NFTs: Coming Soon to a Patent Portfolio Near You?

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.

Cost-reduction

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.

Portfolio management

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?

NFT or Bust? – Impact on The Video Game World

By: Joanna Mirsch

The idea of spending real, hard-earned cash in the video game world is not a new concept. Gamers have been making in-game purchases for quite some time now: unlocking new weapons, characters, levels/maps, and more. These purchases have usually been seen as fun perks to gameplay that allow gamers to tailor their gameplay experience through the content they purchase. However, the growing presence of non-fungible tokens (NFTs) within the video game realm is potentially an entirely different occurrence.

What are NFTs?

There are many ways to understand what an NFT is. It is helpful to first look at what the two words mean separately. At its core, a nonfungible item is something that cannot be exchanged for another thing of equal value; it’s one of a kind. The token references a unit of currency on the blockchain, which is how cryptocurrencies are bought and sold. An NFT—much like bitcoin, ethereum, and dogecoin—is a digital currency that is a type of money. One of the best perks of cryptocurrencies is that they are nearly impossible to counterfeit. Digital currencies operate on what is called the “blockchain”. A blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Since every transaction is recorded across this large network, it makes it difficult for attackers to hack it because they would need to control large portions of the ledger to do any damage.

What distinguishes NFTs from other currencies is that their “underlying technology certifies and guarantees the authenticity of a tether item, raising its value.” Moreover, they can be thought of as “unique, digital version[s] of a certificate of authenticity, publicly rubber-stamped by the blockchain.” As of February 2021, only mere months after coming into the public eye, NFTs have become a booming market whose sales have reached $500 million. NFTs are essentially unique proof of ownership over items people cannot tangibly hold in their hands, such as digital works of art, coupons, video clips, etc. NFTs are one-of-a-kind pieces of code that are stored and protected on a shared public exchange. Fordham Law School professor Donna Redel, who teaches about crypto-digital assets, has explained NFTs as the purchase of a code that manifests as images. Notable NFT purchases include artwork, clips of LeBron James dunking, free pies for life from a Los Angeles pizza shop, digital homes, and much more.

Legal issues surrounding NFTs

It’s potentially dangerous to allow the sale of these unique items without both the creators and users of NFTs truly understanding the rights granted to token holders. While the purchase of NFTs allows buyers to have unique, one-of-a-kind pieces of digital artwork or other products, buyers do not usually get the copyright or trademark to the item. Furthermore, just because you purchase a specific NFT, does not mean others cannot purchase endless other versions of it elsewhere online. Therefore, NFTs—from a copyright perspective—are digital receipts showing that the owner owns a version of the work but does not own any of the exclusive rights in reproducing or preparing derivative works as awarded to copyright owners in §106 of the U.S. Copyright Act. This lack of transparency or awareness behind these NFT purchases could pose serious infringement issues. Many individuals purchasing NFTs are not familiar with the legal restrictions relating to copyrighted works. NFTs do not authenticate IP rights. At most, purchasing an NFT only allows the purchaser to receive the token itself and the right to use the copyrighted work for personal use.

Due to the immature market and lack of flushed out NFT regulation, it is possible the NFTs will allow infringers to steal intellectual property from their rightful owners. The potential for copyright owners to lose ownership over their works is a legitimate fear. Numerous artists have already reported that they discovered their work is being stolen and sold as NFTs without their permission. However, the pertinent legal question that remains is whether the first sale doctrine applies to purchases made by NFT owners. This doctrine allows for individuals who purchase copyrighted works to have the right to sell, display, or otherwise dispose of that particular copy. If this doctrine applies, the owners of NFTs would be able to sell the digital NFTs after they purchase them without the artist’s permission. But it is likely the doctrine is not applicable since NFTs are not tangible works as required by copyright law. The lack of clear rules surrounding NFTs are likely to allow for problems to arise as they grow in popularity.

What do NFTs mean for the gaming world?

One videogame company, SEGA, recently announced its plans to sell NFTs based on its intellectual property—including their classic and current IPs and upcoming projects—in the summer of 2021. SEGA could sell a digital piece of one of its classic games—such as Sonic the Hedgehog art—to a buyer for an extremely high price point. This is one of the reasons that NFTs could become a problem for gamers. Because the sale of NFTs has such a high potential for profit, collectible pieces of classic or limited-edition games—such as the original production sketches of Sonic or a game’s original soundtrack—which might otherwise be bundled with games or sold as physical objects will likely be held back to be sold as more profitable NFTs instead. However, an even greater problem involves possible, and likely, IP infringement through the sale of unlicensed uses of NFTs. DC Comics recently warned creative teams and freelancers employed by DC against unlicensed uses of NFTs after an artist made $1.85 million by selling NFTs of characters he used to draw for DC. This same issue could occur in the video game world too. While there are steps that could be taken to push back against unlicensed uses and sales of NFTs – the real question is whether the video game industry truly benefits from involving NFTs in their games.

While the video game industry has persuaded gamers to buy intangible, digital goods for a long time, what is the benefit of merging NFTs with games? Do gamers need this kind of authenticity to play games? Currently, there are a handful of popular NFT games that allow gamers to tokenize their game assets and use in them in-game or trade them as crypto-collectibles. Some of these games—such as CryptoKitties—record up to $30,000 dollars’ worth of daily transactions and more than 8000 new users weekly. These types of games are supposed to be a mix of thrill and potential profitability. It’s possible that NFT-enabled games can provide a potential boon for the multibillion-dollar video game industry. Currently, games allowing players to buy digital deeds for real estate—in the form of an NFT—have already generated millions of dollars. However, with the growing trend of microtransactions in games, the question of whether NFTs could simply create another pay-to-win structure that incentivizes users to pay large amounts of money to acquire these “authentic” and “unique” digital items is a valid concern. Moreover, what happens if gamers begin selling, distributing, etc. the NFTs they purchase in games? Where do the boundaries exist when it comes to the purchase of NFT content? Perhaps the video game industry is better off not engaging in this new, but potentially problematic, realm of digital currency.