A letter sent by US senators Patrick Leahy and Thom Tillis to the US Copyright Office and the Patent and Trademark Office represent the challenges that lie ahead for the proponents of NFTs.
In the letter, the senators expressed their concern about the legal status of NFTs and asked for clarification on a number of issues, i.e., whether NFTs are copyrightable and whether they are subject to trademark law.
While the issue of intellectual property rights is no longer a secret in an industry that seemingly breaks convention, the letter highlights the murky legal waters that NFTs currently inhabit.
How Does NFT Copyright Work?
In the US, copyright law only protects "original works of authorship." This includes literary, dramatic, musical, and artistic works, i.e., paintings, sculptures, and computer code. To be protected by copyright law, a work must be "fixed in a tangible medium of expression." This is where a legal conundrum towards NFTs exists.
While an NFT represents a digital file, the file itself is not the NFT. The NFT exists on a blockchain and is, therefore, not "fixed" in any one place. This could mean that NFTs are not copyrightable works under US law.
This is not to say that NFTs can never be copyrighted. It's possible that courts could find that NFTs are sufficiently "fixed" when they are transferred to a new owner or when they are displayed on a website or other digital platform. However, there remains no clear precedent on this issue.
Are NFTs Subject to Trademark Law?
Another concern for Leahy and Tillis is whether NFTs are subject to trademark law. In the US, trademark law protects words, phrases, logos, and other symbols that identify and distinguish a product or service in the marketplace.
To be protected by trademark law, a mark must be used in commerce. Unlike copyright law, there's no requirement that a mark is "fixed" in a tangible medium of expression. In other words, NFTs could be protected by trademark law if they are used to identify and distinguish a product or service in the marketplace. However, this is also an area of law that remains relatively untested.
The problem showcases the uncertainty surrounding the legal status of NFTs. This could have implications for both NFT creators and collectors.
NFT creators may find it difficult to enforce their intellectual property rights if their NFTs are not considered copyrightable works. This could open them up to infringement by third parties.
NFT collectors could also face challenges if the NFTs they purchase is later found to be infringing on someone's intellectual property rights. They may be required to return the NFT or pay for damages.
Case in Point: Hermès v. MetaBirkins
Early this year, luxury brand Hermès took an NFT artist to court after the latter used the name "MetaBirkins" to sell NFTs. The artist, Mason Rothschild, created digital representations (images) of Hermès' signature Birkin handbags and sold them for profit. Hermès took exception to this and sued Rothschild at a New York federal court, alleging that he infringed on its trademark.
Rothschild's legal team argued that the NFTs were not subject to trademark law because the term "MetaBirkins" is classified as an art project, meaning its use is protected by the First Amendment.
On the other hand, the giant retailer's attorneys alleged that Rothschild's use of the term was not transformative and, therefore, not protected under the First Amendment. They argued that Rothschild's use of the Hermès trademark was likely to cause confusion in the marketplace, where consumers will assume that the NFTs are connected to Hermès when in fact, it's not.
This case highlights how existing intellectual property laws may not be equipped to deal with the legal challenges posed by NFTs. It also underscores the need for clarity regarding the legal status of NFTs.
Is the Current IP Law Insufficient?
For most legal experts, it's not a question of whether the existing IP Law is sufficient. Instead, the root cause of the wave of litigations and the confusion that haunts the ensuing court decisions is the absence of a clear understanding of what NFTs are and should be.
For the relevant laws to have "teeth" over NFTs, there must be a concerted effort to put a universal definition of what "NFT ownership" should be. This way, when an NFT is sold, the IP rights can be conveyed with it.
Traditional Contracts vs Smart Contracts
One of the tenets that make intellectual property rights and trademark laws effective is the existence of a contractual agreement between the parties involved. For example, when you purchase a physical product, there's an implied contract between you and the seller that gives you the right to use the product in a certain way.
The same goes for trademark law. For a trademark to be enforceable, there must be a commercial relationship between the parties involved. This is why businesses need to have contracts in place with their customers, employees, and suppliers.
The issue with NFTs is that they're sold using smart contracts, which are self-executing contracts that do not require an intermediary to enforce them. This could pose a problem because it's unclear if the traditional rules of contract law apply to smart contracts.
Let's put it this way: the purchase of an NFT doesn't convey the trademark rights or copyright of the physical (actual) asset or item from which the NFT is derived. So, if you buy an NFT of a painting, you don't own the copyright to the painting itself.
It becomes a glaring problem for NFT creators and collectors because it's unclear how they'll enforce their intellectual property rights over the NFTs they've sold or bought.
The Future Of IP Law
Existing IP and trademark laws will suffice as long as jurisdictions start making room for improvement, whether through legislation or court decisions. After all, it took years and a number of lawsuits to solidify the legal status of MP3s and eBooks. The same can be said for NFTs.
To move forward, there must be an industry-wide and settled definition of a smart contract. Since it's the foundation from which NFTs are traded, it's critical to clearly understand their legal nature. When an NFT is sold using a smart contract, intellectual property rights can be conveyed with it. Otherwise, the current IP law will remain vulnerable to legal challenges.
With existing discussions on how to regulate NFTs at the policy level, it's a positive sign that there's a willingness to adapt the law to the changing times. That said, it will still be a long and winding road ahead until we see a more definitive answer to the question, "will NFT IP Law get any better?"