Buyer Beware: NFTs and Intellectual Property Rights

Nyan Cat travels through the limits of space, time and smart contracts

Non-Fungible Tokens (“NFTs”) are hot right now. It seems every day brings us a new headline about record-breaking NFT sales. These sales are being legitimized by the entry of mainstream players like Christie’s and the National Basketball Association. The NFT market is growing quickly and has found its way into the mainstream with the backing of a growing number of celebrity participants.

What is the NFT market right now that is attracting so many buyers? Well, take the esoteric knowledge of the art world, multiply it by the technical obscura of cryptocurrency and wrap it in evolving legal restrictions and you have the current NFT marketplace.

NFTs themselves are a sort of cryptocurrency based trading cards. They are digital versions of items converted into unique tokens and governed by terms found in Ethereum based “smart contracts.” Like cryptocurrency, NFT ownership and transfers are recorded on a decentralized internet ledger called a “blockchain.” Since NFT tokens are unique, they can be limited in number from just one to a specified number. This creates scarcity and scarcity creates value. Ask any collector of art or rare ephemera and they’ll point to the rarity of an item as being one of the principal drivers of its worth.

Most of the NFTs being “minted” and collected right now are static artwork images, but also include digital real estate, GIFs, music, videos and even social media posts. Apart from commanding large amounts at auctions, there can be ongoing financial advantages to digital artists and content owners who sell their works as NFTs. Artists can create smart contract provisions that are inextricably bound as digital code to their NFT to guarantee that a portion of any resale be deposited into the original artist’s Ethereum wallet. Conversely, NFT auctioneers or other middlemen can also insert themselves into the revenue stream this way, adding obscure and perpetual transaction costs to NFT sellers. One of the largest marketplaces for NFTs, OpenSea, adds a 2.5% fee to every secondary sale on its platform.

NFT “Ownership”

So what do you actually own when you buy an NFT? Buyers are most often getting mere bragging rights and the right to display their NFT as the sole owner of it. In most cases, buyers are not actually buying intellectual property rights like copyrights or trademarks — just the right to display the collectible on the internet or hang it on a wall in their home. The terms and limits of NFT “ownership” can be found in the smart contract’s metadata which contains specific terms on what rights are actually conveyed to the NFT owner. They can also be found in the terms of service users must consent to when utilizing an NFT marketplace.

In 2018, Dapper Labs, the company behind an early NFT marketplace called Cryptokitties, realized it was pioneering a new asset class and created an open source NFT License to help define what NFT ownership really means. Many of the principles found in that document form the basis for other companies’ term of service, with one major difference: Dapper Lab’s NFT License allowed NFT owners to profit commercially up to $100,000. Other media companies and sports leagues entering the NFT marketplace have based their terms of services on the Dapper Labs NFT License, but have limited the possibility of an NFT owner profiting from the seller’s intellectual property. These corporate entities have added additional, very protective terms of use regarding the ownership of their content based NFTs.

Ask any collector of art or rare ephemera and they’ll point to the rarity of an item as being one of the principal drivers of its worth.

What it means to own an NBA TOP SHOT Moment

The NBA’s wildly popular Top Shot platform generated sales of over USD$250 million last month with some of its NFTs selling for over $100,000. Top Shot sells basketball player images, statistics and short video segments as tradeable “Moments” on their web-based marketplace on the Flow blockchain. The Top Shot Terms of Use must be agreed to before one can use the NBA’s app to buy, sell or trade Moments on Top Shop. So let’s examine some of the terms required by Top Shot. The opening paragraph describes what you’re getting with legal precision (emphasis added):

NBA Top Shot is an application that provides users with the opportunity to purchase, collect, and showcase digital blockchain collectibles containing exclusive content from the National Basketball Association (the “NBA”) and its current and former players (collectively, the “App”).

You can purchase, collect and “showcase” the NFTs you buy on Top Shop. Nothing here says you get any ownership in the NFTs. So we move on to Section 2. which describes what the NBA means by “showcase.”

The “Showcase” feature of the App allows to you organize your Moments into collections, and show them to your friends.

LOL. All you’re allowed to do is organize and show your pricey digital token based collectibles to your friends, if any, as Section 2 does not guarantee you any friends.

Section 4.C. further specifies the allowed uses by a Moment purchaser of the artwork found in the NFT(emphasis added):

DLI grants you a worldwide, non-exclusive, non-transferable, royalty-free license to use, copy, and display the Art for your Purchased Moments, solely for the following purposes: (i) for your own personal, non-commercial use

“Non exclusive.” Did you catch that? It means that while the NFT you purchased may be unique, elements from that Moment, and even the entire Moment itself, can be used by others, including the NBA, for other uses, up to and including, selling on other blockchain based platforms. So if you bought that NFT thinking you would be the only or one of the few owners of it, check again: the NBA makes you agree otherwise. Purchasers of NBA Moments only have the right to display and copy their “Moment” on websites that allow for the cryptographic verification of Moment owners. For now, that wouldn’t be many sites outside Top Shot’s own website.

NFT ownership resembles fan support and not tangible asset ownership.

Further, you are limited to personal, non commercial uses, so you would not be allowed to make money from NFT ownership outside of the Top Shot marketplace, where you can sell your Moment to other Top Shop users. Here are other restrictions on your ownership of the NBA NFT that substantially limit your rights as a Moment owner:

  1. You may not modify the artwork used in your Moment.
  2. You may not use the art in your Moment to advertise, market, or sell any third party product or service.
  3. You may not use the art in your Moment in connection with depictions of hatred, intolerance, violence, cruelty, or hate speech or that otherwise infringes upon the rights of others.
  4. You may not use the art in your Moment in movies, videos, or any other forms of media, except for your own personal, non-commercial use.
  5. You may not sell, distribute for commercial gain or otherwise commercialize merchandise the art in your Moment.
  6. You may not attempt to trademark, copyright, or otherwise acquire additional intellectual property rights in the art in your Moment.

Violate these terms and you’ll immediately lose ownership to your NFT. Also the moment you trade, sell, donate, give away, transfer, or otherwise dispose of your Moment you lose your rights to display and showcase them to your crypto curious friends. However, even if you fully comply with all of obligations and hold on to your Moment, you can still lose your NFT ownership by account termination. Reassuringly, Section 4.B. of the Terms of Use starts with this statement(emphasis added):

You Own the NFT. Each Moment is a non-fungible token (an “NFT”) on the Flow blockchain. When you purchase a Moment, you own the underlying NFT completely. This means that you have the right to trade your NFT, sell it, or give it away. Ownership of the NFT is mediated entirely by the Flow network: at no point will we seize, freeze, or otherwise modify the ownership of any Moment.

Great! However, Section 5. of the Top Shot Terms of Use later says (emphasis added):

You agree that we, in our sole discretion and for any or no reason, may terminate these Terms and suspend and/or terminate your account(s) for the App.

Say what? You need the Top Shot app to trade and store your Moment NFTs on the Flow blockchain, so no access to the app means you’ve effectively lost all your Moments. They will still be on the blockchain, but you won’t be able to access them. Given that some “Legendary Tier” Top Shop Moments are currently listing for six figure amounts, you may want to think twice before investing into their NFT platform.

Intriguingly, Dapper Labs, is operating the Top Shot marketplace on its Flow blockchain and presumably added the additional restrictions to their original Net License at the behest of the NBA. Anticipating the marketplace, Warner Music Group invested in Dapper Labs in 2019 to explore digital collectibles based on WMG’s extensive collection of music, artist content and record labels. Bleacher Report recently adopted terms and conditions similar to Dapper Lab’s Top Shot NFT license and announced it will be selling rapper and sports related NFTs on OpenSea.

Conclusions

NFT ownership comes with limitations that purchasers may not fully understand. NFTs are substantially different from physical objects that are bought, sold and traded as rarities or collectibles. Imagine buying a Basquiat painting, but as a condition of “owning” it you could only display it at your home or at the seller’s auction house, and at any time, and for any reason, the seller could rescind your access to the artwork without paying you the painting’s market value or refunding your purchase price. How much would that painting be worth to you? That’s why it’s important to understand the intellectual property rights and licensing around NFTs. As the marketplace grows to include major media and sports entities like Disney, FIFA, Dr. Seuss, the UFC as well as established artists, celebrities, musicians and athletes, you can bet that the concept of NFT ownership will start to resemble fan support and not tangible asset ownership. Buyer beware.

If you’re interested in owning an NFT of this article, let me know and I’ll add some original artwork in the margins before minting it.

Athlete and Talent Manager. Producer. Law Professor. CEO of Intelligent Arts + Artists.