In a recent letter to the U.S. Patent and Trademark Office (USPTO) and the U.S. Copyright Office, two U.S. senators said that the rapidly growing but loosely regulated nonfungible token (NFT) industry already affects a wide range of human activities, “from academia to entertainment to medicine to art and beyond.” Legislators asked for a study to find out how this growing technology affects IP rights, such as copyrights, trademarks, and patents.
Some people say that this sector is marked by uncertainty, uneven application of the law, and apathy on the part of the courts. Michael Young, a partner at Finnegan, Henderson, Farabow, Garrett & Dunn, LLP, said “Many people think it’s time for Congress to step in and provide the predictability that innovation needs to grow.”
Recent high-profile lawsuits like Nike v. StockX, Hermès v. MetaBirkins, and Miramax v. Quentin Tarantino raise some tough questions about how non-fungible tokens (NFTs) are made, who owns them, and how they are spread. Senators Patrick Leahy and Thom Tillis have asked for a study on this topic, which is due in June 2023.
In one case, unauthorized NFTs were given out that had shoes with a Nike Swoosh on them. In a second case, digital pictures of Hermès Birkin handbags made of fur instead of leather and made without a license were made in connection with the NFT. In the third case, a well-known film director made NFTs from a movie he directed but did not own.
Anna Naydonov, a partner and co-chair of Young of Finnegan’s Blockchain, NFTs, and Other Digital Assets industry group, said A wave of lawsuits over trademarks and copyrights has already started, and courts are struggling to apply rules that were made before NFTs.
“The lack of clarity about what can be patented and what can’t is still a big problem for NFTs and other crypto-based innovations both in the U.S. and abroad,” said Young. Naydonov added that the same could be said about trademark and copyright issues, especially the secondary liability of marketplaces like OpenSea, metaverse virtual worlds, and other platforms where copyright infringement can happen.
But not everyone agrees that new laws need to be made. Some people think that government involvement in the U.S. and other places would not only be unnecessary, but could also make it harder for NFTs to be used and made better.
Eric Goldman, a professor at the Santa Clara University School of Law and the associate dean for research, said “Yes.” When someone buys a painting or sculpture, they don’t automatically get the rights to use it in the real world. Unless the copyright is transferred separately, the artist or sculptor “may make money off of copies of the artwork/sculpture and stop the property owner from doing the same.” The U.S. Copyright Act makes it clear, even if the average customer doesn’t always know:
“Owning a copyright or one of its exclusive rights is different from owning a physical item that contains the protected work.”
Goldman sees “a lot of wrong claims” that “one part controls the other,” such as that the owner of the NFT controls the IP or that the owner of the IP controls the NFT. People don’t always understand that “an item of IP and its NFT may and often will be owned by separate parties,” just as in the real world, a work of art and its copyright are often owned by different people.
How does a new industry go through growing pains?
But every new technology brings up new worries, and maybe this is just another example of technology moving faster than the law. Will it be hard for regulators and lawmakers to keep up with how fast things change?
A professor of law at Washington & Lee University named Joshua Fairfield told Cointelegraph that the opposite is true. The law is already in place and has been for hundreds of years. One of the oldest parts of the law is the law about property. There’s no reason why someone can’t own an NFT the same way they own a car, a house, stocks, or money in a bank account, since each of these property interests is also a record in a database of who owns what.”
Fairfield went on to tell Cointelegraph that the problem is that online, intellectual property law has become more important than personal property rights.
“If I own a book, I also own the copy, even if the book has information that can’t be copied. But I don’t own an online e-book because too many courts only recognize intellectual property rights.”
Fairfield said that this is starting to change as courts realize that intangible assets like domain names or NFTs are the same as any other kind of personal property interest that we want to hold.
Goldman says that the current situation “looks a lot like the problems we had with domain name ownership 25 years ago.” Even though a domain name is not protected by a trademark, it may still be considered personal property, he said, and he expected that “the non-IP standards designed to protect domain name owners would help settle NFT ownership conflicts.”
On the other hand, Bibby doesn’t agree that intellectual property law has become so important that it has pushed aside concerns about personal property online. When intellectual property rules are handled with care and moderation, it is likely that other interests, like personal property rights, will be respected.
It’s clear that this kind of confusion is not unique to NFTs. SpiceDAO is a decentralized autonomous organization (DAO). They bought the unpublished screenplay for the Dune movie at an auction for more than $3 million. They plan to make an animated limited series based on the novel for a streaming service.
The company then found out, too late, that buying a manuscript of a creative work in the U.S. or Europe does not give the buyer the rights to the work. SpiceDAO was called out on Twitter, among other places, for being careless. Andrew Rossow, an Ohio law professor and tech lawyer, told Cointelegraph in February:
“The Spice DAO and Dune fiasco was a landmark in its own right that sends a very powerful message to everyone involved in the NFT space — creator or owner. The $3-million mistake that was made proved that intellectual property’s dominion in digital fine art is essential to its success and longevity.”
People need to know that the owner of an NFT owns the copy of the photograph or artwork, “just like we own a car or a painting or a book,” said Fairfield in response to a question about the need for clarifications, whether through laws or other means.
“At the moment, people who invest millions of dollars in an NFT are told they don’t have the right to take advantage of the increase in value. This makes it impossible to invest, “he said. Fairfield said, “It is important to realize that owning a non-financial asset is the same as owning personal property every day.”
It says that when someone dies, NFTs go to their heirs. If someone steals an NFT, the owner can ask the court to get it back. If an NFT is damaged or destroyed, the person who did it might have to pay the owner. “An owner knows that if the NFT turns out to be a good investment, he or she will be able to make money from the value going up.”
If fraud is getting worse, there might be a crackdown.
Some people think that making too many changes to laws and regulations at once can be dangerous when it comes to making new technologies. “When the government gets involved in new technical fields, there is always the risk of bad regulation that hurts or slows down progress,” said Goldman. This is especially true when technology changes quickly or when people who run the government don’t understand it.
Goldman also said that the way things are now might not be able to last because NFTs are being used to commit consumer fraud right now. When fraud rates reach a certain level, the government must take action to protect people.
This could lead to too much regulation “Unfortunately, the illegal parts of NFTs could make it hard to see what the honest players are doing. Goldman said, “Even though they’ve always done the right thing, the government’s crackdowns could hurt the good guys.”
“Such risks always exist, which is why intellectual property and marketing lawyers in this space hope that the U.S. Patent and Trademark Office, the U.S. Copyright Office, the Federal Trade Commission and/or legislators work closely with key industry stakeholders to understand the main legal challenges and the technology behind NFTs, and come up with workable solutions,” said Young. Naydonov added that “regulation and legislation without input from the industry could set the U.S. back as compared with other jurisdictions.”
People need to be educated
But Bibby doesn’t think there’s a need for big changes to the law. Instead, she told Cointelegraph, “we need to have a debate about what we know now about NFT ownership.” People need to know that a simple NFT purchase doesn’t give them any copyright, trademark, or patent rights unless it’s made clear that it does. She continued:
“Throughout modern history, laws have been tested by innovation and survived. The U.S. Constitution is a perfect example. The real need is to understand how existing intellectual property laws apply to recent innovations like virtual assets, including NFTs, virtual goods and the like.”
Bibby told Cointelegraph that the results of ongoing court cases like Nike v. StockX and Hermès v. MetaBirkins would probably be enough to “answer many of these unresolved problems.”
Senators have given the USPTO and the Copyright Office until June 9, 2023, to finish their investigation. But given how quickly NFTs and digital assets are being made and passed around, the market may come up with solutions before the combined work of the agencies is published.