So what is an NFT? While it is an encrypted set of data that generates a private cryptographic key that is not mutually interchangeable, we think it’s easier to look at it like this: a piece of data which verifies something as authentic – a photo, video or other digital file or piece of content. NFTs are created for image files in various formats including jpeg or gif, etc., but they are also attached to Tweets (Jack Dorsey sold his first Tweet as an NFT), music files, or video files. The NFT is not the content itself, but rather a way to verify content as genuine and create a record of ownership. Offline, this could be analogous to a certificate of authenticity for an autographed Babe Ruth baseball, a letter of provenance for an Andy Warhol lithograph, or a serial number to a Louis Vuitton handbag.
NFTs tend to be built on Ethereum, with smart contracts, and are standardized. If you’re selling an NFT, you can prove you’re the creator, determine the amount of digital files to be sold or distributed, get paid for the sale, or sell it on any platform. If you own an NFT, you can prove ownership, avoid it being manipulated by anyone, sell it, or hold it in your digital wallet. Once a transaction occurs, it is distributed through the blockchain network. Others with access to the network can see who owns the NFT asset, but are unable to access the asset itself without the unique code (the private cryoptographic key) that the owner has.
A. The Brand’s Use Case For NFTs
Brands, celebrities, and artists are actively participating in the NFT market with some hoping it can be a brand building move, provide an outlet for doing good and even drive profits. Some of the key areas that we are already seeing brands use or contemplate using NFTs include:
Brand or Celeb-Themed Artwork, Memorabilia or Other Assets. One way to create buzz for a brand (and raise money) is to create or sell unique brand-themed assets. Taco Bell created five different taco-themed animated NFTs and released five editions of each in early March. The NFTs sold out in minutes selling for as much as 1.5 wrapped either (WETH) or approximately $2,600 USD (at the time of sale). Procter and Gamble introduced a non-fungible toilet paper – NFTP! Luxury watch brand Jacob & Co. is auctioning off a one-of-a-kind NFT watch, with the highest bidder receiving a certificate of ownership, a case with a hard drive containing the NFT and a digital rendering of a Jacob & Co. watch. Designer Andres Reisinger sold ten pieces of NFT furniture which can be used in any 3D space or virtual world. Finally, the NBA partnered with Dapper Labs to develop a platform to sell NFT memorabilia. A LeBron James highlight recently sold for $200,000 USD!
Charitable Giving. Brands are already using the NFT market to promote good causes. The profits for the Taco Bell NFTs mentioned above will be donated to the Taco Bell Foundation. The P&G toilet paper NFT proceeds went to the charity Direct Relief. Patrick Mahome’s Museum of Mahomes is auctioning off six pieces of one-of a–kind NFT artwork (some with physical memorabilia as well) with proceeds going to the Boys and Girls Club.
Brand Collaborations. Limited edition brand collaborations are nothing new to the marketing world, but NFTs open an entirely new world of possibilities. The artist known as Fewocious partnered with the sneaker brand RTFKT Studios to create virtual editions of Fewocious x RTFKT shoes which sold for $3.1 million in total. Each purchase also came with a physical pair of shoes.
Promotions. The possibility for NFTs and promotional games are endless. For instance, a brand could embed an NFT in every product it sells with some of them being a surprise and delight NFT, such as entry into a virtual concert or fashion show. Brands are also exploring awarding NFTs as prizes in sweepstakes or other prize promotions. Professional sports teams are looking at developing NFTs for their season ticket holders.
Virtual Experiences. The opportunity to use NFTs for virtual experiences is also endless. Post Malone partnered with a social money platform to sell NFTs to play beer pong with him in Malone’s Celebrity World Pong League. Microsoft launched a game celebrating women in science which rewards players with NFTs which unlock secret games in Minecraft. Artists are releasing NFT clips of music and events. Finally, a Canadian individual spent 288 Ether (over $450,000 USD as of this week’s prices) on a virtual real estate property dubbed the “Mars House.”
B. Old Laws Apply To New Technology
Although it might feel like the Wild West, there are plenty of laws that apply to the creation, sale and distribution of NFTs. In particular, intellectual property and right of publicity laws will apply to the NFT assets. Contract issues, charitable and fundraising laws and privacy laws will also apply to the sale and distribution of NFTs.
1. Copyright
For the sellers of NFTs, the first question will be whether they own the copyright in the asset. Importantly, photos and videos taken of celebrities may not be owned by them. And photographers have not been shy in enforcing their rights. Gigi Hadid, The Jonas Brothers, and Kim Kardashian are just a few of the litany of celebrities who have been sued for using a photo of themselves, taken by a photographer, without permission. Accordingly, it will be critical for anyone wishing to sell NFT’s assets to ensure that they own 100% of the copyright in the asset before an NFT is attached to it for sale or distribution.
If the seller of the NFT asset wishes to retain the copyright in the asset, they certainly have that right by operation of law (in the U.S.), but it may behoove the seller to clarify the copyright ownership at the point of sale. Just as we don’t own the copyright in Andy Warhol’s soup cans by purchasing one of his lithographs, the copyright in Jeff Koons’ balloon dogs by purchasing one of his sculptures, or the copyright in Lady Gaga’s Poker Face simply by paying $1.29 to download her song, we don’t own the copyright in an NFT asset simply by purchasing it. That said, sellers could elect to sell the copyright as part of the asset, in a one-of-a kind sale. But absent a license, such a copyright transfer would invariably limit the seller’s ability to sell future assets that appear to be identical or substantially similar, or use the image for other purposes.
2. Trademark
For creators who plan to create and sell an NFT which might contain a third party’s mark, the creator will want to approach the analysis for potential for infringement of the third party’s mark, similar to the way one would approach infringement in the offline world.
When it comes to a brand’s own marks and NFTs, trademark law presents both opportunities and challenges for brands. One of the opportunities presented is that NFTs have the potential to be used for anti-counterfeiting measures to help brands authenticate products. Think of being able to scan an NFT embedded in your physical luxury bag to confirm it is authentic. LVMH has reported that it allows customers to use NFTs to trace the history and authenticity of their luxury goods.
NFTs also present interesting challenges to consider. For instance, if a brand’s mark is used in connection with one type of good or service, does the use of the trademark extend to use in connection with NFT? Or will the brand need to consider risks of exercising their trademark rights in an NFT? Will brands wish to file additional trademark applications or statements of use at the USPTO? How will brands police their trademark in the NFT world? And what will a brand do if someone creates an unauthorized NFT?
We are aware that the USPTO is tackling NFTs in patent filings. In particular, Nike was awarded a patent for NFT footwear by the USPTO in 2019 (U.S. Patent No. 10,505,726). That said, we have not seen any movement by the USPTO in revising its classes of goods and services or other revisions to the TMEP to address NFTs.
3. Right of Publicity
NFT assets, when applied to brands, tend to expose right of publicity issues. Right of publicity law stems from state statute or common law, and some states do have post-mortem right of publicity statutes. Although the elements of a right of publicity violation are not identical among states, a right of publicity violation tends to occur when one uses someone’s name, likeness or persona, for a commercial purpose and without permission.
The case law has generally concluded that a brand’s use of someone’s name, likeness or persona without permission tends to be a right of publicity violation. Although NFT assets are new, it could be a tricky proposition for a brand to rely on an argument that an NFT asset is not a commercial use. Accordingly, brands who sell NFT content will need to obtain permission for any third parties appearing in the content.
4. Contract & Financial Regulatory Issues
While NFTs can be created using smart contracts, brands tend not to be set up to collect, sell or use cryptocurrency as the method of payment. As such, they could consider using third-party platforms to process payment, or work with a financial institution that currently transacts in cryptocurrencies. Earlier this month, Morgan Stanley announced that it would offer cryptocurrencies for sale to certain clients, and PayPal offers cryptocurrencies for purchase. While we do expect the list of financial institutions who transact in cryptocurrencies to grow, brands will need to check with their own banks to determine whether this is an option. Alternatives could be the sale of NFT assets in dollars or other government-backed currencies.
5. Charitable & Fundraising Issues
As mentioned earlier, many brands are looking at NFTs as a way to do good and raise funds for good causes. However, brands need to be cognizant and consider implications of charitable solicitation laws, such as those governing commercial co-ventures and auctions, just as they would in the offline world. Registration by the brand as a commercial co-venturer may be necessary and the benefitting charity may also have to be registered to solicit in all 50 states. The brand should also consider compliance with commercial co-venture advertising disclosure and contractual requirements. Many states have specific disclosure requirements and contractual provisions which must be in a commercial co-venture agreement.
6. Privacy Concerns
Most brands have gone through various privacy audits and updated their privacy policies after the introductions of both the European General Data Protection Regulation (GDPR) and the California Consumer Privacy Act. That said, we have seen brands wish to sell NFT content globally. When sold on the brand’s platform, this can present additional privacy risks and considerations. Specifically, brands may need to develop compliance tools, updates to their privacy policy, or even an assignment of a data protection officer. Certainly the path of least resistance would be to offer NFT content for sale to the consumers that brands currently do business with, but opening NFT content sales globally is not impossible.
Conclusion
As we write this client alert, we acknowledge that the rapidly changing technology will present unique challenges to brands. We are also entirely unsure if this new technology will last the test of time. That said, we are excited about the challenges and opportunities it presents to brands to both capture additional revenue and expand their philanthropic efforts.
In-depth 2021-088
