedents created to address the emerging web3 technologies.”
For Withers partner Gina Bibby, the common thread running through NFT litigation appears to be a lack of education and/or due diligence.
“Before minting an NFT, one needs to have a clear understanding of the IP associated with the NFT, who owns the IP, and what rights (if any) one has in using said IP to mint an NFT,” she explains.
“In the immediate future, I see more NFT-related litigation because people don’t seem to yet understand that IP rights are often associated with NFTs.”
As Haynes Boone associate Mike McArthur points out, a key question in such cases will be whether the disputed licensing agreement “explicitly addresses NFTs”, or if NFTs “were presumed” by one or both parties to fall under the more general IP provisions.
In a dispute involving NFTs filed in September, an internet role-playing video game creator sued a Romanian developer at a federal court in Washington DC, over its creation of NFTs based on a mafia-themed game.
The silent treatment
NC Interactive, a US subsidiary of Korean video game industry giant NCSoft, alleged that Bucharest-based Amber Studio created source code, pictures, characters, as well as other game-related assets for a gaming project that was then known as “Criminal Empire”.
NC Interactive later shelved the game and licensed the concept to Amber Studio. Following the termination of the contract, Amber allegedly violated its terms and collaborated with another business, Syndicate Production PTE, rebranding the concept as “Mobland”.
NC Interactive claims that Mobland has now generated “orders of more than 8,000 NFTs in excess of $3 million”, and that it has seen no royalty payments.
In McArthur’s view, the specific question here is: did the licence explicitly authorise Amber Studio to mint NFTs based on the game or engage others to do so?
“Did it define the downstream treatment of these NFTs, especially in relation to ownership and royalty payments?” he further queries. “Portions of the complaint show that there was not an explicit reference to NFTs in the licence, but that both parties still allegedly understood the sale of game-related NFTs to be subject to royalty payments.”
If the agreement is silent on the subject, he notes, the court will still need to determine whether the sale of game-related NFTs by Amber Studio and its licensee infringed any of NC Interactive’s IP rights with respect to the game.
“Another interesting open question here is what will happen to the NFTs that have been sold by Amber Studio if they are found to infringe copyrights owned by NC Interactive.”
Smart contracts
When licensing contracts are silent or there simply isn’t one, the challenge posed to NFT owners is that it is generally held that the purchaser does not automatically acquire the full set of copyright rights to the character depicted in the digital image simply because it was embodied in an NFT.
One solution that has emerged is the so-called smart contract, where NFTs are minted through digitised contracts that assign ownership and reassign it, alongside IP rights. Such contracts purport to grant a greater set of copyright rights to the subject of the NFT.
But the existence of a digitised contract will not necessarily put litigants at bay, and can instead generate a new set of questions.
This is especially so in the scenario where an alleged infringer takes certain IP assets without authorisation, and the damages and royalties owed, may still need to be decided through courts.
As Uribe points out this is “one of the unique aspects of the Bored Ape NFTs in which the full set of copyright rights are part of the NFTs”.
The Bored Ape Yacht Club is a collection of 10,000 unique Bored Ape NFTs—unique digital collectibles on the Ethereum blockchain.
Earlier this year, actor Seth Green dominated headlines when he alleged that his Bored Ape Yacht Club #8398 was stolen from his crypto wallet.
Green had planned a television show “White Horse Tavern” based cartoon creature where he was supposed to introduce #8398, but he was unable to do so after he lost his NFT and the commercial rights associated with it.
According to Green, he fell victim to a scam when he clicked on a malicious link which led to the theft of his digital assets, including #8398. A collector named DarkWing84 later bought Green’s stolen NFT for $200,000, prompting the actor to threaten a lawsuit.
Good faith purchasers
This triggered questions over the nature of the rights held within Green’s smart contract and whether DarkWing 84 could be seen as a ‘good faith purchaser’.
Good faith purchasers are individuals who unknowingly and in good faith buy property from a seller whose own actions in obtaining the property are of questionable legality.
Under common law, such purchasers obtain valid ownership themselves free from the taint of the seller’s actions.
As there is no case precedent as yet regarding such smart contracts, it remains unclear whether the doctrine of good faith purchaser extends to licensing rights embodied in the NFT, and if the good faith purchaser is required to know about the smart contract when acquiring it.
According to Uribe, an NFT creator and owner must consequently tread carefully when deciding to adopt a smart contract when monetising NFTs.
“They must look carefully at what is included in the ‘smart’ contract, and what it means about derivative rights. Those are only a few of the many questions involved in the ultimate business decision,” notes Uribe.
Consider a separate licence
The Seth Green case underlines why companies should still consider a separate licensing arrangement instead of a full transfer of ownership of the NFT and the underlying IP is the challenges that can arise with enforcement, according to Jonathan Menkes of Knobbe Martens.
“If the NFT contains artwork and that NFT and all IP rights are transferred to the NFT purchaser, the original owner may have little recourse in stopping unauthorised third party uses of that artwork without the assistance and cooperation of the NFT purchaser,” he explains.
“Indeed, it may be very difficult to obtain the true identity of the NFT purchaser in the first place and even if they are known, they may not have the financial ability or interest in pursuing a lawsuit against these third parties.”
And while the courts continue to mull over these perplexing questions, for now, it is vital that such licensing contracts from now on stand up to future scrutiny.
“It will certainly be helpful to see how courts balance IP rights with First Amendment protections in relation to NFTs as these cases are decided. But for now, parties must avoid some of this doubt by clearly defining the parameters and role of NFTs in their agreements," says McArthur.
“It is essential to explicitly define within their agreements what its licensees are and are not authorised to do with respect to NFTs based on the subject matter.”
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