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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS
Contract Corner

Non-fungible tokens (NFTs) have exploded in popularity over the past year. Use cases for NFTs have been growing as more industries are realizing the benefits they present. A report by blockchain specialist Chainalysis found that almost $41 billion was spent on NFTs in 2021—a number that is likely to continue growing.

In essence, an NFT is a unique blockchain-based token that links to a digital or physical asset. NFTs are commonly used to represent ownership of sports memorabilia, artwork, videos, images, gaming assets, digital collectibles, or other creative content. NFTs have also been associated with physical assets such as sneakers or fine wine.

From a legal perspective, there are important issues to consider regarding the licensing and rights to the underlying content or asset associated with an NFT. For anyone looking to create an NFT (known as “minting”), rights clearance is a crucial first step. In this Contract Corner, we highlight some of the key considerations relating to rights clearance and NFTs.

1. An NFT is a token, not the underlying asset.

The rise in popularity of NFTs has made it easy for anyone to access the technology required to mint an NFT. The minting process depends on the platform, but it generally involves uploading a digital file, such as an image, a video, an audio file, or a 3D model, and the platform generates the unique token. It is important to understand, however, that an NFT is a blockchain-based “token” that links to the underlying asset, and the creation or ownership of an NFT does not mean that the owner has the intellectual property (IP) rights in the associated asset. If the NFT-linked work is an exact copy of a copyrighted work or it constitutes an unauthorized derivative work, then the copyright owner may assert infringement on the basis that a copy was made to generate, display, or promote the NFT, or some other exclusive right of the copyright owner was violated. Therefore, the person or entity minting the NFT must either own the underlying asset or have the necessary rights to mint and sell the NFT.

2. Verify your rights in the underlying asset. Do your due diligence!

Taking an asset and creating an NFT out of it for the purposes of commercialization is not straightforward from a legal point of view. For instance, the underlying content of an NFT is often subject to agreements or copyrights that were drafted prior to the NFT age. It is critical, then, for minters to verify what rights they have in the asset and whether they extend to the creation of an NFT and any subsequent use.From a copyright perspective, the minter must verify that they have the right to tokenize the underlying work. If the plan is for an NFT to use a brand or mark, then trademark rights are implicated if the marks are used without consent of the owner. For physical assets, the person minting the NFT will need to ensure that they have ownership of the physical assets or the right to create the NFT. Therefore, before creating and selling an NFT, it is important to ensure you have the various permissions you need, or you could be stuck paying your profits to various rights holders.

3. Document the transfer of rights.

If a creator does not have the right to mint an NFT associated with a particular asset, it is imperative to obtain necessary rights before moving forward with the creation and sale of the NFT. As always, the best practice would be to obtain such rights through an express grant in writing.

For example, if the creator does not own an asset, then a license will be required granting the rights and permissions to use the asset for the purposes of creation of an NFT and subsequent use of the NFT.

The same applies to cases where the creator used third party IP to create an asset (e.g., a video). Remember, creation of an NFT likely amounts to the use of the asset. So, if you licensed music for your video and the license terms allowed you to use the music as a part of the video for distribution on the internet, it does not necessarily mean you have the right to create an NFT from your video which incorporates this music.

4. Do not forget about names and likenesses.

Another issue arises when an NFT depicts the name, image, or likeness of a real person. This implicates the common law right of publicity, which prevents the unauthorized commercial use of a person’s name, likeness, or other recognizable aspects of an individual’s persona without that person’s consent. The sale of an NFT would likely be considered a commercial use and if the NFT depicts a person without consent, then it would likely be deemed a violation of that individual’s right of publicity unless there is an applicable defense.

5. Review terms of service of NFT marketplace.

As part of the rights clearance process, it is a good idea to consider the terms of service of the NFT marketplace you plan to use. Not all NFT marketplaces or platforms are the same, and it is common for the terms of service to require minters to represent and warrant that they have obtained all rights, licenses, consents, and permissions to create, display, and sell an NFT and associated content. As a result, it is important to review the terms of service for the applicable NFT marketplace as an additional means to informing what rights you need to clear.