NFT and Intellectual Property Intersection:

Licensing, Monitoring, Enforcement Strategies

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James G. Gatto, Blockchain & Fintech Team Leader, Sheppard Mullin, Washington, D.C.

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IP & NFTs: Licensing, Monitoring,Enforcement Strategies

May 20, 2021

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James GattoBlockchain Technology and Fintech Team LeaderGames Team LeaderSheppard MullinJgatto@sheppardmullin.com+1.202.747.1945

BackgroundBlockchain & Fintech Team LeaderGames Team LeaderOpen Source Team leader

• 35 years of experience focused on all aspects of intellectual property, open source,internet and technology law especially ones driven by new business models and/ordisruptive technology

• Heavy focus on interactive entertainment (games, AR, VR, fantasy sports, esports)blockchain, blockchain games, cryptocurrency/NFTs, digital art and onlinegambling

• Advises clients on IP strategies, game development and publishing agreements,licensing and technology transaction agreements, regulatory issues (securities, gambling,AML) and technology litigation

James GattoJ.D., Georgetown UniversityLaw Center, 1988B.E., Electrical Engineering(Physics minor), ManhattanCollege, 1984Former U.S. Patent Examinerbio

Recent HonorsCryptocurrency, Blockchain and Fintech Trailblazer, The National Law JournalGo-To Thought Leadership Award for Blockchain Technology Law, National Law ReviewTop Rated Lawyer, Martindale-Hubbell AV Preeminent®Best Lawyers (2021) Patent LawSuper Lawyers

Overview

Overview of NFTs and Current Trends The Intersection of NFTs and IP

- IP Protection Strategies for NFTs (Patents, Design Patents, Trademark,Copyright, Trade Dress)

- IP Infringement Monitoring and Enforcement Challenges and Strategies Licensing of IP for NFTs

- Key Issues- Strategies

Significance of Terms of Service and Other Legal Issues

What the Heck’s an NFT?

https://youtu.be/mrNOYudaMAc4

What are NFTs?

Non-fungible Tokens = asset (physical or digital) + evidence of ownership

Asset Evidence of Ownership

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What are NFTs?

NFT ownership is recorded on blockchain

- Creation and resale managed by smart contract

The actual file is stored somewhere else!

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What are NFTs?

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Token URI

What are NFTs?Non-fungible

Cryptographic token (e.g., ERC-721 or 1155)Created (minted) and Managed by Smart Contracts

Transactions Recorded on Distributed ledger (blockchain)

Transactions Performed viaa digital wallet or other application

Often on NFT Marketplace

Digitally Displayed in various ways

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What is a Blockchain?

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What Can Be Tokenized?NFTs can be used to represent virtually any type of real or intangible

item, including:ArtworkVirtual items within video games such as skins, virtual currency,

weapons and avatarsMusicCollectibles (e.g. digital trading cards) Tokenized real-world assets, from real estate and cars to racehorses

and designer sneakersVirtual landVideo footage of iconic sporting moments

Examples of NFTs

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What Drives NFT’s Value?Scarcity …Personal connection

Same as other collectibles

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How/Where do you get them?

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How do you display them?

There’s an App for That

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Depends on how NFT is structured

Current Trends NFT sales top $2 billion in first quarter, with twice as many buyers as

sellers https://www.cnbc.com/2021/04/13/nft-sales-top-2-billion-in-first-quarter-

with-interest-from-newcomers.html There were nearly 150,000 active wallets in the first quarter — more than

1.5 times the number from a year ago Jack Dorsey Tweet Christies – Beeple NYT – Article

Which Blockchain?

NFTs can be created on one of any number of blockchains The most popular has been Ethereum (ERC-721, ERC-1155) Flow by Dapper Labs (NBA Top Shot)EOSIO (Mythical Games – Blankos)Others

Smart contracts mint and manage sale and resaleCan program to collect % of resale

Digital Art and NFTs - Technology

Modifications and Combinations Collaborative Art Programmable Art Layered Art Generative Art Pooling/Fractional Ownership

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There is a lot of cool technology … that drives some of the interesting legal issues

Programmable Art

Description

What if, in an alternate reality, one could fish for the sun and moon to change morning into night and night into morning?

With this piece, it will alternate between the First Catch of the Day and Last Catch of the Day depending on our actual time of day in the real world.

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Layered Art

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NFTs – IP ISSUES

NFT = TOKEN + ASSET Typically own the token, but only have a license to the instance of

the digital asset referenced in the token metadataCopyright owner retains rights in the underlying work If selling NFTs, rights clearance like licensing of other mediaReview TOS for platform through which you sell

- Ensure license with original sale- Smart contract can impose certain restrictions- Ensure platform does not overstate what user “owns” or is “buying”- % of resale (can get paid directly via smart contract to a digital wallet)

Licensing Opportunities

The IP owners that may capitalize on NFT boom can include: brands that have famous trademarks, logos, and other brand

identifiers teams, bands, artists, celebrities game companies that have unique characters or game art book, movie and other publishers that have unique characters and

other IP artists who created have physical or digital works text – tweets and articles other IP owners

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Licensing IP for NFTs

Brands/IP Owners should consider nuances of NFTs when licensing: Limit scope of license to specifically agreed upon authorized uses Limit # of instances to maintain scarcitySpecify license fee based on sale and resale Limit modifications/combinations – approve NFT and prohibit

subsequent modifications or combinations w/o approval Limit where distributed – specify agreed upon distribution channels Limit how distributed – e.g., prevent unauthorized pooling or

fractionalizationNFTs and Intellectual Property: What IP Owners and NFT Creators Need to Know

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IP Protection For NFTs Generally NFTs Often Result from Collaboration When drafting agreements negotiate ownership of IP rights

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IP Protection Issues

Utility PatentsDesign Patents TM/trade dressCopyrightRight of Publicity

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Sample Patents

U.S. Patent 10,946,283 “efficiently storing, issuing, and transacting tokenized blockchain game assets managed by a smart contract”

Sample Patents

Unity – U.S. Patents 10,587,410 and 10,225,085 “System and method for digital token exchange and delivery”Enjin - Published App 20190385136 “Generating Permanent Data

Records and Assets for Digital Items in a Networked Video Game System” Disney – U.S. Patent 10,992,454 “Blockchain configuration for secure

content delivery”DISH Network – U.S. Patent 10,885,159 “Content and Anti-Piracy

Managent System And Method”Nike - U.S. Patent 10,505,726 “System and method for providing

cryptographically secured digital assets”

Design Patent Protection Violation of a design patent permits recovery of all of the infringers’

profits (not just those attributable to the use of the design/trade dress)

35 U.S. Code § 289 creates a special form of damages for infringement of design patents, allowing a patent owner to pursue "total profits"(also referred to as "infringer profits") as an alternative to the traditional patent damages available under Section 284, such as reasonable royalty. "Total profits" damages are calculated using the infringer's total sales and subtracting appropriate costs and expenses.

Can Be a Significant Advantage

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Trademark Protection For NFTs Types Word Marks Logos, Design Marks / Trade Dress Slogans Motion Marks

Classes 9: Downloadable Software 42: Non-downloadable Software 28: Digital collectibles and games 41: Entertainment Services

Intent to Use Constructive Priority Date

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Copyright Infringement

Many of the traditional principles applyMonitor and act early If NFT infringes copyright – DMCA take down notice to the platformOnce sold, NFT is associated with a user wallet, but identity may be

hard to ascertain

First Sale Doctrine

Limitations on exclusive rights (17 U.S. Code § 109)(a)Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

First Sale DoctrineFirst sale doctrine typically not applied to digital goods. Capitol Records, LLC v. ReDigi Inc. The statute only protects distribution of copies that were “lawfully

made under this title” The files that ReDigi were reselling were not lawfully made - the

copyrightable content itself was transferred and copied “The fact that a file has moved from one material object — the user's

computer — to another — the ReDigi server — means that a reproduction has occurred. Similarly, when a ReDigi user downloads a new purchase from the ReDigi website to her computer, yet another reproduction is created. It is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created.”

Does First Sale Doctrine Apply to NFTs?

In some cases, NFTs can be bought and sold without copying or moving the digital asset (token metadata contains a pointer to the URI of the digital file) It is possible that the prior treatment of digital goods under the first

sale doctrine may be inapplicable to NFTs (under this fact scenario)

Public Display

Limitations on exclusive rights (17 U.S. Code § 109)(c)Notwithstanding the provisions of section 106(5), the owner of a particular copy lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to display that copy publicly, either directly or by the projection of no more than one image at a time, to viewers present at the place where the copy is located.

Infringement

Many NFTs use third party IP without permission IP owners are waking upDC Comics

- artist made $1.85 million by selling NFTs, including characters he used to draw for DC (e.g. Wonder Woman and others)

- DC Comics sent a stern warning to the creative teams and freelancers employed by DC that unlicensed use of NFTs is a no-go!

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Terms of ServicePowerful tool to legally protect you…if done rightMust form valid contract - sign on property doesn’t bind a passerby Modifications must be agreed to - once we have an agreement you

need to agree to change the dealMust be customized to your business model and legal risks - Do not

treat as boilerplate/copy from othersYou must act consistent with what’s in the TOS to get the benefit Courts will enforce TOS if properly formed - it has saved most

game companies from gambling suits - prohibit secondary markets (this specific point may not be relevant to NFTs but is example) Leverage requirement for arbitration and avoid class action

4 Big Regulatory IssuesSecurities AML/Sanctions Tax Gambling

• SEC enforcement and guidance - has found most crypto currencies/tokens to be securities

• Hasn’t squarely addressed NFTs

• Fractionization/Pooling• New Commissioner• Safe Harbor?

• FinCEN - first agency to issue guidance on CVC (2013); more strictly enforcing AML rules;•OFAC – sanctions avoidance•Greater scrutiny on digital art

• IRS – issued guidance on taxation of CVC

• Treats and taxes crypto currency as property

• Operation Hidden Treasure

• Growing scrutiny of chance-based mechanics

• More gambling-related lawsuits against games/apps

• Terms of Service – customized TOS are critical and legal terms need to be consistent with business model and advertising

Securities Law

It is illegal to offer or sell securities in the United States, unless theoffer and sale are made pursuant to an effective registrationstatement filed with the United States Securities and ExchangeCommission (“SEC”) or are exempt from registration under theSecurities Act. SEC primarily uses Investment Contract analysis (Howey test):

- Investment of Money- Common Enterprise- Reasonable Expectation of Profits- Based on the Efforts of Others

Securities Laws – NFTs

Howey testNFTs

- arguably no common enterprise (e.g. no pooling, vertical interest)- arguably “profits” not from efforts of others (e.g., if increase due to market

scarcity)

Each situation is fact dependent

US Jurisdiction If you interact with US customers … you will be subject to US Law!

Key Takeaways

NFTs are here to stay There are some unresolved legal issues The “media” part of the NFT gets treated like most other media The token part requires additional considerations Licensing IP for NFTs is like licensing other media, but requires some

unique considerationsGetting initial legal review before you go to far is advised

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Contact Information & Resources

James Gatto │ EmailPartner, Blockchain & Fintech Team LeaderGames Team Leader

Sheppard Mullin Blockchain Blog: https://www.lawoftheledger.com/

Protecting IP and Limiting Liability When Licensing IP for Digital Art and NFTs (Mar. 2021)

NFTs and Intellectual Property: What IP Owners and NFT Creators Need to Know(Mar. 2021)

The Hammer Falls on the First Major Blockchain-based Art Auction (Nov. 2018)

Tokenized Art Legal Issues (Feb. 2021) Blockchain Games and Collectibles – Patents

and Other Legal Issues (Mar. 2019) Legal Issues With Blockchain-Based Crypto

Games and Collectibles (May 2018)