September 28, 2021

Volume XI, Number 271

Advertisement

September 27, 2021

Subscribe to Latest Legal News and Analysis
Advertisement

NFTs: Brands and Advertisers Should Grasp the Basics Before Digitally Diving In

With digital versions of pizza slices, collectible corporate mascots, and dancing animated tacos, marketers are seeking to capitalize on the non-fungible token (NFT) trend by capturing consumer attention and connecting with their fans.1 Business analysts see opportunity from new revenue streams in the digital space.2 But brands should know that in this new field, there are no legal “silver bullets” established to ensure a risk-free foray into this latest online fascination. Instead, best practices are making sure that marketing executives and their legal advisors understand the foundational principles of NFTs before deciding to get involved.

Picking the Right Partner

An NFT allows a creator to take a particular creative work and sell a unique and digitally traceable ownership claim to it. The caveat in the process is in creating the NFT — called “minting” — which allows the original creator of the work to significantly limit the subsequent NFT owner’s ability to distribute, reproduce or create a derivative work from the underlying property. To overly simplify, ownership of an NFT often merely grants bragging rights, rather than transferring substantive intellectual property rights. Those exact rights granted are often determined by the terms of service drafted by the platform used to mint the NFT. Accordingly, brands should closely compare the terms of service between minting platforms to pick their partner of choice.

Though brands may only be interested in granting buyers bragging rights, how each platform deals with those rights varies. For example, the NBA’s Top Shot platform allows fans of the basketball league to purchase and collect video “moments” of dunks and top plays; it is their digital take on traditional trading cards with fans trading these moments via an online marketplace.3 The NBA platform’s terms of use prevent modification of the clips in any way, bar commercial use entirely, and even include a clause preventing the moments from being used alongside anything that could be considered hateful or violent.4 The terms for SuperRare — a minting platform popular with established companies — contain many of the same restrictions. But, with a goal of protecting both the moral rights of artists and a brand’s connection to the works minted, the terms also prevent the NFT owner from doing anything to “falsify, misrepresent, or conceal the authorship of the Work.”5 One of the earliest platforms prevents commercial use of the work by the NFT owner but only to the extent that the commercial use creates revenues greater than $100,000 per year.6 Each platform is different, and the number of minting websites online increases each day.

For brands entering this marketplace, using their legal teams collaboratively to find their platform partner of choice is a must. The protections each brand will want are likely to vary, but the platform selected should, at a minimum, have terms to prevent the misuse of trademarks and service marks, bar the creation of derivative works and prevent further commercial use.

Choosing What to Mint

After deciding on a platform, knowing what to mint safely is a critical element to risk mitigation. Brands and their legal teams should conduct a full analysis of their rights regarding each of the works minted. Though this may appear to be a traditional intellectual property analysis, there are a litany of unsolved questions with such a new digital product.

For example, TIME magazine is minting covers as collectible artworks, but as of May 2021, the magazine has only made illustrative works available.7 Often, all rights, title and interests in and to artwork, such as illustrations, done in-house or under a work-for-hire scheme are fully assigned in favor of the magazine publisher. The same is not as likely to be true for an image licensed from a photographer or photo agency. Further, TIME’s illustrations do not depict popular figures as of yet, forestalling any possibility of a right of publicity claim. An image of a public figure on a magazine cover may often be acceptable under a newsworthiness standard.8 Courts have yet to consider whether the minting of an NFT amounts to more of a merchandise sale: a commercial use that raises more concerns for likeness appropriation.

Brands that aim to mint NFTs containing intellectual property licensed or acquired from others should re-examine their rights anew by reviewing agreements to determine the scope of licensed rights. With this novel digital product, there are no clear assumptions about what would, or would not, be covered, necessitating additional legal review.

Protecting Future Buyers

The appeal of buying an NFT is that the “bragging rights” granted are recorded on the blockchain: a distributed public ledger that tracks transfers between users to guarantee authenticity. NFTs can be sold from user to user without worries that a fake has entered the marketplace. The decentralized nature of the NFT’s “on the chain” ledger makes disrupting an owner’s legitimate claim to a digital work nearly impossible.

However, copies of the actual digital works — as in the actual JPEG, PNG, .mov files — are not also replicated on the same distributed network. Although this might sound ideal from an exclusivity perspective, this creates challenges for keeping these images and videos around in perpetuity. The files in question are likely hosted by the platform displaying the work, which can go out of business and fail to continue to pay for server storage. When the web address pointing at a digital work no longer functions decades after its initial sale, it is not clear how the NFT would still hold value.

Brands may want to understand how these files are stored and distributed by the applicable platform. They can ensure access in the future through a distributed file sharing network: some point to networks like the InterPlanetary File System (IPFS) as a solution, but experts have already identified limitations of even these platforms in covering all NFT works forever.9 At a minimum, organizations might consider putting their own retention measures in place to ensure the original files are not lost to time. Even if organizations are not obligated under the terms of service to provide such files, verifying future access may be an insurance policy to forestall possible legal action.

Patrons of the Digital Arts

When reading headlines with big dollar signs, businesses can feel as though they are missing out on a valuable revenue stream, but brands should appreciate the more humble origins of NFTs before getting into the market.

For generations, patrons investing in the physical paintings and sculptures of living artists helped these creators earn a living and continue to produce work. But digital artists have had difficulty establishing a similar revenue stream. Despite the US Court of Appeals for the Second Circuit’s rejection of a “digital first sale” principle,10 the inherent reproducibility of the internet era can render investment in a digital file meaningless with a simple “ctrl + c.” NFTs provide a solution. They allow a buyer to know they have certain exclusive rights to the underlying work. Although the work itself might be duplicated and shared widely, only the NFT owner can claim those sole bragging rights and point to the public blockchain ledger to definitively prove they “own” the digital copy of the work.

This creation has been a boon to the artistic community.11 Fans of an independent musician or a digital artist can become patrons by buying exclusive rights. In this way, NFTs function similarly to the way creators have found success through Patreon, a platform that allows fans to support their favorite YouTubers or podcasters with a nominal monthly subscription in return for bonus content or exclusive discussion boards.12 Additionally, smart contracts embedded in the NFT can be set up to require royalty payments to be paid to the creator upon resale, similar to France’s droit de suite or the Artist Resale Right in the United Kingdom, further supporting living artists.

With that background, brands should seek authentic and meaningful ways to use NFTs to engage with consumers, as the (growing) NFT community is built upon a foundation of supporting creatives. Additionally, the amount of electricity and computer power required to keep many NFTs’ blockchain running has raised concerns about its impacts on climate change, leading to some public blowback. Combined, the potential for public relations missteps or failing to actually connect with NFT consumers are outcomes companies should consider before launching.

All of that said, the NFT marketplace has become big business for brands with established followings. As of March, the rabid basketball fans in the NBA’s Top Shot system have spent more than $230 million buying and trading NFTs. Brands with existing fan bases or those with sound rights to creative works that mesh with current NFT markets should consider whether now is the time to get in the NFT game.


(1) “Why Taco Bell, Charmin, and Pizza Hut are Trying to Sell You NFTs,” Marker (Mar. 19, 2021)

(2) Daniel Roberts, “Mark Cuban Explains NFTs: Get Over the Lack of Physical Ownership,” Decrypt (Mar. 5, 2021)

(3) “Next Level NBA Collectibles,” NBA Top Shot (as of May 1, 2021).

(4) “Terms of Use,” NBA Top Shot (last updated Mar. 10, 2021).

(5) “SuperRare Terms of Service,” SuperRare (last updated Apr. 11, 2011).

(6) “CryptoKitties Terms of Use,” CryptoKitties (last updated Nov. 11, 2018).

(7) “Time,” SuperRare (as of May 1, 2021).

(8) For discussion on the outer bounds of newsworthiness, see Booth v. Curtis Publishing Co., 15 A.D.2d 343 (N.Y. 1962).

(9) Victor Tangermann, “NFTs Have a Huge Persistence Problem,” Futurism (Mar. 17, 2021)

(10) Capitol Records, LLC v. ReDigi Inc., 910 F. 3d 649 (2d Cir. 2018).

(11) Anna Bauman, Jonathan Chang, & Meghna Chakrabarti, “How NonFungible Tokens Are Digitally Disrupting The Future Of Art,” On Point (March 16, 2021)

(12) “These Top Patreon Creators Earn More Than $200,000 a Year,” Patreon (Dec. 10, 2020)

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume XI, Number 174
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Associate

Matthew Hartzler is an associate in the Intellectual Property practice.

312-902-5489
Advertisement
Advertisement
Advertisement