The Legit Ledger Podcast Ep. 1
Introducing The Legit Ledger: Intellectual Property Considerations for Licensing NFTs with Yasamin Parsafar and Jim Gatto
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Listen to the original podcast released: June 14, 2022
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Presented by Sheppard Mullin’s Blockchain Team, The Legit Ledger podcast covers blockchain-related legal issues and offers practical tips on keeping transactions legit. In each episode, we discuss legal and regulatory matters relating to blockchain tech and business models with thought leaders and industry professionals who have hands-on experience with this evolving legal landscape.
For our inaugural episode, Sheppard Mullin attorneys Yasamin Parsafar and Jim Gatto address the various intellectual property considerations for licensing digital assets related to NFTs, including the specific rights and types of licenses that may be granted.
Guests:
About Jim Gatto
Jim Gatto is a partner with the Intellectual Property Practice Group in Sheppard Mullin’s Washington, D.C. office, where he co-leads the Blockchain & Fintech Team. His practice focuses on blockchain, interactive entertainment, digital art, AI, and online gambling. He advises clients on IP strategies, development and publishing agreements, licensing and technology transaction agreements, and tech regulatory issues. Jim has been involved with blockchain since 2012 and has been recognized as a thought leader by leading organizations, including Best Lawyers in America 2021-2022; Cryptocurrency, Blockchain and Fintech Trailblazer, The National Law Journal, 2018; and Thought Leader on Blockchain & Cryptocurrencies, National Law Review, 2018.
About Yasamin Parsafar
Yasamin Parsafar is a partner with the Intellectual Property Practice Group in Sheppard Mullin’s San Francisco office, where she serves as co-leader of the firm’s Blockchain & Fintech team. Her practice focuses on protecting her clients’ intellectual property rights through counseling, prosecution, enforcement, and litigation. Yasamin leverages her litigation experience to strengthen and protect her clients’ intellectual property, manage risks, and position businesses to succeed in the event of a dispute. She frequently advises and protects brands venturing into web3 on various issues related to non-fungible tokens, metaverses, games, online marketplaces, and other platforms.
Transcript:
Yasamin Parsafar:
Welcome to the Legit Ledger, a podcast by Sheppard Mullin's Blockchain Team about blockchain-related legal issues and practical tips for keeping things legit. In each episode, we cover legal and regulatory issues relating to blockchain technologies and business models. Our podcast features thought leaders and industry professionals who have hands-on experience with this evolving legal landscape. Let's get legit.
Yasamin Parsafar:
In this episode of the Legit Ledger, we are going to discuss intellectual property considerations for licensing NFTs. Your hosts today are Jim Gatto and myself, Yasamin Parsafar. We are both intellectual property partners who co-lead Sheppard Mullin's Blockchain Team. The three specific issues we will be discussing with respect to NFT licenses are; first, deciding what rights you want to grant, second, making sure you have the rights that you want to grant, and third, structuring the license to reflect this accurately and clearly.
Yasamin Parsafar:
And before we get into those issues, Jim is first going to give us some background on what is an NFT.
Jim Gatto:
Thanks, Yas. So NFTs, we've heard a lot about them in the news. It's kind of hard to miss them. There's a lot of misinformation out there though, and part of what we're trying to cover with the Legit Ledger is to help you understand accurately these items and the legal issues that go with them.
Jim Gatto:
So with NFTs, I think it's important to understand first and foremost, there's really two parts to an NFT. There's the token itself, which includes a unique token ID. And that token ID typically gets associated with a wallet ID. And that's what reflects ownership of that NFT. The second part is what the NFT represents. So typically, the NFT can represent a digital asset, a physical asset, or other entitlements, like tickets or access to events, et cetera.
Jim Gatto:
Today, we're going to focus primarily on digital assets. So in this context then, an NFT typically represents some rights to a digital asset. And what's important to understand and distinguish is that you typically own the token, but you only have a certain set of limited rights to the digital asset. And that's where the license comes in. And what we're going to cover today is some of the different ways in which people structure licenses for the digital assets associated with NFTs.
Jim Gatto:
And so before we can really kind of get into what you're licensing, it's kind of important to understand kind of the range of rights that may be involved in the digital asset associated with an NFT. So Yas, you want to cover that?
Yasamin Parsafar:
Sure. So there are various types of intellectual property rights that may be included in digital assets. So we have copyrights, trademarks, the right of publicity, and in some cases, patent rights. Copyrights, we're talking about anything that's an original work of authorship fixed in a tangible form of expression. This can include digital visual art, like photographs, music, and other sound files, audio visual works, such as video clips, and other types of works.
Yasamin Parsafar:
Another right that can be implicated in the digital asset associated with an NFT is trademark rights. Trademarks are basically, can be any symbol, such as a word, phrase, logo, design, sound, color, or any combination of these things that identifies the source of goods and services that are provided in connection with those marks.
Yasamin Parsafar:
Then we have the right of publicity, which prevents the unauthorized commercial use of an individual's name, likeness, or it can be other recognizable aspects of an individual.
Yasamin Parsafar:
Jim, do you want to tell us a little bit about patent rights that might be implicated with the use of NFTs?
Jim Gatto:
Sure. For both situations where there's a digital asset, typically the asset itself is not going to involve patent rights. Patents are typically more involved with the technology used to create NFTs, or if there is something functional about the asset associated with the NFT, there may be something patentable there. We've seen some people try to create NFTs around a patent to grant rights in a patent. But for today, we're going to kind of put the patent stuff aside and focus on the bundle of rights that Yas talked about, the copyrights, trademarks, and right of publicity.
Yasamin Parsafar:
So when dealing with assets that include any of these rights, it's really important that before entering into a license agreement to grant these rights to the purchaser of the NFT, you should make sure that you actually have the rights to do so. And that means either that you own the rights yourself, or that you have the right to sublicense these rights to somebody else through a proper license agreement where you're the licensee and you have the right to be doing what it is you're going to be doing with the IP in connection with the NFT.
Jim Gatto:
Right. And we've seen that that's become a really, not surprisingly become a really big issue. There's a number of folks who have created NFTs around certain IPs that they didn't own or didn't have the rights to. And in some cases, it's just people who are doing blatant infringement. In other cases, there's legitimate dispute as to who owns the rights. One of the famous cases that's pending right now is Quentin Tarantino was going to make some NFTs around Pulp Fiction, and Miramax sued him saying that they have the rights, not him.
Jim Gatto:
The challenge with some of the NFT disputes around IP rights is that many of the properties that were developed before NFTs were created didn't squarely address NFTs. And so it's a matter of interpretation of who has what rights. And in part, it may relate to the bundle of rights that Yasamin talked about, is that to the extent that one party has the rights to all digital media based on a film, for example, then that might be broad enough to cover digital assets associated with NFTs. It's going to be fact-specific as to the scope of the license, and then general principles of intellectual property law.
Yasamin Parsafar:
And one thing that's important for people to consider, particularly with respect to copyrights, which are implicated very often by use of NFT, is that the copyright owner has a bundle of exclusive rights which include not only making copies, but also the right to distribute the work, the right to publicly perform it, the right to publicly display the work, and also to make derivative works, such as various adaptations of the original work. And so I think a lot of issues that arise are with a misunderstanding of what rights the copyright owner actually has and how that prevents subsequent users of the work from doing whatever it is that they want to be doing with that work.
Jim Gatto:
Right. And there's definitely a lot of misunderstandings out there, as we've seen, with the growing number of disputes and lawsuits that are pending.
Jim Gatto:
So to kind of jump into the second topic. Okay, so now that we understand what are some of the types of rights that can be granted, the next question you really need to assess is, okay, so based on the rights that are implicated in the digital asset associated with the NFT, what are the rights that I want to grant to someone who purchases this NFT? And in many cases, licenses that include work that's copyrighted or may have other value beyond the NFT, certainly anything that may include a trademark of a brand, for example, many of the NFT licenses that we're seeing are personal, non-commercial licenses to display the work and to resell the NFT. Those are the core rights.
Jim Gatto:
So this what enables you to do is to, if it's a piece of digital art, for example, you may be able to display it in a NFT-based art gallery or really any location that enables you to display something that can verify you're the owner of the NFT. That's probably the most restrictive license, the personal, non-commercial license. And the non-commercial part means you can't charge people for doing it. You can't charge a fee for viewing. You can't commercialize the asset in other ways, such as by creating T-shirts or posters or any other merchandise that may include an image of that digital asset. So that's one end of the spectrum.
Jim Gatto:
We've also seen at the other end of the spectrum, we've seen commercial licenses. And so some of the Web3 projects, the Bored Apes and CryptoPunks and World of Women, have been more permissive in the scope of licenses. And some of them have changed over time. So I'll put CryptoPunks aside for a second, actually. But Bored Apes, there's an express license that grants a personal license, but it also grants commercial rights in the assets, in the Ape itself. And so people are doing different things to commercialize the works that are covered by those NFTs.
Jim Gatto:
And in between, there's some other models. I mean, there's many different models that can fall in between. So one of the earliest successful NFT projects was CryptoKitties. And in the license that they used there, there was a limited commercial license where you could commercialize up to, I think it was $100,000 per year before you needed a separate license.
Jim Gatto:
So there's not really a right or wrong way to license this. One of the things I will say that we're kind of seeing as somewhat of a trend, although there's exceptions to this, is that many existing brands that have pre-existing IP upon which they're basing the digital asset for an NFT, tend to use the more limited personal, non-commercial license. If there's a trademark image in that, at that digital asset, you certainly don't want people using your trademark in ways that you may not be able to control. And if it's copyrighted material from a movie or some other, again, pre-existing IP where there's a separate market for that IP, you may not want to grant broad rights to the NFT owner.
Jim Gatto:
So that's kind of one end of the spectrum, although we're seeing some brands experiment with some forms of commercial licenses. But at the other end of the spectrum, a lot of the companies that are doing commercial licenses, what we tend to see are companies that are Web3 companies, companies that their business is the creation of NFTs. There's not a preexisting set of IP that they're now trying to monetize. Those aren't hard and fast rules, but that's just kind of a general trend.
Jim Gatto:
So with that as a high-level set of parameters, the next thing they really need to think about is, okay, so once you understand and make a business decision as to the license that you want to grant and the specific rights under the different buckets that we've talked about, and then you have to make sure that you actually have those rights to grant. Okay. So, Yas, you want to talk about some of the other considerations around granting commercial license rights?
Yasamin Parsafar:
Yeah. So I think the distinction that you made is very important for people to understand, and that is the distinction between these kind of Web3 business models that are creating IP for the purpose of others to be able to use that IP and commercialize it versus a long-established brand or a famous brand that has marks that are associated with that company for years and their goodwill and they may not want to give unrestricted access to those marks via a commercial license.
Yasamin Parsafar:
And one important thing to consider is with trademarks in particular, that in order for a trademark owner to maintain its rights, particularly an owner that is licensing rights out to others to use as marks, that owner must control the nature and quality of the goods and/or services that are rendered under the mark. And their failure to exercise sufficient control over that use can result in an abandonment of trademark rights.
Yasamin Parsafar:
And so this is one thing that's really important to consider when licensing is that is something that should be built into the license, but also really consider whether you want to grant those rights because policing is going to be very difficult for large brands or large projects. And by that, I mean really making sure that the user of the mark that you licensed out is complying with your quality control guidelines or mechanisms and that you have a way to check that and do something about it if it's not the case so that you can maintain control of your mark.
Yasamin Parsafar:
Another thing for brand owners to consider is the harm that their brand may suffer if their marks are being used in connection with immoral, illegal, or offensive content.
Yasamin Parsafar:
So those are all, I think, important considerations before deciding whether to allow others to make commercial or widespread use of your mark.
Yasamin Parsafar:
And then with respect to copyrights as well, granting these rights out for others to make commercial use can devalue your work. And so that's one important consideration. Also, some projects we've seen seek to not license out the copyrights, but to assign or transfer the rights entirely. And under the Copyright Act, a transfer of rights requires a writing that's signed by the owner, or the agent of the owner. So that's also a consideration if that's something you really want to do to make sure that you're doing that effectively.
Yasamin Parsafar:
And then similar to trademarks, some copyrighted works that become associated with brands that may function as a trademark, even in some cases if you're allowing people to use those works in connection with content that is immoral, illegal, offensive, anything like that, that can also cause harm to the brand. So it's really important to set out not only the scope of permissible use, but also restrictions on use of your IP in your licensing agreements.
Jim Gatto:
Those are all good points. So one of the other things I think that's interesting and is really just starting to emerge as far as a consideration... So even for the Web3 companies, we'll stick with Bored Apes for a second because it's really been one of the, I think, poster-childs of a successful NFT project to date and it has a commercial license and there's some interesting things that are being done with that commercial license.
Jim Gatto:
So one of the things that has been done with that commercial license is that one of the NFT owners actually opened a Bored Ape Yacht Club restaurant called Bored and Hungry. And it's also reported that Coinbase is actually creating a trilogy of films, a three-part series around Bored Ape Yacht Club. And so, as we said earlier, while many of the kinds of preexisting brands or companies that have pre-existing IP that are now creating NFTs to get additional value from their NFTs, the opposite is happening with some of these Web3 companies. They're creating NFTs to create a brand, and now that brand is being used in different ways for restaurants, T-shirts and movies, and much more.
Jim Gatto:
So I think with these issues, I think the last thing I will just say is that for folks that are granting a commercial license, even if you don't really have a preexisting brand right now, you want to think about what, if any limitations you want to impose on the commercial license. And so even Bored Ape Yacht Club, their commercial license imposes some restrictions on the use of the trademark. And it'll be interesting to see whether folks abide by that as they create these commercial ventures, whether they're restaurants, movies, or other commercial ventures, and what happens if they don't.
Jim Gatto:
So I think with that, we've kind of covered the three points, Yas. Any other points you want to make before we wrap this episode up?
Yasamin Parsafar:
No. I think just our last point is another really important consideration, is to make sure that the license is binding on the purchaser. And I think we'll cover that in another episode.
Jim Gatto:
There's certainly a lot to cover there. Well, thank you all for tuning in today. I hope you enjoyed this podcast. And we look forward to seeing you on the next one.
Yasamin Parsafar:
Thank you.
Contact Information:
Resources
- NFTs and Intellectual Property: What IP Owners and NFT Creators Need to Know
- Protecting IP and Limiting Liability When Licensing IP for Digital Art and NFTs
- Tokenization and the Law: Legal Issues with NFTs | Law of the Ledger
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