What IP Attorneys Need to Know About Cryptocurrency and NFTs: An Interview with Moish Peltz
Alt Legal Team | April 01, 2021
NFTs have the potential to bring significant changes to the legal industry and to our legal clients. Nearly anything can be tokenized, including real estate and intellectual property. It is now possible to imagine licensing agreement governed by smart contracts with royalty payments automatically flowing to creators and brand owners. The implications for the legal industry and IP attorneys are enormous. IP and business law attorney Moish Peltz joined us to discuss what IP attorneys need to know about cryptocurrency and NFTs. Watch the video interview and review our breakdown below. Also, check out Moish’s article: What do Trademark Attorneys Need to Know about NFTs and learn more during our May 4 webinar where he discussed the topic in depth: Fun with Non-Fungibles: NFT and blockchain basics for IP attorneys
What is cryptocurrency? What are NFTs? What is blockchain?
This technology is generally running on the blockchain. The blockchain is a distributed database where the entire history of these transactions is on this ledger. It’s a continuing chain where each block confirms all previous transactions that occurred within this database. This blockchain is the framework that allows the cryptocurrency and other types of tokens like fungible tokens and non-fungible tokens (NFTs) to exist on top of that technology. We have on the base layer the blockchain and on top of that are the cryptocurrencies which are being transmitted on top of the blockchain or using the blockchain to transact. Those systems allow different types of tokens. A fungible token would be something that exists on top of that layer that could be spent just like a cryptocurrency. It may be a type of currency that exists on another blockchain, for example, the Ethereum blockchain allows different types of tokens to exist on top of it. Non-fungible tokens, unlike currency, are unique. They can be thought of as collectibles like trading cards or comic books. But it’s not only the collectible itself, it allows more complex things to happen. A helpful analogy is it is like a museum and you can display your ownership of the collectible.
Can you give us some context for why NFTs are relevant for trademark and IP attorneys?
Attorneys should be aware of these technologies and how they might impact their client’s businesses. Different brands, content creators, and intellectual property owners are going to be want to take advantage of these technologies. They are going to want to use NFTs to find new audiences for their brand, expand the way they connect with those audiences, and perhaps grow some revenue. I think for a lot of attorneys, they are going to see that their clients are perceiving these technologies as a huge opportunity for their businesses.
What are the NFT marketplaces to be aware of and what is being sold?
There are a ton of different NFT marketplaces and new ones appearing almost every day. An NFT is a digital asset that can be uniquely created, sold, traded, and auctioned. The marketplaces that are emerging are allowing people in a seamless way, without understanding the underlying technology, to list their NFT for sale, to auction it off, or to create some branded collaboration. There are public marketplaces, for example, OpenSea, which is a platform to buy and sell NFTs as if it was on an exchange. But instead, it’s a visual representation of the NFT and you can buy and sell it using the cryptocurrency on which the NFT exists on top of. OpenSea is an example of an open platform where anyone can come in and buy using their wallet. Something like NBA Top Shot is more of a closed marketplace. It is an officially-licensed marketplace that the NBA has created that allows NBA plays to be bought and sold as digital collectibles. There are many other platforms doing this and a lot are trying to add on different elements that are interesting to buyers and sellers on the marketplace, but are also going to enable different utility for people creating these NFTs. For example, as a brand owner, you can start thinking about the types of royalties you can collect upon sale. Those are the things that make NFTs exciting for my clients and those looking to create NFTs in this marketplace.
What copyright issues must be considered when creating NFTs?
From a copyright perspective, and if I’m a brand or IP owner, a licensee, or someone who is going to create an NFT, the basic issue is: do I have the right to use the copyright as an NFT? If you are an artist and you’ve made the art yourself, this is straightforward. But these issues become more complicated when there are co-authors, work-for-hire scenarios, etc. However, existing agreements between employers and employees and in other contexts may not have considered NFTs as the ultimate use case for what you may be doing with your copyright. You need to look at the agreement and if it is straightforward and allows you to do whatever you want with the copyright, then you can proceed with creating NFTs. But if the agreement is more limited, there may be other rights that you need in order to execute your strategy correctly. Additionally, issues like fair use, really haven’t been analyzed in this context yet. Those are questions that IP attorneys are going to have to start asking and that we may be answering for a long time depending on how this all plays out.
What trademark issues must be considered when creating NFTs?
You need to ask if you have the right to use the trademark in the context of NFTs. Are there other goods or services being packaged with the NFTs and do you have the trademark rights to work with those? Also, we need to consider what we are doing with those trademarks. When we draft license agreements, we must consider whether there other protections that we need to plan for or predict like quality control. There are lot of open questions and the checklist of what you need to do is still evolving.
When a client comes to you looking to secure trademark or copyright protection over an NFT, what are the steps you need to take? For trademark protection over an NFT, what classes should you be searching and filing in?
You need to determine what the plan is for the NFT. Are you minting the NFT for an existing platform? Are you partnering with someone to create a platform or do something else with your IP like the NBA did? You need to determine the terms of service that will govern the NFT. Consider who you are partnering with and giving the right to use your IP. Is the right limited or all encompassing, and is it something you can take back? An NFT on the blockchain may be irreversible in some respects. You’ll need to determine if you have control over it after the fact. Those are the kinds of questions you need to be asking.
Attorneys know to protect trademark and copyright assets by registering them nationally or internationally, protecting them by and filing them as early as possible. In terms of trademark prosecution, there are number of classes already being used:
- Downloadable or non-downloadable computer applications for certain cryptocurrency uses (Class 9 and 42)
- Providing a cyrptocurrency service or marketplace (Class 35 and 36)
Additionally, if your client is packaging another service, or combining an NFT or cryptocurrency service with a traditional business offering, the existing trademarks or copyrights may not be enough to protect them. You’ll need to explore new classes or product lines to proactively cover the intended use by your client.
When engaging in a licensing agreement involving NFTs what must be considered?
This is a really exciting area. If you own IP or if you’re a brand, in order to get comfortable in this space and allow yourself the opportunity to profit in a safe way, you’ll need to establish some parameters. The license agreement is the way to do that. To the extent that you are entering this space, you need to make sure that these arrangements are considered, in writing, and are binding. You should consider what parties are authorized to act and what hats the parties will be wearing in these transactions. You’ll also need to consider which platforms to be operating on and the kinds of NFTs they will be creating. One of the really exciting opportunities here is the idea of royalties upon resale. For example, if I sold you an NFT, and you turned around and resell it, I as the creator of the NFT would get a royalty upon your resale of the NFT to a third party. How parties will handle royalties and resale must be considered at the onset. Then getting to more traditional licensing terms – How is the marketing campaign going to look? Who is getting attribution? How are disputes going to be handled? What are the risks can be predicted? Is one party handling compliance or risk mitigation? There are a lot of different factors to consider in this area.
What do you do if someone has infringed your intellectual property in an NFT?
This is a really interesting area and I am guessing it will be very frustrating for IP attorneys for a long time. Because of the nature of blockchains and because they are decentralized, open, internationalized, and pseudonymous, this has the potential to be very difficult to act upon infringement. If you don’t know who has infringed your work and where they’re located, what are you going to do to stop it? I think in the context of BitTorrent and other decentralized internet sources, IP attorneys have already experienced this, I think this is just going to compound on that problem. To the extent that you can identify who is infringing, where they are located, and what platform they are operating on, these are things attorneys are going to have to counsel their clients on. You’ll also have to consider how the platform is going to be able to execute a takedown and where it is located. Then you’ll need to determine if the takedown is sufficient or if something else needs to happen like a demand letter or litigation. This is going to be very fact-dependent. IP attorneys are going to have to know enough about the ecosystem to advise their clients as to what the options are, what is practical, what is cost-effective, and what is just impossible to control.
What are the risks of using NFTs?
This area is something that might be outside the scope of what an IP attorney might do, but everyone should be aware of some of the security issues here. You’re selling something that is unregulated. The SEC hasn’t issued guidelines for NFTs and it is unclear what diligence steps need to be taken and it’s unclear whether there will be regulatory guidance in this area. Attorneys need to be mindful that the regulatory landscape for cryptocurrency is shifting and there is a lot of grey area. You may want to have someone on call who is more experienced in the regulatory space so that you know the right questions to ask and you can be sure that your clients aren’t getting into civil or criminal issues based on their minting of NFTs and acting on these platforms. It can be a potential minefield.
Moish E. Peltz, Esq is a Partner at Falcon Rappaport & Berkman PLLC where he chairs the firm’s Intellectual Property Practice Group. Moish focuses his practice on intellectual property and business law and aims to help companies grow their businesses and brands. Moish also supports FRB’s Commercial Litigation and Emerging Technology Practice Groups. Moish’s practice encompasses both transactional and business litigation matters. His practice also focuses on U.S. and worldwide trademark prosecution and enforcement, including litigation before the Trademark Trial and Appeal Board (TTAB).