By: Hannah Avery
At this point the craze surrounding NFTs is far from breaking news. NFTs (“non-fungible tokens”) have been created for everything from the “Disaster Girl” meme to the world’s first tweet. They have been the subject of numerous articles, publications, and blogs, including this blog by the Washington Journal of Law, Technology, and the Arts’ Associate Editor-in-Chief Joanna Mirsch, discussing video game-related NFTs. Despite NFTs’ widespread popularity, early “NFT craze” trends seemed at odds with established American intellectual property rights, with many works being minted as NFTs without the consent of the original creator. At the very least, ownership of NFTs was widely regarded as independent of ownership of the underlying intellectual property rights. But… what if they weren’t?
While the sale of an NFT by itself does not automatically confer the underlying IP rights, the use of self-executing contracts in conjunction with the sale of an NFT can. This is the exact type of transaction that IBM was betting on when it teamed up with IPwe to create a platform for block-chain-enabled IP transactions. The IBM/IPwe platform transfers patent rights by building a smart contract with standardized terms into the token. The patent owner is able to set the terms of that contract, including what information is public and what is not. With this big bet on patent NFTs by IBM, the launch of IPwe’s secure licensing & selling capabilities, and the first sale of a patent and the related patent rights as an NFT in April 2021, many forward-looking patent-holders may be wondering whether they should convert their patent portfolios to NFTs.
Unsurprisingly, the press release for the IBM-IPwe partnership touts a number of benefits of blockchain-based IP transactions including increased transparency, reduced transaction costs, and greatly improved capacity for patent-holders to manage, value, and transfer their IP assets. Additionally, blockchain-based patent transactions could help to prevent future SEP licensing disputes and/or to simplify their resolution. However, there are also a number of potential risks which could dissuade those who would otherwise be early-adopters.
Increased transparency of ownership
Since the introduction of blockchain technology, one of its most praised features has been the unique ability to create an indisputable record of a series of transactions. As applied to patent rights, this feature would allow users to track the ownership of patent NFTs and the transactions associated with patent license NFTs. This tracking mechanism would provide clarity of ownership of the patent rights. According to IPwe’s Chief IP Officer Cheryl Milone Cowles, “distributed network verification . . . provides the confidence of transacting with a clear current title and history.” While such assurance is undoubtedly appealing to potential investors, it may be too good to be true… at least for now. Given the nature of this technology and the current case law governing patent ownership disputes, situations could arise where a legal approach or remedy would be unclear. Some experts have raised concerns including: whether an owner of a patent whose NFT was stolen through a ransomware attack would be able to reestablish ownership through the legal system; whether a court would recognize transfer of a patent via NFT absent a more standard, written assignment; and, if courts do prove willing to recognize such an assignment via an NFT sale, what evidence will be considered sufficient to demonstrate ownership. Such uncertainties could easily lead to unfavorable, or simply unsatisfying, outcomes for purchasers.
Historically, the costs of obtaining, maintaining, and licensing IP have been high. Therefore, the promise of a platform that could lower those costs, as IPwe claims, would be welcome news to many players in the IP space. While the technology behind the platform may be complicated, the theory of potential cost-savings is simple — the smart contracts included in token sales, as discussed above, would replace the current process of IP sales and licensing that is laden with attorneys fees, paperwork, and onerous contract negotiations. Such savings would be embraced by any organization accustomed to shouldering the burden, but it has the potential to be game-changing for small and medium-sized companies who may have previously been reluctant to engage in IP-related transactions because of current prohibitive costs.
While tokenizing IP assets may interfere with a company’s existing portfolio management strategies, such disruption of existing strategies could also reap rewards for the first movers in this space. For example, the potential for easy resale of an IP asset could increase the value of that asset at the time of the initial sale. Or, standard essential patent holders could also utilize smart contracts to avoid expensive litigation while capturing licensing fees with each sale or resale. The possibilities are endless.
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All in all, tokenizing patent assets may reduce the costs associated with patent licensing and streamline portfolio reporting. However, early adopters of this approach will have to navigate uncertain legal areas regarding the ownership of their tokenized IP rights. In our information-based economy, adopters could be risking some of their most valuable assets in their effort to become an industry leader. Is it worth the risk?
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While there are many different types of token standards, the most popular is found in the Ethereum infrastructure, which deploys tokens using the ERC20 standard, which sets the rules for fungible tokens.