NFTs IP Study Results Published by USPTO and U.S. Copyright Office in Joint Study with Womble Bond Dickinson

The U.S. Patent and Trademark Office and the U.S. Copyright Office recently published the results of their co-study (on the interplay between non-fungible tokens (NFTs) and intellectual property. The Report is the result of a June 2022 request from Senators Patrick Leahy (D-VT) and Thom Tillis (R-N.C.), and incorporates feedback from a Federal Register Notice and three online public roundtables.

Acknowledging the absence of a “single, uniformly accepted definition of NFTs,” the Report adopts the following definition:

“The term ‘NFT’” refers to: (i) a unique cryptographic token, (ii) the ownership of which is recorded to a blockchain (or another type of digital distributed ledger system), (iii) that provides the owner rights in or access to one or more assets or entitlements.”

The Report expands on each of these definitional components and addresses the creation, transfer, uses, and challenges of NFTs based on stakeholder input, before evaluating the role of NFTs and blockchain technology in three main areas of intellectual property:

Copyright

The creation of an NFT, or the “minting,” that creates a new copy of a copyrighted work “may implicate the copyright owner’s exclusive right of reproduction,” yet “independent of any associated asset, the code underlying the NFT itself may be copyrightable.” One consideration however is whether minting creates a derivative work. Further, whether an NFT is stored on-chain or off-chain, centralized, or decentralized, may implicate the right of reproduction. Lastly, the display of an associated work could implicate the public display right, or where the associated work is a digital phonorecord, marketplace display could implicate the public performance right on both the sound recording and the musical composition.

On the issue of enforcement, stakeholders identified that the Digital Millennium Copyright Act’s (DMCA) notice-and-takedown system has had some success in eliminating infringing assets; however, the “pseudonymous and decentralized storage of NFTs” creates problems identifying infringers, locating appropriate jurisdictions, and removing infringing content. The Report notes that “none of these issues arising from decentralized storage or pseudonymity are unique to NFTs,” with the creation of the internet lending itself to similar challenges.

Four main roles of NFTs in the copyright ecosystem were identified from stakeholder feedback. First, NFTs could be used “as recordkeeping tools to aid in documenting the provenance of creative works and copyright ownership.” Second, NFTs could also “be used to improve or enhance the Copyright Office’s registration of copyrighted works and recordation of documents pertaining to copyright” (although the Copyright Office expressed doubt in this proposal however for a variety of enumerated reasons). Third, NFTs could offer a resale royalty right (droit de suite) not currently offered by U.S. law but available in countries such as Australia and those in the European Union. Lastly, the Report identified that “NFTs and smart contracts could be used as a form of digital rights management (DRM) – digital tools used to communicate and control the terms on which consumers can access and use copyrighted works.”

Trademarks

The Report notes that trademarks function similarly in the NFT market as in other markets, identifying and distinguishing the source of goods and services. The USPTO’s Trademark Next Generation ID Manual currently sets forth several relevant examples of acceptable goods and services for the registration of trademarks in the NFT space:

Class 9: Downloadable image files containing {indicate subject matter or field, e.g., trading cards, artwork, memes, sneakers, etc.} authenticated by non-fungible tokens (NFTs).

Class 16: Paintings authenticated by non-fungible tokens (NFTs).

Class 35: Provision of an online marketplace for buyers and sellers of {indicate goods, e.g., sneakers, paintings, etc.} authenticated by non-fungible tokens (NFTs).

Classes 25 and 42 have also been amended recently to reflect the growing NFT marketplace. The Report directs examining attorneys and federal courts to conduct a “likelihood of confusion” analyses with NFT-related trademarks as it would with other trademarks. However, there is an “absence of clear, controlling judicial precedent” on the topic, despite decisions such as Hermès Int’l v. Rothschild and Nike v. StockX.

Trademark infringement and misappropriation were commonly noted issues identified by stakeholders in relation to NFTs, but the lack of judicial precedent creates uncertainty. As with copyright, decentralization and anonymity allow for the risk of further misuse. The USPTO has provided NFT-specific training and will continue to do so to ensure that the interplay between trademarks and NFT remains “consistent, predictable, and fair.”

Patents

Commenters suggested that NFTs have the potential to enhance patent portfolio management, allowing “patent information, licensing, assignments, and commercialization more transparent and straightforward,” while also providing “immutable timestamps for patent application filings.” The technical characteristics of smart contracts/NFTs could also “aid in tracking and controlling the distribution of royalties associated with patent licenses,” or to fractionalize patent ownership.

The Report notes concerns over the ability to obtain patent rights for NFT-related inventions based on eligibility, novelty, non-obviousness, and inventorship requirements. Most commenters suggested that the current eligibility guidance was sufficient, where NFT-related inventions would overcome § 101 hurdles where an invention relates to a practical application rather than an abstract idea or improves NFT-related technology, providing a “technological solution to a technological problem.” Questions were raised on the eligibility of NFTs for design patents. As would be expected, the role of artificial intelligence in the wake of Thaler v. Vidal was raised. The Report referred back to that Federal Circuit decision and § 100(f) inventorship requirements. It is thus likely that AI-generated NFTs face would face even greater hurdles.

It was suggested that the USPTO could use blockchain technology to reduce the costs and complexity associated with obtaining patents and reduce barriers to entry to encourage innovation. The blockchain could also be useful in authenticating office actions or recording/validating patent assignments. This comes at the risk, however, of overcomplicating the system for practitioners.

In conclusion, NFTs and blockchain technology hold vast potential in the IP sphere, with countless possible roles as acknowledged in the Report. However, the lack of legal precedent creates uncertainty. The continuously evolving technology further disrupts the ability to make predictable the interplay between NFTs and IP.

The consensus among commenters was that new legislation was not urgently needed to address NFTs and blockchain technology in the IP sphere. The Copyright Office and USPTO remain committed, however, to continue soliciting feedback, updating policies, and educating practitioners as both the technological and legal landscape evolve.

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