Legal Tokenization: Emerging Legal Issues Surrounding NFTs

The Legal Intelligencer

One of the more notable technological developments of the past two years has been the rise of the nonfungible token (NFT), the latest in the world of cryptocurrencies and distributed ledgers. This breakthrough technology has taken the art and tech worlds by storm.

Twitter CEO Jack Dorsey, for example, sold an NFT of his first tweet for the equivalent of $2.5 million. The NBA sells “unique” NFTs of basketball moments, called NBA Top Shots, the value of which has exploded. And the popular band Kings of Leon recently released their new album, “When You See Yourself,” as an NFT—becoming the first band to do so.

So, what exactly are NFTs? And, equally important, where does the law fit into this revolutionary form of digital property?

NFTs 101

NFTs have exploded into the American zeitgeist. Digital art, gaming, music, film, sports—nearly every major industry—has waded into the NFT world. Most often, NFTs make their way into public awareness through collectible projects like the Bored Ape Yacht Club, CryptoPunks, and World of Women. And while NFTs have proponents and skeptics alike, most agree NFTs aren’t going anywhere anytime soon. According to Morgan Stanley, the use of NFTs for online video game cosmetics has the potential to become a multibillion-dollar market by 2030.

Courts have seen an influx of NFT-related litigation in recent months. In each case, the essential question is what does an NFT give you? A contractual right? A license? Something else? To be sure, a license is a species of contract—but there is an important difference between the two. A contract would be the ideal tool for transferring ownership. But a license is merely a limited grant of permission to use something owned by someone else. As explained below, three courts are wrangling with this very issue as we speak.

Huh, What Are They Good For?

The first case involves a dispute between an international athletic brand and a leading online marketplace and clothing reseller (primarily, and not surprisingly, of sneakers). Recently, the defendant started selling NFTs to consumers to signify ownership of actual products. The plaintiff then filed suit. In its complaint, the plaintiff alleges the NFTs sold by the defendant represent more than a receipt or ownership certificate; rather, the NFT itself constitutes a new product that infringes on plaintiff’s trademark. The question for the court boils down to whether the NFT is a distinct product subject to trademark protection, or merely a component of a sale akin to a banknote.

The second case involves another retail-related NFT. On May 6, a federal judge in Manhattan denied a motion to dismiss a trademark lawsuit against an artist called Rothschild for selling “MetaBirkins,” which are NFTs depicting Birkin bags sold by the French fashion house, Hermès. According to Hermès, Rothschild sold over $1 million worth of MetaBirkins without Hermès’ permission. Rothschild countered that the NFTs are protected by the First Amendment and do not lose constitutional protection “just because he sells it.”

In the third case, filmmaker Quentin Tarantino was sued by Miramax for alleged copyright infringement based on his selling of “Pulp Fiction” NFTs—that provide a link to the screenplay. Tarantino maintains he retained the right to publish the screenplay under a 1993 agreement. But Miramax argues selling NFTs is not included in Tarantino’s reserved rights since the contract does not include any “forward-looking language” for rights to assets like NFTs that were not invented when the contract was signed.

Going Forward

The outcomes of these early cases will have ripple effects that extend far beyond the parties themselves. A few months ago, on March 9, President Joe Biden published an Executive order on “Ensuring Responsible Development of Digital Assets.” This executive order directs federal agencies to coordinate and assess challenges and opportunities in the NFT space. As NFT issues continue to be tested in court, regulators and legislators will be watching, waiting, and perhaps advocating for changes in the regulation of crypto.

With more cases surely to come, and as organizations begin to incorporate NFTs into their operations and product offerings, navigating the various legal and regulatory issues that undoubtedly arise will be critical.

“Legal Tokenization: Emerging Legal Issues Surrounding NFTs,” by Jeffrey N. Rosenthal and Thomas F. Brier Jr.  was published in The Legal Intelligencer on June 3, 2022.