Commercializing NFTs – generating value from digital assets and intellectual property rights

This is part 3 of our IP Update series exploring the evolving landscape for Internet, Digital Media and e-Commerce.

• Part 1: “NFTs: Art meets crypto – traditional copyright issues in a tokenized world”
• Part 2: “Branding in the metaverse – how brand owners can find growth in the virtual realm”
• Part 4: “Generative art NFTs - what brand owners need to know about copyright protection”

Overview

2021 was a big year for Non-Fungible Tokens (NFTs) resulting in significant commercial value. The creators behind Cryptopunks, an NFT project with over $2 billion worth of trading volume¹, signed a representation deal with a leading Hollywood talent agency to pursue a range of commercial projects. Purchasers of the Bored Ape Yacht Club (BAYC) NFTs, including music producer Timbaland, distribution label Universal Music Group, and consumer products company Arizona Iced Tea², have all commercially exploited the NFTs they purchased for marketing and merchandising efforts. Adidas also released a video on their collaboration with BAYC to begin their push into the Metaverse ³. 

The ability for NFT purchasers and creators to leverage and commercialize their NFTs is contingent on ownership of the intellectual property (IP) rights and/or access to the commercial rights governing the underlying digital asset. Depending on the particular project, there may be limitations on how a buyer may commercialize the NFT asset, including limits on revenue, limits on rights to create any derivative works, and/or requirements to pay royalties to the NFT creators. In this article, we provide an overview of the various approaches to intellectual property rights taken by popular NFT projects and the resulting commercial rights and benefits afforded to purchasers and creators.

Licensing of commercial rights to purchasers while retaining IP rights for creators

Some NFT projects have adopted the NFT License⁴, a license originally created for the CryptoKitties NFTs that aims to define the rights of both NFT purchasers and creators. Under the NFT License, the purchaser of the NFT obtains a limited right to use, copy, or display the art underlying their NFT “for the purpose of commercializing [their] own merchandise”, to generate up to $100,000 in gross revenue each year. The creator of the NFT retains ownership of all legal rights to the underlying art, including all intellectual property rights.  The NFT License has been adopted by several prominent NFT projects such as CryptoPunks⁵ and Meebits⁶.

To strike a balance between the needs of NFT creators, purchasers, and the wider fan community, the Forgotten Runes Wizard’s Cult NFT project⁷ has taken a more unique approach to licensing their Wizard-themed NFTs. Purchasers of these NFTs obtain a non-exclusive, royalty-free commercial license to the underlying art for up to $5 million in revenue per organization, after which a 20% blanket royalty is applied. The non-exclusive license allows the creators to also exploit the intellectual property rights governing the art. Individuals that are neither creators nor purchasers can also use the art underlying the Wizard NFTs under a Creative Commons non-commercial license ⁸, a popular open-source license for online creators.

Assignment of commercial and intellectual property rights to purchasers

The creators behind the BAYC collection took an approach that aims to provide unlimited commercial rights to the purchasers of their NFTs, with ownership of the NFT being mediated “entirely by the Smart Contract”. According to the terms and conditions, “when you purchase an NFT, you own the underlying Bored Ape, the Art, completely”⁹. Further, purchasers obtain an unlimited, worldwide license to create derivative works based upon the underlying Art with no cap on the revenue that a purchaser can generate or earn.

However, purchasers should note that although ownership is mediated entirely by the Smart Contract, the Smart Contract includes no specific provision speaking to the ownership of the intellectual property rights governing the NFT art¹⁰. What this means from a copyright perspective is that there is no executed assignment of copyright, so copyright may not immediately vest to the owner upon purchase of a BAYC NFT. A written assignment is required to perfect the copyright transfer. From a trademark perspective, a purchaser would generally not receive any trademark rights, since trademark rights only arise upon use of a trademark in the course of commerce or upon registration of the mark. Instead, the purchaser obtains permission to pursue trademark rights in the NFT, but the purchaser is fully responsible for assessing whether the mark is available to be used with the goods or services they plan to offer and to pursue protection for.  

The World of Women NFT project¹¹ goes a step further than BAYC and assigns all of its rights, title and interest to the intellectual property underlying the Art to purchasers. The project specifically addresses trademark rights by providing that purchasers may use the terms “World of Women”, “WOW’, or “WoW” when using the underlying art for non-commercial purposes only. Upon resale of these NFTs, all rights must be transferred to subsequent purchasers, and the original creator is entitled to compensation upon resale in accordance with a commission determined by the NFT marketplace¹².

Intellectual property rights in the public domain - the Creative Commons license

In stark contrast to the NFT projects above, some creators have opted to take a fully open-source approach by adopting the Creative Commons¹³ license dedicating the underlying copyright to the public domain. An example is the CrypToadz project, whose website states that “to the extent possible under law, [the creator] has waived all copyright and related or neighboring rights to CrypToadz by [the creator].¹⁴”

Similarly, the Nouns NFT project, which aims to auction “one noun, every day, forever”, provides that “nouns artwork is public domain”. However, the project compensates the team behind the project by dedicating every 10th Noun NFT minted for the first 5 years of the project to be shared among the founding members¹⁵.

In conclusion – NFT creators and purchasers should take due care of all commercial and IP rights

NFT creators should carefully consider an appropriate intellectual property strategy and approach to manage how the intellectual property rights underlying their project will be transferred to the purchasers and the public. Creators that wish to retain control over intellectual property rights in a project may adopt a traditional licensing model, those that wish to provide their community with unlimited commercial rights may assign these rights, and projects without a commercial focus may adopt the Creative Commons license.

Companies and brands looking to purchase NFTs for commercial use and marketing programs should be aware that the intellectual property and commercial rights obtained upon purchasing an NFT will vary depending on the approach to intellectual property and licensing taken by the creators. Purchasers should carefully examine the terms and conditions, licenses, and the Smart Contracts governing the NFT project. Purchasers should also seek competent legal advice to ensure that a project provides a valid transfer of copyright upon execution of the Smart Contract, and to clear and protect the underlying trademark rights necessary to commercially exploit the NFT as a brand or marketing tool.

For further information on how to strategically protect your brand in the metaverse, please contact a member of our firm’s Trademarks and Brand Protection team.

The preceding is intended as a timely update on Canadian intellectual property and technology law. The content is informational only and does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.

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