The unsettled legal terrain of NFTs

IP lawyers look to the US for indication as to how the courts are handling disputes

The unsettled legal terrain of NFTs
George Kondor QC, partner at Oyen Wiggs Green & Mutala LLP

This article was created in partnership with Oyen Wiggs Green & Mutala LLP

Mallory Hendry of Canadian Lawyer sat down with George Kondor QC, partner at Oyen Wiggs Green & Mutala LLP to discuss the intersection between NFTs and IP

Powered by smart contracts, non-fungible tokens (NFTs) are units of data associated with digital files, a physical object or both. Being stored on a digital ledger – generally the Ethereum blockchain – provides a guarantee of uniqueness and a public certificate of authenticity. The first NFT was minted in 2015 and they exploded in popularity in 2020, but “the world of NFTs as they relate to intellectual property and vice versa is still very unsettled,” says George Kondor QC, partner at Oyen Wiggs Green & Mutala LLP.

“There’s nothing in Canadian legislation related to NFTs because they’re generally so new, especially in Canada. It’s basically just court decision by court decision as disputes come up – that’s how we’ll develop what rights people can crystallize. It will be several years before we get clear guidance, but there are some current US cases that aren’t strictly relevant here but are proceeding the way I think Canadian law will move.”

Kondor’s interest in the world of NFTs was sparked by a new artist client who mints them, and that client has since referred fellow creators. Across Canada, there’s been a rise in so-called NFT lawyers whose knowledge is more on the regulatory side of things – how to approach Ethereum, how to get an NFT on the system in the first place – as opposed to the “hardcore IP” where Oyen Wiggs has deep expertise. The firm’s powerhouse reputation precedes it, and Kondor’s connection with that small group “has really seemed to get Oyen Wiggs’ name out there – by word of mouth and doing good work for our clients, we keep hearing from artists and their management.”

When it comes to NFTs, Kondor identifies two main issues in relation to IP. The first is copyright, which is a big facet of IP that Oyen Wiggs deals with regularly. When someone purchases an NFT that usually includes a license to view and use the underlying digital asset, but copyright principles still apply. Original or subsequent sales don’t necessarily include or convey copyright, and some agreements grant license for personal use, others for commercial use and some are unlimited.

“There are coming cases now where people are trying to monetize their ownership of an NFT in a way that the copyright owner of the underlying work might not like, and there will be more of those battles coming down the road,” Kondor says. “With clients, the first thing we do is get everything straight in everybody’s mind about what these things are that they’re minting and selling – and then the discussion moves on to copyright.”

What does the client think will be valuable to whoever’s purchasing their NFT? If it’s a one-time piece of art, copyright can be included so that whoever buys it can do whatever they want with it – like when someone buys a physical painting – while others might only want the NFT sold and to keep the right to sub-license their work to others, akin to a limited-edition print, where the same artwork underlies a certain number of different NFTs. In that case, the seller wouldn’t want to include anything allowing the owner of the NFT to reproduce it.

In Canada, there’s also a notable provision within copyright law called moral rights, comprised of rights of attribution and association and rights of integrity. They allow the creator to require that their name is always, never or only in some contexts connected with their work, and it provides that the creator can sue people for disparaging the work – meaning it is possible for people to get in trouble for infringing on moral rights by creating NFTs based on certain artwork.

“I’ve come across that with my clients, where there’s an egregious out-and-out theft of a work where something gets added to it – like a little moustache – and it’s sold as an NFT,” Kondor says. “That can be prevented from a copyright standpoint and a moral rights stand point.”

The other IP related aspect of NFTs relates to the trademark world. Emerging as a theme in some of the on-the-ground legal cases in the US is brand owners finding that creators are minting NFTs using the brand owner’s trademark, thus diluting their trademark rights. French fashion house Hermes International S.A. is in the midst of a notable situation in the US where it has taken legal action against someone depicting the brand’s iconic Birkin bags in the underlying artwork of the NFTs they mint.

Hermes argues that the artist's depictions of its luxury bags violate its trademark rights while the minter says he’s entitled to use artwork showing the bags as the underlying asset of his NFTs just as Andy Warhol famously depicted Campbells’ Soup in the 60s. He argues his digital works are protected by the First Amendment. Most recently, a federal judge declined to throw out the trademark lawsuit against the artist’s sale of "MetaBirkins."

There are a number of these cases in the pipeline and they’re being closely followed by Kondor and other IP lawyers in Canada for the potential to clarify how trademark law will be applied to NFTs in the US. As it stands in Canada, when discussing the trademark side of things “we have to make sure clients aren’t stepping on any toes,” Kondor notes, adding that brand owners want control over what any artist ­does with their trademarks, so those are the kinds of disputes he sees on the horizon.

“We’ll soon have much more indication from the US how courts there are going to handle things and that will be relevant in Canada eventually: we’ll likely follow the general principles that are developed down there.”

Currently some of Kondor’s clients sell NFTs for hundreds of thousands of dollars but it’s unclear if that trend will continue, with some predicting the NFT craze is already on the decline. One of the main obstacles is how deeply environmentally unfriendly Ethereum is, but it’s set to move from the proof-of-work blockchain system to the more environmentally friendly proof-of-stake system this year. That may well be enough for NFTs to continue to expand in importance from both a consumer point of view and a legal point of view, Kondor says.

“Everyone has heard the hype about NFTs, but most don’t have a clue what they are and what they do. They’ll likely be with us for a while, but it’s difficult to say how the law will develop around them. There’s lots of uncertainty – but where there’s uncertainty, there’s a need for lawyers.”

George Kondor has a wide-ranging patent and trademark practice. He is a Fellow of the Intellectual Property Institute of Canada (IPIC) and supports the activities of the International Trademark Association (INTA), the Association of University Technology Managers (AUTM), the Intellectual Property Owner’s Association (IPO), the Patent and Trademark Association of British Columbia (PTABC) and the Canadian Corporate Counsel Association (CCCA).

George serves his profession and the intellectual property community generally as an educator, coach and mentor to lawyers, law students and the general public.

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