Launching an NFT Project – The Essential Legal Elements – Part 2

In this Part 2 of our series on the essential legal elements of an NFT project, we’ll be looking at Intellectual Property (IP) rights – how they arise, how they are protected and potentially infringed.

Intellectual Property Rights

1.Copyright

IP rights principally focus, in respect of an artistic NFT, on copyright. Copyright arises upon creation of a work: for example, the creation of a digital image, and the first owner will be the artist (subject to any employment contract, in which case the employer will own the copyright). Unless copyright is assigned (transferred) to another party under a signed, written contract (an assignment), it remains with the original holder. An artist can sell their digital illustration (the digital file) but retain the valuable copyright in the illustration.

A Copyright owner has the right to protect their work by stopping others from using it (copying, displaying, exploiting it) without permission; it is a right that can be licensed or sold.

Copyright infringement occurs when someone uses the whole, or a substantial part, of a work without the copyright owner’s permission.

It is therefore important to ensure that the NFT project has the right to licence the use of, or assign ownership of, copyright in the artwork the subject of the NFT.

Where the party selling the NFTs is a separate legal entity (a limited company, for example) from the owner of copyright in the artwork, it will be necessary to grant that entity the right to deal in the relevant IP rights. It may be that IP rights are assigned to a holding company which then licences the use of the IP rights, or a licence is put in place between the copyright owner and the corporate entity.

The smart contract within the NFT will then contain a sub-licence to the NFT holder granting certain IP rights which may be either limited (the right to display only, for example) or may be more extensive (the right to commercially exploit the artwork).

However, the rights of the NFT holder should be clearly defined in the NFT smart contract (which we discuss in the next instalment of the series).

If copyright is infringed, it can lead to not only the removal of the NFT from the hosting platform but can also trigger a claim for damages and an injunction against the infringer. A recent example of this is a claim made in respect of an NFT featuring and purporting to assign rights in the artist Jean-Michel Basquiat’s 1986 mixed media work on paper, ‘Free Comb with Pagoda’. The NFT was created without the permission of the copyright owner (the late artist’s estate) and was removed from its hosting forum. See the article here.

2. Moral Rights

Moral rights sit alongside copyright, protecting the integrity and ownership of the work, and include:

• • the right to be recognised as the author of the work (paternity right);
  • the right to object to the derogatory treatment of the work (this would broadly include any unauthorised editing and adaptation of the work); and
  • the right to object to false attribution of the work; and
  • the right not to be identified or named as the author of a work which they did not create.

Like copyright, moral rights arise on creation of a work (and belong to the author of an original work), however unlike copyright, moral rights cannot be transferred. Importantly, they remain with the creator of the works even if the copyright does not.

In the UK, moral rights may be waived – i.e. given up – but cannot be assigned or sold to a third party. In agreeing to waive moral rights, an author would no longer obtain the benefits moral rights provide.

Under UK law, remedies for infringement of moral rights could include damages, which is a financial reward, or an injunction preventing further infringing uses depending on the circumstances.

It is vital therefore to consider moral rights along with copyright at this early stage.

3.Trade Marks and Registered Designs

It is not only copyright and moral rights of which you need to be aware: trade mark and registered design rights may also be infringed in the creation of an NFT. It can be tempting to include trade marks for example, in NFTs to make them more appealing or by way of social commentary, for example. However, if without permission, the NFT reproduces, and/or takes unfair advantage of, or is detrimental to, a trade mark, then it may infringe those trade mark rights.

The infringement of design and/or trade mark rights can lead to expensive litigation.

It is recommended therefore that an IP audit is carried out in respect of the artwork the subject of the NFT, to verify and ensure appropriate rights and permissions are obtained before an NFT is created and promoted.

You may also wish to register a trade mark or design before the launch of the project, to protect your branding, and the advice of a lawyer is recommended as to this also.

If you would like to discuss this further, please contact us today.

In Part 3 of this series, we will consider the Smart Contract element of an NFT project: its importance in the granting and protection of rights, what can go wrong and how to avoid it!.