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NFTs and Intellectual Property Law

AUTHORs: Rory O'Keeffe, Carlo Salizzo co-author(s): Megan Kearns Services: Technology and Innovation DATE: 03/05/2022

The increasing popularity of non-fungible tokens (“NFTs”) has raised a number of interesting issues from an intellectual property law perspective, both for businesses who operate NFT resale platforms and those which sell NFTs via such platforms. We have outlined, by way of example, some of the issues we have recently advising on in this article.

Directive 2019/790 – Intermediary Liability for Copyright-Infringing Content

The controversial Article 17 of Directive (EU) 2019/790 on copyright and related rights in the Digital Single Market, implemented in Ireland by S.I. 567/2021 (together the “DSM Regulations”), has been a source of concern for “online content sharing service providers” (“OCSSPs”), as defined under the DSM Regulations. Such entities are subject to new obligations to ensure copyright-infringing content is not uploaded to their platforms, which include, for example, a positive obligation to seek authorisation from the rightholder for any uploads. If such obligations are not complied with, the provider could be held liable for copyright infringement.

The application of the DSM Regulations to NFT resale platforms raises an immediate question, as the definition of an OCSSP expressly excludes “online marketplaces”. The DSM Regulations, unfortunately, do not contain a definition for “online marketplace” and it is not clear whether such definition would extend to a platform dedicated to the minting and sale of virtual assets such as NFTs. We may well see this question brought before the Court of Justice of the European Union in coming years as parties test the meaning of the Directive before the courts.

Failing to fall within the definition of OCSSP may have significant consequences for platforms, particularly if they are unable to avail of an appropriate ‘safe harbour’ provision if found to have (inadvertently) hosted and facilitated the sale of pirated content posted by users.

Copyright Ownership & the Sale of NFTs

An issue arising for businesses selling NFTs via resale platforms is the query as to what rights, exactly, are being transferred to the purchaser of the NFT. An NFT (in its common form) is a digital representation of a good – it is not the actual good. Any copyright arising in the good (such as, for example, a work of art) would therefore not transfer to the purchaser unless the contract which governs the NFT (i) expressly provides for it, and (ii) complies with the requirements for the transfer of copyright under applicable law.  Where the only express contract terms involved in the sale are the purely functional terms of the smart contract which makes the NFT work, a favourable outcome is by no means guaranteed.  For more on smart contracts, please see latest article on smart contracts

In much the same way as with any licence of potentially valuable IP (particularly brand-related), it is also important for NFT sellers to avoid undesired use of the NFT – such as by displaying it alongside offensive imagery. In addition to carefully defining what rights are being passed with the sale of the asset, sellers should insert appropriate limitations in the legal agreement governing the NFT, as well as technical safeguards in the smart contract itself.

The question of intellectual property rights ownership also raises potential issues under consumer protection law. It is unlikely to be the intention of the seller that the copyright in the image within the NFT be transferred entirely to the purchaser, yet the purchaser may not understand this to be the case.  Indeed, we have already seen litigation in other jurisdictions on this exact issue. This, depending on the circumstances, could constitute misleading advertising. 

For more information on the regulation of NFTs in the areas of intellectual property law, commercial contracts or consumer protection law, please contact Megan KearnsCarlo Salizzo, Rory O’Keeffe or your usual Matheson contact.