CRYPTO LAW – NFT2
non-fungible token – NFT
NFTs are currently on everyone’s lips. At the latest since it became known in March 2021 that a digital work of art called ‘EVERYDAYS: THE FIRST 5000 DAYS’ by the artist Beeple was sold at an auction at Christie’s for 69 million US dollars, it has been clear that this universe or metaverse is an exciting new area for many companies. The IP world is also observing the developments relating to NFTs and the associated new technologies with great interest.
In the meantime, a verdict was issued in New York on the extent of trademark protection in the virtual world, particularly in connection with the use of NFTs. It was about the infringement of the Birkin trademark of the Hermès company. An artist by the name of Mason Rothschild created 100 NFTs of the famous Hermès handbag ‘Birkin’ on the NFT trading platform ‘OpenSea’ and offered them as ‘MetaBirkins’, i.e. as a ‘virtual Birkin’. The artist has already made more than a million US dollars with the sale of these virtual handbags. The fashion house Hermès considered the virtual handbag to be an infringement of its ‘Birkin’ brand and filed a suit in New York. The court agreed with Hermès and confirmed the trademark infringement. So far there are very few decisions on this issue, especially in Europe, so this decision could be groundbreaking.
But what is an NFT anyway?
NFT, pronounced Non-Fungible Token, means a non-exchangeable or replaceable token. However, this meaning cannot be translated into legal terms that easily. So far, very little has been regulated about this relatively new technology involving cryptocurrencies and blockchains. This fact, but also a changing common understanding of art, values and originals, explains why an NFT or a digital work of art can achieve sums that were unthinkable just a few years ago.
Legal classification of NFTs and how to acquire an NFT?
In ‘real’ life, i.e. with physical objects, e.g. (art) works, the legal classification is simple or clarified by settled case law: If a picture by an artist is sold under normal circumstances, the purchaser of the picture becomes the owner and the artist remains the owner author of the work. Copyright per se cannot be sold, only usage rights can be granted, whereby the third party can acquire the right to reproduce, publish or edit the work.
It is currently assumed that an NFT is not a physical thing like a ‘real’ object, since NFTs are digital, decentralized stored units that are not spatially delimitable and cannot be stored on a data medium. According to the current legal situation, no ownership of an NFT can be established. Classification as an intangible good as a different right within the meaning of Section 823 (1) of the German Civil Code is currently being discussed.
Further legal questions depend on this legal classification, e.g. how NFTs can be transferred, how action can be taken against an unauthorized creation of an NFT, etc.
What is actually being sold when talking about the acquisition of an NFT?
Put simply, when you purchase an NFT, you receive a kind of certificate that confirms the authenticity of the (digital) work/work of art/music/event and to which certain rights of use are associated, e.g. the right to publish or resell or participate in the event.
Using blockchain technology, the right to the NFT can be clearly proven and transferred. Entries and transactions relating to an NFT are stored in a blockchain in an unchangeable manner, which means that the origin of a digital work and its history of ownership or the existing rights to the digital work can be proven. You acquire a certificate of authenticity for a digital work of art, an image, video or audio file, but not the intellectual creation behind it.
So-called smart contracts are the basis for the transfer of NFTs. However, these smart contracts are not contracts in the familiar sense, but rather contract management, i.e. the framework conditions that determine the scope of the NFT and the work/event associated with it.
It is clear that an NFT does not automatically include all conceivable usage rights to the digital work. Both as a seller and as a purchaser of an NFT, it is important to pay close attention to which rights are transferred in a legal transaction with an NFT. Similar to a license agreement, the design options are almost unlimited and it is important to ensure that the desired use of the digital work corresponds to the agreed use.
Although there are no special legal regulations on NFTs, contracts concluded in this regard are legally effective and their fulfillment can be enforced in court.
Copyright and NFT
Another interesting question is to what extent copyright plays a role in NFTs. It is clear that when selling an NFT belonging to an image, the original authorship remains. The purchaser of the NFT receives the certificate of authenticity (NFT) for the image and a (copyright) right of use in accordance with § 31 Para. 1 Copyright Law. The details of the right of use are regulated by means of a license agreement. The author can also stipulate that he will continue to use his work himself. In the case of an exclusive right of use, the buyer is the sole owner of the rights to use, distribute and reproduce the work.
It is important to know that – unless other rights of use have been granted – only the author may create an NFT for his work. The so-called minting (embossing) of the NFT, i.e. the creation of the token on the blockchain, is to be seen as a kind of duplication within the meaning of Section 16 (2) Copyright Law.
Furthermore, § 32a Copyright Law should be considered in the case of NFT trading, since it is regulated by law here that the author may be entitled to a right to a contract adjustment if the income and advantages from the use of the work are so great that the consideration for the author is relatively small. This is intended to prevent the author from not being adequately remunerated if his work generates high income and advantages and this was not foreseeable when the rights of use were transferred.
Trademark law and NFT
The current development shows how important it is to protect your products in the virtual world. It can make sense to expand your brands in terms of virtual goods.
Well-known companies such as Nike and L’Oréal have already registered their trademarks for “virtual goods” (e.g. for shoes, clothing, etc.).
Do you have questions about NFTs or need legal support? We will be happy to answer them and will be happy to advise you!
