Damages of at least US$1.6 million awarded by the US District Court in the ‘Bored Ape Yacht Club’ litigation

In May 2023 we reported on the IP infringement decision of the Californian District Court, in relation to the dispute between the creators of the Bored Ape Yacht Club (BAYC) non-fungible token (NFT) collection, Yuga Labs, and the ‘artists’ Ryder Ripps and Jeremy Cahen.  In that decision, the Court found against the defendants and, on 25 October 2023, the order for damages was handed down.  This blog post looks at the recent damages decisions and its implications.  (For a refresher on NFTs, you can consult our series here.)

As background, the defendants created an NFT collection called the Ryder Ripps BAYC (RR BAYC) collection, which essentially copied the iconic ape images from the Yuga Labs’ BAYC collection.  The defendants’ alleged that this was for the purposes of commentary on Yuga Labs and the BAYC NFTs.  The Court found against the defendants on the claims of false designation of origin and cyber-squatting (in relation to certain domain names used by the defendants).  It also dismissed the defendants’ First Amendment / Rogers defence because no artistic expression was at issue, finding that “As Yuga has pointed out, and the Court agrees, Defendants’ sale of RR/BAYC NFTs is no more artistic than the sale of a counterfeit handbag“.

The lengthy 28-page damages judgment contains a summary of the key findings of the Court in determining liability against the defendants, before proceeding to assess the equitable remedies available to Yuga Labs.  In particular, there were four questions to be determined on damages:

  1. Whether Yuga Labs is entitled to a disgorgement of the defendants’ profits based on the false designation of origin claim, and, if so, what amount;
  2. The amount of statutory damages to be awarded to Yuga Labs for the cybersquatting claim;
  3. The scope of any permanent injunction; and
  4. Whether this is an ‘exceptional case’ warranting an award of attorneys’ fees to Yuga Labs.

On question (1), the Court emphasised that an accounting of profits is never automatic and never a matter of right, but it considered that the equitable factors warranted disgorgement here (there was no delay by Yuga Labs in bringing the action, it would act as a deterrent from future infringement, and the defendants intended to deceive consumers by creating the RR BAYC collection).  Accordingly, the Court awarded Yuga Labs the profits attributable to the infringing conduct.

Yuga Labs contended that this amount was US$1,589,455, which included $1.4 million in profits from the initial sales of the NFTs, $100k from resale profits, and $100k for unsold NFTs.  However, the Court excluded the unsold NFTs, because these would be captured by a permanent injunction requiring transfer of the RR BAYC smart contract to Yuga Labs (more on this below), and deducted money spent by the defendants on creating the collection (including paying a programmer to create it).  Applying these deductions, the total awarded to Yuga Labs under question (1) was almost US$1.4 million.

In relation to question (2), the damages for cybersquatting, they are limited by statute to between US$1,000-100,000 per domain name, ‘as the court considers just’.  The Court considered that the maximum penalty of $100k each (for the two impugned domain names) was fair, just and appropriate here because of the wilful and egregious nature of the cybersquatting – the defendants registered these domain names solely for commercial gain and in bad faith to divert consumers away from the legitimate BAYC collection.

On the third question of injunctive relief, the Court ordered that the defendants should be permanently enjoined from marketing, promoting, or selling products or services, including the RR BAYC NFTs, that use the BAYC marks.  The defendants were also ordered to transfer control of the domain names, social media accounts, and the RR BAYC smart contract to Yuga Labs.  Interestingly, in the damages decision of the New York District Court in the MetaBirkins NFT litigation (reported by us here), that Court refused to order transfer of the NFT smart contract because of the modicum of artistic expression in the infringing works in question there.  Given the RR BAYC collection here simply copied the existing BAYC artwork, the Court had no hesitancy in ordering transfer of the smart contract.

Finally, in relation to question (4), the Court considered the totality of the circumstances and concluded that this is an ‘exceptional case’ entitling Yuga Labs to its reasonable attorney’ fees.  The Court found it salient that the entirety of the defendants’ conduct was in bad faith, continued even after the action was filed by Yuga Labs and the liability decision was handed down, and the defendants managed the litigation in a vexation and frivolous manner, and were found to be obstructive and evasive throughout.

In total, therefore, the Court awarded Yuga Labs around US$1.6 million in damages, plus their reasonably attorneys’ fees – essentially the maximum amount that it could.  This decision is a strong deterrent to others who might consider a ‘cash grab’ in the NFT space by impermissibly stepping on the IP rights of others.  In particular, this litigation has validated the unregistered trade marks of Yuga Labs and will be important to protect their IP rights going forward.  Although the defendants were given a public forum to promote their conspiracy theories about Yuga Labs and the BAYC collection (which can be read in the decision), ultimately they have left the company (and NFTs generally) in a stronger position.

For further discussion of intellectual property issues surrounding NFTs and the various cases there have already been around the world on these issues, see our series The IP in NFTs.

Author

George McCubbin
George McCubbin
Senior Associate - London
+44 20 7466 2764

Talking Shop: A consumer sector podcast series: Episode 5 – Why NFTs; why now?

Josh ToddGiulia Maienza and George McCubbin join Aoife Xuereb to discuss the NFT (Non-Fungible Token) marketplace in the consumer sector – from fine wine and fashion to enhancing the customer experience.

They explain how types of marketplaces work, whether that be trading NFT-linked physical products or digital assets in the real world or the metaverse. Commercial legal considerations include IP, standardized licensing terms, anti-counterfeiting measures, financial services regulation regimes, advertising laws and consumer protections.

Even if NFTs are not part of your strategy, recent legal action underlines the importance of protecting your brand and customers from third party behaviour – our team share some helpful practices for legal teams.

For more, check out the TechQuake series or our comprehensive guide to The IP in NFTs.

About Talking Shop

Expert insights for navigating the big trends and key issues redefining the global consumer sector. From rampant digitisation and supply chain reinvention to sustainability and geopolitical factors, the consumer sector is fast-evolving to meet the challenges – and opportunities – facing companies today.

Join our hosts Aoife Xuereb and Andrew Rich as they ‘talk shop’ with special guests unpacking the risks and opportunities for companies as they navigate new markets, technologies and customers, whilst managing operational, workplace and regulatory change in the sector.

Key contacts

Josh Todd
Josh Todd
Senior Associate, Melbourne
+61 3 9288 1781
Giulia Maienza
Giulia Maienza
Senior Associate, London
+44 20 7466 6445
George McCubbin
George McCubbin
Senior Associate, London
+44 20 7466 2764
Aoife Xuereb
Aoife Xuereb
Partner, Melbourne
+61 3 9288 1874
Andrew Rich
Andrew Rich
Partner, Sydney
+61 2 9225 5707
Susan Black
Susan Black
PArtner, Sydney
+44 20 7466 2055

Remedies for IP infringement by NFTs – the MetaBirkins case continues

The US District Judge has now handed down its opinion and order (23 June 2023) on a number of post-trial motions sought by the parties in the “MetaBirkin” case and these provide some interesting insights into how courts may approach the question of remedies in non-fungible tokens (NFT) related cases.

The motions for additional remedies (including the transfer of social media accounts and domain names, as well as the transfer of the NFTs and accounting for further income received via the NFTs) followed the Manhattan jury’s decision in February 2023 (see our blog post here), after a nine day trail, to award Hermès US$133,000 in damages against ‘Mason Rothschild’ (not his real name), the creator of the NFTs, in relation to the infringing use of Hermès’ trade marks in a collection of NFTs depicting fur-covered Birkin handbags called the “MetaBirkins”.   Hermès, is the luxury brand that makes the Birkin handbag. The case also involved allegations of cyber-squatting via the domain name metabirkins.com.

Post-trial motions

Following the jury decision in February, the parties applied for a number of post-trial motions, including the request for additional remedies by Hermès.  Meanwhile, Rothschild, in turn, asked for the decision to be overturned and the finding of a judgment of law in his favour or for a new trial.

On 23 June 2023, US District Judge Jed S. Rakoff issued his 37 page opinion and order on the motions.  The tenor of the judgment is well summarised in the opening paragraph, where the Court surmised that “In effect, the jury found that Rothschild was simply a swindler.

Additional remedies

In addition to the monetary damages already awarded by the jury, Hermès sought a permanent injunction against Rothschild to require him to do seven particularised things including:

  • discontinuing his use of the Birkin marks;
  • transferring the com domain name and related social media accounts to Hermès;
  • transferring any MetaBirkins NFTs (including the associated smart contracts) in his possession to Hermès (on this, the Court observed that the smart contract, which refers to the computer code that governs the dealings with the NFT, is distinct from the digital file associated with the NFT and can therefore be owned by unrelated entities);
  • accounting to Hermès for any further income received from the MetaBirkins NFTs; and
  • notifying purchasers of the MetaBirkins NFTs of the relief described in the injunction.

The Court agreed with Hermès on a number of their requests above (but not all of them), and awarded a permanent injunction against Rothschild which encompassed the following:

  1. Rothschild and any other persons in active participation with the sale of MetaBirkins, such as associates or business partners, are prohibited from using the Birkin marks or engaging in any other activities that would mislead the public on any association Hermès has with MetaBirkins.
  2. Rothschild is to transfer the MetaBirkins domain name to Hermès based on the jury’s finding that Rothschild was liable for cyber-squatting.  The Court did not order that Rothschild transfer any social media accounts, observing that any continued use of these accounts would be prohibited by the first order above.
  3. Rothschild is to disgorge any profits made from the sale of MetaBirkins NFTs since the beginning of the trial to present day, which includes any royalties, transfer income and any other financial benefits.  This reflects the fact that some NFT smart contracts can direct that royalties are payable to the initial creator of the NFT upon the reselling of the NFT for value.

Interestingly, in addition to declining the transfer of the social media accounts, the Court also refused to order that Rothschild transfer any MetaBirkins NFTs (and associated smart contracts) in his possession to Hermès to be destroyed.  This was deemed to be unnecessary given the other measures in place forming the core of the injunction.  Additionally, the Court considered that there was nothing to suggest that Rothschild would violate the injunction now that it had been granted, so a narrower injunctive approach was adopted.

Rothschild’s requests

There are two circumstances in which a new judgment, and hence a new trial, can be sought.  The first is where there is little to no evidence supporting the verdict made such that no reasonable person would come to the same conclusion.  The second, is where the jury came to a ‘seriously erroneous result’ amounting to a ‘miscarriage of justice’ considering the evidence brought.

The Court strongly disagreed with Rothschild that such circumstances were made out here, essentially on the basis that Rothschild’s actions were perceived as intentionally deceitful due to the use of Hermès branding in the NFTs and falsely implying an association with the Hermès brand.

What does this decision mean for IP owners?

The opinion and orders in this case provide an insight into the approach that courts in the US may adopt in the event of trade mark infringement by NFTs.

First, it is important to note that the destruction of infringing material may not always be necessary in these cases and reflects the somewhat cautious approach taken by courts generally when awarding injunctive relief.  The Court looked at the balance between protecting the rights of IP owners in prohibiting unlawful conduct, on the one hand, and respecting the creative expression of NFT artists on the other hand as protected by the First Amendment of the Constitution – here, the Court stated that “because the MetaBirkins NFTs are at least in some respects works of art, the Court, out of an abundance of caution, chooses to enter a narrower injunction that would remedy continued consumer confusion while avoiding any potential constitutional problems“.

As an injunction is an inherently equitable remedy, the conduct of the parties is fundamental in determining whether one is granted.  When evaluating which equitable principles should determine the Court’s decision, it was stated that there is no need to prove ‘wilful’ deception on the part of the defendant, but, if found, this would strongly support the case for the party seeking the injunction.

Additionally, there is an emphasis placed on whether other remedies would suffice, such as the award of monetary damages, without the need for an injunction, as well as on the degree to which the defendant had gained benefit from the use of the trade mark that had been found to be infringed.

In this case, even though the jury found that Rothschild had profited significantly from the sale of MetaBirkins, this was still not enough to order a transfer of the infringing NFTs in his possession to Hermès, on the assumption that Rothschild would not breach the injunction now that it had been granted.  For IP owners, this means that there may be cases where they are unable to demand the destruction or transfer of all infringing goods, even in the event of an overt infringement.

For further discussion of intellectual property issues surrounding NFTs and the various cases there have already been around the world on these issues (eg the cases involving Juventus and the Bored Ape Yacht Club) see our series The IP in NFTs.

 

George McCubbin
George McCubbin
Senior Associate - London
+44 20 7466 2764
Rachel Montagnon
Rachel Montagnon
Professional Support Consultant, UK
+44 20 7466 2217

Bored Ape Yacht Club unregistered trade marks effective against copycat NFTs in Californian summary judgment

In a significant decision for NFT content owners worldwide, the producers of the Bored Aped Yacht Club NFT collection, Yuga, have successfully used unregistered trade mark rights and claims of false designation of origin under the US Lanham Act  (as well as domain name squatting claims) to obtain a summary judgment against individual defendants who had created an NFT collection pointing to, that is, reusing, Yuga’s Bored Ape Yacht Club (BAYC) images (Yuga Labs, Inc. -v- Ripps, et al. 21 April 2023, CV 22-4355-JFW(JEMx), US District Court, Central District of California).

This case follows the recent decision of the New York court (in the Meta-Birkin case) and the Rome court (in the Juventus case) to allow the use of registered trade mark rights to prevent others using brand names in relation to NFTs.

Read more about these decisions and NFTs in general in our series The IP in NFTs.

Background

Yuga is the creator of BAYC, one of the world’s most well-known and successful Non-Fungible Token (NFT) collections. Yuga states that BAYC NFTs often resell for upwards of hundreds of thousands of dollars, and that prominent celebrities are holders of BAYC NFTs. Yuga maintains that much of the BAYC NFT collection’s value arises from their rarity because only 10,000 BAYC NFTs exist and each is entirely unique.

Yuga noted that it owns no registered trade marks covering the BAYC collection, but claimed that it owns several unregistered trade marks, including “BORED APE YACHT CLUB,” “BAYC,” “BORED APE,” the BAYC Logo, the BAYC BORED APE YACHT CLUB Logo, and the Ape Skull Logo (BAYC trade marks). Yuga said that it has used these marks since around April 2021 in connection with advertising, marketing, and promotion of its products and services nationwide and internationally through multiple platforms, including the BAYC website, NFT markets such as OpenSea, and social media platforms, such as Facebook, Instagram, and Twitter.

The first defendant Ripps is a visual artist and creative designer whose works comment on what is described as the boundaries between art, the internet and commerce. From around November 2021, Ripps began criticising Yuga and the BAYC collection through his Twitter and Instagram profiles, podcasts, and cooperation with investigative journalists. Fundamental to this case, in around May 2022, Ripps, along with another, created their own NFT collection, known as the Ryder Ripps Bored Ape Yacht (RR/BAYC).

The defendants’ NFT collection was being promoted under the branding “Ryder Ripps Bored Ape Yacht Club” and pointed to the same online digital images as Yuga’s BAYC NFT collection but used verifiably unique entries on the Ethereum blockchain. The defendants contended that this RR/BAYC collection served several purposes, including bringing attention to their criticisms of Yuga, creating social pressure demanding that Yuga take responsibility for its actions, and educating the public about the technical nature and utility of NFTs.

False designation of origin and trade mark use and infringement

Yuga succeeded in claims of “false designation of origin” under the Lanham Act which “prohibits the use of false designations of origin, false descriptions, and false representations in the advertising and sale of goods and services” as well as in its claims of infringement of its unregistered trade mark rights.  In order to succeed under false designation of origin under the Lanham Act, “a claimant must demonstrate that: (1) it has a protectable ownership interest in the mark; and (2) the defendant’s use of the mark is likely to cause consumer confusion.”

The defendants argued that Yuga did not own any trade mark rights in the BAYC trade marks because NFTs are intangible and as a result are ineligible for trade mark protection (not being “goods” as such). However, the California court agreed with the New York court’s conclusions in the Hermes v Rothschild (Meta-Birkin) case earlier this year (see our report here) quoting the court in that case and confirming that “goods [need not] be tangible for the Lanham Act to attach”.

The defendants also argued that even if the NFTs were “tangible goods”, Yuga could not fulfil the requirement for the marks to be used in commerce to have trade mark status. The court concluded that Yuga had used the marks “in commerce”, at least because it sold 10,000 BAYC NFTs. Indeed the defendants’ stated aim of producing their NFT collection, to draw attention to their perceived criticisms of Yuga, would not have been necessary had Yuga not already established significant brand recognition and goodwill from the use of the BAYC marks in commerce.

The court also found that the purported licence given by Yuga to holders of its BAYC NFTs was a copyright licence only, and did not purport to confer any rights in the unregistered trade marks.  Accordingly, the defendants’ argument that Yuga had transferred or abandoned their trade mark rights could not succeed.

Finally, the Court found that the defendants’ use was likely to cause confusion. The court agreed that the Yuga marks were conceptually and commercially strong and therefore it was more likely for there to be confusion when they were used by the defendants, and in any case the marks being used by the defendants were almost identical as were the goods in relation to which the marks were being used. There was also actual evidence of confusion presented but the court felt it was not necessary to consider it, as the other factors weighed so heavily towards a finding of confusion.

The damages to be awarded will be decided at trial.

Defences

In defence, the defendants’ argued that their RR/BAYC collection is an expressive work protected under the First Amendment (the Rogers test) and/or that the affirmative defence of nominative fair use applied, because the collection was intended to be a commentary on BAYC and Yuga.  The court swiftly dismissed these arguments, finding that the defendants’ sale of RR/BAYC is “no more artistic than the sale of a counterfeit handbag” and so the Rogers test did not apply – in addition, fair use was not applicable because the defendants used the BAYC marks to sell and promote their own product, RR/BAYC, and not to critique the BAYC marks themselves.

Cyber-squatting

Yuga also raised a cause of action under cyber-squatting.  The defendants had registered and used the domain names https://rrbayc.com/ and https://apemarket.com/. To succeed in the cyber-squatting claim, Yuga needed to establish that the domain names were identical or confusingly similar to their trade marks and had been registered with a bad faith intent to profit from their use of Yuga’s marks.  The court concluded that incorporating Yuga’s marks into the domain name established this – rrbayc.com incorporating the BAYC mark and, perhaps more generously, apemarket.com incorporating Yuga’s BORED APE mark and “other APE-based marks and merely adds the descriptive word market”. The defendants were also found to have registered domain names in bad faith with an intent to profit. Accordingly, Yuga’s claim under this ground succeeded.

 

George McCubbin
George McCubbin
Senior Associate - London
+44 20 7466 2764
Rachel Montagnon
Rachel Montagnon
Professional Support Consultant, UK
+44 20 7466 2217

NFT infringes trade mark rights – Italian Court grants preliminary injunction in Juventus case

The IP Division of the Court of Rome has issued a preliminary injunction to prohibit the minting and marketing of Non-Fungible-Tokens (“NFT”) that, unauthorised, reproduced well-known trade marks owned by the Juventus football club. While various cases related to NFTs and intellectual property rights are pending before the US courts, this is the first time that a court in Europe has found an NFT to be infringing IP rights, setting a useful precedent for brand owners seeking to protect their trade marks in the new era of the metaverse.

Factual background

In 2021, Blockeras, a company that operates in the crypto market, launched an NFT project consisting of the minting and marketing of trading cards in NFT format (CARDS) depicting famous past and present sports players.  Buyers of CARDS were also able to trade these collectibles on Blockeras’ platform, each time paying a transaction fee to the platform owner, establishing a secondary market.

A series of these NFT CARDS was dedicated to the Italian football player Christian (a.k.a. Bobo) Vieri. The player was portrayed in the different phases of his career, wearing the uniforms of the football clubs he was playing for at each point in time. One of the CARDS of this series depicted the player in his early years wearing the official uniform of the football club Juventus and reproduced the distinctive and renowned signs of that football club.

The Juventus club, having become aware of the marketing of NFTs that reproduced their trade mark without their consent, started legal action and filed a preliminary injunction application against Blockeras to prohibit it from minting and marketing these CARDS via NFTs and also seeking their removal from the platform and the entire market.

Juventus claimed that Blockeras’ conduct constituted trade mark infringement and unfair competition because their NFTs reproduced the club’s trade marks, without any authorisation, in particular the word marks JUVE and JUVENTUS and the figurative mark consisting of the black and white striped T-shirt characterized by the two gold stars on the chest.

The decision of the Court of Rome

The Court of Rome ruled that the NFT CARDS infringe the well-known trade marks of the football club and that the minting and marketing of those products constituted an act of unfair competition. The Court granted a preliminary injunction, ordering Blockeras to cease any minting and marketing activity in relation to the NFT CARDS reproducing the trade marks of the club and to withdraw any NFTs from the market and from any website directly or indirectly controlled by the company.

Trade mark infringement: Blockeras had argued that the trade marks alleged to have been used in the NFTs, had not been registered for virtual downloadable products and did not expressly claim “NFT” in the Nice classes for which the trade marks were registered, The Court did not agree:  firstly because the trade mark specification expressly mentioned that the registration included products not listed in Class 9 and, in particular “downloadable electronic publications“; and secondly because, in any case, Juventus have provided sufficient evidence to demonstrate that its trade marks are known and recognised in the public and have been actively promoted and marketed through online and offline merchandise and thus could be classified as “well-known” trade marks, which enjoy enhanced and broader protection including in relation to products and services that have not been expressly claimed in the trade mark specification.

On these grounds, the Court of Rome concluded that the minting of NFTs depicting the world-renowned trade marks created a risk of market confusion and association with Juventus, as the consumers may be induced to believe that the football club was somehow involved in Blockeras’ trading CARDS project in light of the identity of the signs used, or that there was a commercial relationship between the parties of some sort, in particular as Juventus had itself already begun using NFTs. The Court therefore concluded that the use of the trade marks by Juventus constituted trade mark infringement.

In its reasoning, the Court was also not swayed by the defendant’s arguments that (i) the NFTs were minted with the individual player’s consent to use his image and that, in any case, (ii) the CARD was protected under Italian copyright law as a reproduction of a famous person, falling under the specific exception set out by Art. 97 of the Italian copyright law which applies to famous person ‘portrait. The Court rejected these arguments claiming that:

  • the authorisation given by the player (Vieri) only covered the right to use his own personal image and could not extend to the reproduction of the trade marks owned by third parties. The court explained that only the owner of a trade mark can consent to its use;
  • the protection granted by Italian copyright law to the publication of the image of famous person is limited to reproductions that have a scientific, educational, or public value. In the case at issue, the Court reasoned that the CARDS project was a pure marketing operation as was also evidenced by the fact that the defendant would get a fee for every subsequent trade of the CARDS on its platform.

Therefore, the Court rejected all Blockeras’ arguments of non-infringement and found the NFT CARDS to be an unauthorised and infringing reproduction of the football club’s trade marks.

Unfair competition: In addition, the Court found that Blockeras’ conduct constituted an act of unfair competition because the company, through the unauthorised reproduction of the famous trade marks, was using a third party’s trade mark without consent and was appropriating qualities of the trade marks for the benefit of its business. Unfair competition provisions applied in light of the fact that Juventus had been taking concrete steps towards entering the meta-market itself and thus the two parties could be considered competitors.

Overall decision of the Court: In light of its conclusions on both the trade mark and unfair competition claims, the Court of Rome, considered that the misuse of the trade marks could also lead to their dilution and to subsequent irreparable damages, found that there were the requirement of prima facie case and irreparable harm and issued a preliminary injunction.

Comment

The decision of the Court of Rome could represent a steppingstone as regards IP protection in relation to NFTs, virtual goods, and the metaverse in Europe. Many practitioners, as well as academics, had already suggested that NFTs would be subject to intellectual property laws and that there could be a high risk of infringement of many different IP rights, from trade marks, to designs and copyright, through the development and use of NFTs, but there have not been any disputes to reach the courts in Europe until now.

Following an extensive interpretation of existing principles, the Court of Rome held, for the first time, that minting an NFT (like any other commercial activity) requires prior consent and  proper authorisation from the owner of any trade marks incorporated into the NFT or used in relation to it.

Going forward, it may become much more common to see trade mark registrations that expressly cite NFTs and other digital assets. The 12th edition of the Nice Classification, which is effective from 1 January 2023, expressly lists “downable digital files authenticated by non-fungible-token” in Class 9. This might imply that any trade marks that do not include this in their current specification cannot be enforced against use in NFTs, but the decision of the Court of Rome could provide some comfort to brand owners in terms of interpretation of the breadth of coverage of current specifications.

This dispute is likely to be one of a string that will involve NFTs and IP rights as this new asset class becomes established in the media. An understanding of the impact of such use on trade mark, copyright, design rights and moral rights to mention just a few IP rights, is key for all those creating NFTs and licensing their rights to others to do so. Monitoring the metaverse for brand, design and art work misuse will also be a priority for brand owners and designers alike. .

 

To read more about the role of IP in NFTs both in their creation and the policing of this new digital asset, read other blog posts in our IP in NFTs series and in particular our post Strategies for protecting your brands and products in the metaverse

A briefing outlining the key considerations relating to IP and NFTs is now available to download here in PDF format. 

 

Authors

Giulia Maienza
Giulia Maienza
Associate - London
+44 20 7466 6445
Andrea Pontecorvi
Andrea Pontecorvi
Trainee - Milan
+39 02 3602 1424

Rachel Montagnon
Rachel Montagnon
Professional Support Consultant - London
+44 20 7466 2217
Pietro Pouche
Pietro Pouche
Partner - Milan
++39 02 3602 1394
Andrew Moir
Andrew Moir
Partner - London
+44 20 7466 2773

 

The IP in NFTs – Law Commission (E&W) proposes that digital assets are treated as new form of personal property

How should digital assets be treated in terms of property? This is what the Law Commission of England and Wales has been considering in its consultation paper paper on the recognition and protection of digital assets which is open for responses until 4 November 2022.

The consultation paper recommends law reform to recognise a third category of personal property – referred to as ‘data objects’ – in addition to things in possession (such as physical objects) and things in action (such as contractual rights). The consultation paper acknowledges the flexibility of English law to accommodate digital assets within existing legal principles (including crypto-tokens and crypto-assets). However, the Law Commission recommends reform to ensure ‘data objects’ are treated consistently under English law so as to promote greater legal certainty.

Three criteria are proposed that a thing must exhibit in order to fall within the proposed third category of personal property.  It must:

  • be composed of data represented in an electronic medium, including in the form of computer code, electronic, digital or analogue signals;
  • exist independently of persons and exist independently of the legal system; and
  • be rivalrous (i.e. be incapable of ‘double spend’, or simultaneous use for different purposes).

This consultation paper follows on from a decision of the UK High Court in May 2022, in the case of Osbourne v (1) Persons Unknown and (2) Ozone trading as Opensea [2022] EWHC 1021 (Comm).  In the facts of that case, two non-fungible tokens (NFTs) were misappropriated from a digital crypto wallet controlled by Osbourne.  Osbourne then sought an urgent interim injunction to freeze any dealings in the NFTs on the marketplace OpenSea.  The UK High Court found that there was “at least a realistically arguable case” that NFTs are personal property and, accordingly, could be protected with the usual types of remedies that govern other types of property.  This included interim injunctive relief, which was granted in Osbourne’s favour.  A similar decision had been reached, years earlier, in relation to Bitcoin.

A more detailed review of the consultation paper can be viewed on our FSR and Corporate Crime Blog, here.

Contacts

George McCubbin
George McCubbin
Senior Associate - London
+44 20 7466 2764
Rachel Montagnon
Rachel Montagnon
Professional Support Consultant - London
+44 20 7466 2217
Charlie Morgan
Charlie Morgan
Senior Associate
+44 20 7466 2733
Marina Reason
Marina Reason
Partner
+44 20 7466 2288
Andrew Moir
Andrew Moir
Partner - London
+44 20 7466 2773

 

The IP in NFTs – what you need to know

Non-fungible tokens (NFTs) are one of the hottest intellectual property (IP) topics currently. NFTs can be used simply for marketing purposes or as a new form of asset to attract investment or as part of the transfer of products and services into the metaverse.

This new asset class has exploded across all sectors and raises some interesting challenges from an IP perspective.  While NFTs have demonstrated themselves to be a powerful tool in the new digital era, they remain poorly understood.

NFTs can refer to or contain valuable intellectual property rights, for example, digital artwork, branded goods, or logos.  Ensuring intellectual property rights are protected and respected should be a paramount consideration in NFT projects.

Releasing NFTs can give rise to a number of IP-related issues, such as:

  • Who has the right to create and release NFTs
  • Does the NFT infringe third party rights
  • What rights are transferred with the NFT (and on resale)
  • How this rights transfer is achieved

Even if there is no intention to create and release NFTs, brands must be vigilant to protect their IP in the metaverse and new web3 economy.  Any strategy could include monitoring of key marketplaces and platforms, defensive registration of domain names (including the new Ethereum Name Service) and trade marks in new digital classes, and developing policies to employ if infringement is detected.

In our series of blog posts on NFTs, we explore intellectual property considerations, misconceptions and issues that we are seeing arising in the NFT space, including, in this blog post, clarifying what NFTs are and how they can create effective control over digital assets and the use of NFTs for provenance and anti-counterfeiting.

Other blog posts in our series look at the IP rights that are being purchased (or not) with an NFT, IP issues associated with the minting of NFTs, and what can be done to protect the rights of brand owners in relation to NFTs and the metaverse.

What are NFTs?

NFTs are uniquely identifiable tokens, “minted” (created) using blockchain technology.  When an NFT is created on the blockchain, the token is added as a ‘block’ of digital data to the chain.  Because these blocks are linked together, the data in each block is immutable (that is, it cannot be changed without affecting the whole chain).

The NFT itself is a collection of data that provides information about the token, such as its contract address, token ID and name, and the ‘identity’ of the original creator.  While NFTs are commonly associated with a digital asset, such as an image or movie, this asset does not form part of the NFT’s metadata.  Instead, the NFT metadata will link to the location where the digital asset is stored (such as a website address).

In a parallel to the traditional fine art world, an NFT could be thought of as the certificate of authenticity for a print or painting.  In this sense, an NFT functions as a digital certificate of ownership over a digital asset, but it is not the digital asset itself.

One NFT collection illustrates the distinction between an NFT and the underlying digital asset.  In March 2021, an artist known as @neitherconfirm created an NFT series called ‘atlas III’ with each NFT in the series linking to a JPEG image file, showing an abstract portrait at the time of the sale of the NFT.  However, once the NFTs were purchased, the artist swapped the JPEGs to images of rugs.  This was possible because the NFTs linked to image files that were stored at a website address which the artist had access to.  There are solutions to prevent this from happening, such as minting the NFT using the InterPlanetary File System (IPFS), which effectively preserves the image file and prevents tampering, but this ‘atlas III’ auction shows how an NFT is not the same as the digital asset that it links to.

NFTs can create effective control over digital assets

The quintessential use case for NFTs, to date, has been the sale and trade of digital assets like art, design and digital fashion.  NFTs create scarcity for a digital asset that otherwise, because of their digital nature, would be capable of infinite dissemination.

NFTs, provenance and anti-counterfeiting

The ability of NFTs to provide provenance over digital assets has also transferred into the real-world, and it is now common to see NFTs that are associated with physical products.  For example, brands can now sell an NFT which is redeemable for a physical product (such as fine wine or sneakers), which creates a convenient market for the trade of those goods.  The NFT also functions as an anti-counterfeiting tool to disrupt unlawful activities and tackle infringing copying of goods.

 

Other posts in our IP in NFTs series look at the IP rights being purchased (or not) with an NFT, at IP issues associated with the minting of NFTs, and at branding issues for NFTs and the metaverse.

Follow our NFT blog series by subscribing to our blog IPNotes.

For comment on how NFTs are being regulated in the UK and EU, please see our HSF blog post here.

A briefing containing the first four blog posts in our IP and NFTs series is now available to download in PDF format. 

Contacts

George McCubbin
George McCubbin
Senior Associate - London
+44 20 7466 2764
Giulia Maienza
Giulia Maienza
Associate - Milan
+39 02 3602 1396
Rachel Montagnon
Rachel Montagnon
Professional Support Consultant - London
+44 20 7466 2217
Andrew Moir
Andrew Moir
Partner - London
+44 20 7466 2773
Pietro Pouche
Pietro Pouche
Partner - Milan
+39 02 3602 1394