IP And NFTs: Where Are We?

Famed director Quentin Tarantino and production company Miramax settled their infringement lawsuit over non-fungible tokens ("NFTs") before the US District Court for the Central District of California could weigh in on the merits of the claims, leaving us with far more questions than answers when it comes to the development of intellectual property law around this trendy new technology.

Indeed, the directors of the US Patent and Trademark Office and US Copyright Office are in the process of conducting a joint study to untangle the various interests at play, having promised Sens. Thom Tillis and Patrick Leahy they will deliver findings by June 2023. Meanwhile, several other federal district courts are struggling with how to apportion value in the context of digital marketplace transfers.

Here's what you need to know about where things stand:

The problem lies in the fact that NFTs haven't found their place within the 232-year-old (albeit evolving) framework of the US Copyright Act. Nor is it clear whether—or how—NFTs might trigger liability under the 76-year-old federal Lanham Act, which governs trademark infringement and unfair competition.

NFTs are units of data stored on a blockchain that signify ownership of (supposedly) unique digital media items. They are sold and/or traded in connection with "smart contracts" that govern the terms of transfer. But NFTs are separate and distinct from the digital items they are meant to authenticate, making it extremely difficult to assign title to the various intellectual property rights stemming from the sale of each NFT.

In this context, the joint federal agency study is meant to address a number of key issues, including:

• Acquisition of rights: Who owns what if the NFT creator is a different person or entity than the creator of the underlying asset?
• Transfers of rights: How does the transfer of an NFT impact IP rights in the associated asset?
• Licensing of rights: How should IP rights in the associated asset be licensed in an NFT context?
• Infringement of rights: What is the appropriate infringement analysis where an NFT is associated with an asset covered by third-party IP? Or where the NFT creator also owns the IP in the underlying asset, and the asset is infringed by a third party?
• Remedies: Are current statutory protections adequate to protect rights owners in NFT marketplaces?

Several lawsuits addressing various copyright, trademark, unfair competition, and breach of contract issues in connection with NFTs have been filed in New York and Los Angeles over the past year and a half, but have either settled or are still in their infancy, leaving us with a dearth of case law on the issues:

May 2021: French luxury brand Hermès sues artist Mason Rothschild for trademark infringement based on Rothschild's sale of NFTs related to digital images he had created of handbags he dubbed "MetaBirkins." Rothschild lost his motion to dismiss and is seeking certification for an interlocutory appeal. Hermes Int'l et al. v. Rothschild, Case No. 1:22-cv-00384, US District Court for the Southern District of New York.

June 2021: Roc-A-Fella Records sues its co-founder Damon Dash, alleging that Dash's attempt to mint Jay-Z's album "Reasonable Doubt" as an NFT constituted unlawful conversion of the copyright in the album owned by Roc-A-Fella. The Court granted a temporary restraining order against Dash, and the parties subsequently settled. Roc-A-Fella Records, Inc. v. Dash, Case No. 1:21-cv-05411, U.S. District Court for the Southern District of New York.

November 2021: Miramax sues Tarantino based on Tarantino's sale of NFTs for a collection of digital images of portions of the original handwritten version of the screenplay for Pulp Fiction, implicating both copyright and trademark rights. In this case, beyond pure IP issues, the parties disagree over interpretation of Tarantino's original contract with Miramax, in which he reserved all rights for print publication of the screenplay (including in digital form). On September 8, 2022, the parties filed a notice of settlement. Miramax, LLC v. Tarantino, Case No. 2:21-cv-08979, U.S. District Court for the Central District of California.

January 2022: Rapper Lil Yachty (real name: Miles Parks McCollum) sues NFT seller Opulous for trademark infringement based on Opulous using his name and likeness as part of a "Lil Yachty NFT Collection" advertising access to his new music. Defendants were unsuccessful in challenging personal jurisdiction and recently filed their answer to the complaint. Miles Parks McCollum v. Opulous et al., Case No. 2:22-cv-00587, U.S. District Court for the Central District of California.

February 2022: Nike sues online retailer StockX for trademark infringement based on StockX's sale of NFTs for limited edition Nike sneakers that include images of the sneaker. The case is in the discovery phase. Nike, Inc. v. StockX LLC, Case No. 1:22-cv-00983, U.S. District Court for the Southern District of New York.

June 2022: Yuga Labs, the company behind the famed NFT collection known as the "Bored Ape Yacht Club," sues artist Ryder Ripps for trademark infringement. According to Yuga Labs, Ripps has been using Yuga Labs' trademarks to lure consumers into buying his own copycat NFTs. Ripps recently filed a motion to strike or, in the alternative, to dismiss, which itself was stricken by the Court. Yuga Labs, Inc. v. Ripps, Case No. 2:22-cv-04355, U.S. District Court for the Central District of California.

The only meaty judicial opinion to come out of any of the above cases so far has been Judge Jed. S. Rakoff's May 18, 2022 order denying Mason Rothschild's motion to dismiss Hermès' trademark claims. Although the order does not resolve any of Hermes' claims on the merits, it does offer a first glimpse at how courts may treat trademark claims involving NFTs moving forward.

In his motion, Rothschild argued that he used "MetaBirkins" as a title to an artistic work as opposed to a source-identifying trademark. Therefore, it constituted free expression protected under the First Amendment pursuant to the Second Circuit's seminal case Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989). Rogers held that use of a trademark in connection with a work of art does not constitute infringement if the mark is "minimally artistically relevant" to the product and use of the mark does not "explicitly mislead" regarding content, authorship, sponsorship, or endorsement. 875 F.2d at 1005.

Key to Rothschild's argument was the fact that although he sold each image with a unique NFT identifier, the NFTs were separate from the underlying work and labeled numerically as opposed to using the name "MetaBirkins." So although it was the NFTs themselves that garnered prices comparable to real-life luxury handbags, Hermès' infringement claim necessarily had to center around unauthorized use of the mark for the underlying artwork. To Hermès, the artwork and NFT "commodity" were intertwined, given Rothschild's use of "MetaBirkins" to sell other products and operation of digital storefronts and marketing campaigns using the name.

Judge Rakoff denied Rothschild's motion based on the fact that Hermès had adequately alleged that the "MetaBirkin" label was explicitly misleading under the Ninth Circuit's likelihood of confusion factors, and therefore could potentially survive a Rogers challenge. He declined to weigh in on the second Rogers factor, however: whether "MetaBirkin" qualified as artistically relevant. Hermes' allegation that Rothschild "entirely intended to associate the 'MetaBirkins' mark with the popularity and goodwill of Hermès' Birkin mark, rather than intending an artistic association" was sufficient to defeat a motion to dismiss.

Judge Rakoff did observe that use of NFTs in connection with the underlying work should not automatically strip the work of artistic significance. He agreed with Rothschild that the fact that the NFT's status as a marketplace commodity in and of itself should not necessarily be wrapped up in the value of the artwork it authenticates: "because NFTs are simply code pointing to where a digital image is located and authenticating the image, using NFTs to authenticate an image and allow for traceable subsequent resale and transfer does not make the image a commodity without First Amendment protection any more than selling numbered copies of physical paintings for the purposes of Rogers."

Other courts, and perhaps even the USPTO and Copyright Office, will likely look to Judge Rakoff's initial guidance as a foundation for this newly evolving area of intellectual property law moving forward. In the meantime, the lines are still blurry between creative freedom, artistic value, fair use, ownership, marketplace competition, and commercialism in the digital age—at least with respect to NFTs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.