What happens when NFTs and intellectual property collide? In December 2019, Nike was granted U.S. Patent No. 10,505,72S for cryptographic digital assets covering footwear, thereby securing its place in non-fungible token (NFT) history. While many NFTs gaining notoriety as of late depict memes or famous photographs, NFTs can be associated with either digital or physical assets (such as a shoe), which assets ultimately exist separately from the NFTs themselves. In contrast to most other digital creations, however, an NFT’s unique identifying code hosted on the blockchain makes it one-of-a-kind.
Blockchain technology creates a shared, immutable, decentralized ledger of all transactions across a peer-to-peer network. Though most commonly associated with cryptocurrency systems, blockchain technology can be applied to virtually any industry. IBM, for example, has created a “Food Trust” blockchain to trace the journey that food products take to get to their locations.
A blockchain collects information in groups, or blocks, that hold sets of information. When a block is filled to capacity, it is closed and linked to a previously-filled block, forming a chain of blocks, or a “blockchain.” All new information that follows is compiled into a new block, and new blocks are always added to the end of the chain when filled.
Unlike a database, which typically utilizes tables of data, each block in a blockchain is permanent and immutable once it is filled and closed. Also unlike a database, each block in the blockchain is stored linearly and chronologically. To this end, each block contains its own hash, the hash of the block before it, and an exact timestamp recorded when the block is added to the chain. Each block thus forms part of a permanent timeline.
The decentralized nature of blockchain technology means that all transactions stored on the blockchain can be transparently viewed by anyone. Of course, individual records stored within the blockchain are encrypted. Blockchain participants can thus remain anonymous while blockchain transactions themselves are transparent. By maintaining a secure and decentralized record of transactions in this manner, participants can confirm transactions without the need for a central clearing authority.
The Nike patent connects a real-world physical shoe to a virtual collectible digital shoe (represented as an NFT) to authenticate and track exchanges and purchases of each. When a consumer buys a pair of real-world physical shoes, a “CryptoKick” NFT is generated. The CryptoKick includes a digital representation of the shoe that is linked with the consumer and assigned a cryptographic token. The consumer may utilize the CryptoKick to securely trade or sell the physical pair of shoes, trade or sell the digital shoe, or store the digital shoe in a cryptocurrency wallet or locker. In addition, the consumer may “breed” the digital shoe with another digital shoe to create “shoe offspring,” which may then be custom manufactured as a new pair of physical shoes in the real world.
The Nike patent (granted a mere 19S days after filing as part of the United States Patent and Trademark Office (USPTO) Track One program) vividly illustrates the new world we find ourselves in, where physical and virtual worlds collide and NFTs have gone mainstream. This new world has created new opportunities for monetizing intellectual property. With it, however, comes new challenges and considerations with respect to intellectual property protection.
The USPTO has now confirmed that they will be undertaking the study requested by Senator Thom Tillis and Senator Patrick Leahy in June 2022 to engage in a joint effort with the Copyright ALEXIS NELSON is a patent attorney with Kunzler Bean & Adamson.
Office to examine issues related to NFTs and understand “how NFTs fit into the world of intellectual property rights.” In their letter to the USPTO on June 9, 2022, the Senators remarked that “NFTs are already in global use today and their adoption continues to grow since their relatively recent introduction,” with NFTs being “found in nearly all spheres – from academia to entertainment to medicine, art, and beyond.” Some of the questions that will be addressed in the study include:
- How do transfers of rights apply? How does the transfer of an NFT impact the IP rights in the associated asset?
- How do licensing rights apply? Can and how can IP rights in the associated asset be licensed in an NFT context?
- What intellectual property protection can be afforded? What IP protection can be afforded to the NFT creator? What if the NFT creator is a different person or entity from the creator of the associated asset?
While we wait for official guidance from the USPTO on these matters, the following considerations may be instructive.
Intellectual Property Licenses
Traditionally, intellectual property has been monetized by granting licenses to third parties. As NFTs become more ubiquitous, they should also be factored into the scope of such license agreements. On one hand, intellectual property owners may wish to license their intellectual property to developers in blockchain technology to reap the benefits of this emerging market. On the other hand, it may be wise for licensors to impose restrictions on or expressly preclude a licensee from creating NFTs based on the work being licensed.
DC Comics learned this lesson the hard way when Jose Delgo, a former DC and Marvel comics artist, made $1.85 million dollars by selling NFTs of his drawings online. Many of the NFTs that Delgo sold featured Wonder Woman® and other licensed characters.
Here, an ounce of prevention is worth a pound of cure. Existing remedies for trademark, copyright, and design patent infringement may be asserted against NFT creators whose NFTs infringe the intellectual property rights of a third party. The immutability of blockchain transactions and the pseudo-anonymous nature of NFT ownership, however, make it nearly impossible to identify the infringer once the NFT has been sold. As a result, the process of enforcing intellectual property rights and obtaining recourse against the infringer may be futile.
Patent Marketing and Licensing
Of particular interest to patent owners may be the prospect of tokenizing patents as NFTs for the purpose of monetization and licensing. Patents tokenized as NFTs would include a “smart contract” stored on the blockchain. A smart contract is computer code that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions to which a user agrees. Beneficially, once those conditions are met, the smart contract is executed immediately and automatically carried out without requiring third-party involvement. Since blockchain transactions are encrypted and tracked on the blockchain, patent transactions performed via NFTs would provide both security and transparency to parties. Purchasing an NFT patent on the blockchain would automatically give the buyer of the NFT all of the rights to the patent as set forth in the smart contract, including the right to sue for infringement.
Blockchain-enabled patent transactions have tremendous potential for facilitating efficient patent monetization and licensing, as well as for mitigating risk associated with patent transactions. Though still an emerging technology, platforms for blockchain- enabled patent transactions (such as that contemplated by the partnership between IBM and IPWe®) purport to provide transparency and certainty to both buyers and sellers, automate execution of license agreements, and automatically collect fees and/or royalties on behalf of the licensor. Indeed, one of the unique aspects of NFTs is the ability for the licensor to collect a fee not just when the NFT is originally sold, but each time it is resold as well. This capability requires that the smart contract include a properly worded license.
Because smart contracts are digital and automated, blockchain- enabled patent transactions may increase speed and accuracy of patent transactions, in addition to reducing and/or eliminating expenses and delays associated with due diligence practices, license negotiation, and error reconciliation. Blockchain-enabled patent transactions may also simplify the process of collecting andmaintaining prior art data and data related to patent families. In addition, the permanence of blockchain data may facilitate tracking and recording revenues received from patent assets.
Patent licensing attorneys need not worry about job security quite yet though. Blockchain-based patent marketplace platforms have not been tested, and deals associated with patent ownership andlicenses may continue to exist outside of the blockchain even if blockchain-based patent transactions become commonplace.
Since NFTs do not automatically transfer an ownership or license unless a smart contract is associated with the purchase, it will remain the buyer’s responsibility to ensure exactly what they are buying when they purchase a patent NFT.
Patent NFTs may also give the erroneous impression that they can be relied upon to guarantee the authenticity of a patent. In the United States, however, a U.S. patent assignment, grant, or conveyance must be recorded in the U.S. Patent & Trademark Office within three months from the date of conveyance or prior to a subsequent conveyance. Otherwise, the conveyance is void against any subsequent purchaser or mortgagee. 35 U.S.C.
§ 2S1. Conveyances of patent NFTs may thus be void if not also recorded with the USPTO.
Buyers (and their attorneys) will need to continue to authenticate the title to the patent or obtain a warranty of title from the seller before purchasing a patent NFT. Otherwise, transferring the NFT may continue to perpetuate errors in the patent NFT rather than ensuring an accurate chain of title to the patent.