Brand Protection Today – Article 9: Brand Proliferation through Non-Fungible Tokens (NFTs)

Brand Protection Today – A Series from InfoLawGroup 

At InfoLawGroup, we recognize that communication technology is changing at a furious pace and the need to protect brands is greater and more complicated than ever. We deal with these issues in our daily practice and have shared insights from choosing a mark to protecting the mark in this nine-part series on Brand Protection. You can return to the beginning to view the entire series HERE.

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by Tatyana Ruderman

In this week’s article, we take a closer look at the latest trend powered by blockchain technology: exploitation of non-fungible tokens, commonly referred to as “NFTs.” We will talk about how NFTs can be used as part of a brand protection strategy, as well as to increase brand presence and consumer engagement.

(In case you missed last week’s article on blockchain technology and intellectual property management, you can find our higher level overview HERE.)

A piece of digital property becomes an NFT when it is “tokenized” or “minted”, through a process in which the digital asset is recorded on a digital ledger with all its attributes and transaction activity (when it was created, who owns it, how many times has it been sold or licensed, etc.). NFTs can also be “linked” to physical items, for example, selling a virtual token redeemable through a unique code imprinted on or packaged with a physical product.

Digital property is often experienced as being fungible and lacking a certain preciousness. Its ownership is hard to validate or track, and it can easily be manipulated or replicated. In contrast, the uniqueness and aspirational authenticity of NFTs (coupled with the convenience and lower barriers involved in creation of digital content) make them very attractive for digital content creators and brands.

NFTs seem to range from digital items that offer a direct and practical utility (such as music sales) to items whose appeal and driver of value is simply their newness, rarity, uniqueness, exclusivity or other factors that are difficult to quantify (such as collectible items).

Attention to NFTs has recently exploded (SNL even chimed in last weekend to offer its audience a much-needed primer), so we won’t belabor you with an exhaustive list of trending NFTs, but include the chart below to provide a snapshot of how NFTs are being used or explored by content creators and brands in various spaces. This chart is followed by some potential benefits of NFTs for creators and brand owners, and lastly, of course, the challenges and questions ahead.

Digital Music/Audio

One of the more straightforward use cases, a record or sound clip can be minted as an exclusive and unique NFT, arguably conveying a similar (though certainly not identical) sense of satisfaction to owning a rare vinyl record. A virtual token can also be linked to a physical record, tape, or other form of media.

Digital Art

Digital art is another space easily pierced by NFT art. Grimes recently sold around $6 million worth of NFT art and digital artist Beeple has sold $3.5 million worth of NFT art.

Some pieces also come with physical frames for displaying the NFT art.

Film/TV

In the same vein as digital music and visual art, there is great potential for commercializing films or TV shows as NFTs. Some speculate that videos of celebrities and exclusive movie scenes could be minted and sold for millions.

Minting videos as NFTs is much more logistically complicated than content produced by a single creator, given that production of a film (or even just a sophisticated clip) involves multiple players (actors, directors, producers, musicians, etc.) and their associated rights.

Video Games

The art of video games and existence of video game assets creates an almost perfect cultivation ground for NFTs to move in, and offers a nearly seamless transition for users who already spend gratuitously on digital currency and products that support their gameplay.

The intersection between video games and digital fashion will be something particularly interesting to watch in coming years.

Apparel

Nike secured a patent for tokenizing shoes (by having the owner redeem an ID code that links them to the shoes). The token also enables Nike to receive % of re-sales (and reap benefits of increase in sneaker value over time). Owners also have permission to “breed” shoes through manufacturing scripts and restrictions (possibly as an effort to feed the appetite for sneaker knockoffs).

Entertainment

Kings of Leon minted a “golden ticket” which gives the owner unlimited front-row access to Kings of Leon concerts, and Kings of Leon gets % of any resale proceeds.

Sports

The NBA released digital trading cards through a trading platform called “TopShot”, which are valued around $200K a piece.

Memes

 

The subject of the “Bad Luck Brian” meme minted and sold it as an NFT for $36,000.

GIFs

A remastered Nyan Cat—a GIF that can only be described as a joyful gray cat shaped like a pop-tart swimming through space followed by a rainbow trail—was minted and sold at auction for $300 ETH (or nearly $600K).

Internet Content

Jack Dorsey of Twitter minted and auctioned his first ever tweet as an NFT, selling at $2.9 million.

Collectibles, “Trading Cards” and Other Digital Memorabilia

Taco Bell minted a few digital tacos, which were sold at 0.001 Ethereum (about $2), but with potential for upsell.


Potential Benefits to Content Creators and Brands

  1. Authentic Ownership. As reviewed in last week’s article, NFTs theoretically offer a major benefit in assuring a buyer of an item’s authenticity. This could be a powerful tool in a brand’s strategy to fight counterfeits.

  2. Limited Availability = Increased Control and Increased Value. Content creators can limit the availability of an NFT and establish certain sharing or re-selling permissions. This will not only allow content creators to manipulate the value of the NFT, but also to retain more control over their brand, which has until now been very difficult to do in the digital space.

  3. Resale Proceeds. Quite significantly, a creator can receive a portion of proceeds from subsequent sales tied to their original creation (even where, for example, an NFT is incorporated into another NFT or other product).

  4. Controlled Distribution: Bridging Connection between Primary and Second Market. Brands can retain certain control over their minted NFTs past the point-of-sale and through distribution as the NFT moves through the marketplace. This may give brands greater leverage to combat “after market” alterations that may negatively impact their brands.

    Promotional rules often restrict a winner’s ability to re-sell a prize, however it is logistically difficult to track if such a re-sale occurs. With blockchain transactions, subsequent sales are recorded on the ledger and thus transparent/discoverable.

  5. Removes or Reduces Role of Intermediaries. This benefit is particularly liberating for independent artists.

  6. Building Layers of Consumer Experience. Because of the nature of NFTs, a brand can use these items to sustain engagement with a consumer, for example, offering a prize for consumers who collect a complete set of digital trading cards or linking an NFT to access to a physical experience (such as front-row seats at a concert).

Challenges and Questions Ahead

In our last article, we noted some overarching challenges to using blockchain technology for management of IP generally, and here consider some additional challenges specific to NFTs:

  • Value is in the Eye of the Beholder. Will the value of certain NFTs endure after the trend fades (such as those sold for millions)? How should brands valuate NFTs when awarding them as a prize? While the underlying utility of certain NFTs is clear, there is some real concern that other NFTs are currently overvalued, and that the bubble will inevitably burst.

    • To help set the value of an NFT, a brand should consider a number of factors: How many copies should be “minted”? Is the buyer allowed to re-sell (and if so, what is the appropriate royalty % to take)? Should the NFT be linked to a physical item?

  • Securing NFT Transaction. Since ownership of the NFT is connected to a private key, privacy and data security considerations should play a big role in establishing protocols for exchanging the private key.

    • If a private key is lost or stolen, the NFT connected to it is potentially irretrievable.

  • Fragile Security. While we are certainly accustomed to ascribing value to things that do not exist in physical form, NFTs raise some new issues.

    • The value (and very existence) of NFTs relies on blockchain technology, which is powered by hardware, and the ability to access and enjoy an NFT relies on various 3rd party platform owners. As a result, an NFT has the potential to “disappear” into thin air or otherwise be compromised through a security breach.

      • And, unfortunately, there are already many reports of NFTs “going missing.”

    • Also, NFT ownership is only as good as the ability to access it, which tenuously lies in an irretrievable private key.

  • Intellectual Property Infringement. Praising NFTs for perfect uniqueness and immutability is somewhat deceptive, because NFTs are of course subject to many of the same legal issues faced by other types of intellectual property, including copyright, trademark, and patent infringement as well as other legal issues such as enforcing a right of publicity.

    • In theory, a benefit of NFTs for brands is that they cannot be duplicated, but in reality, this ignores the wide potential for fraud. As we referenced last week, several artists have complained that they found their work minted as NFTs without their permission. How can it be ensured that a piece of property is thoroughly vetted before it is minted?

      • And, at what point would display of an NFT constitute infringement? For example, posting the Nyan Cat GIF to social media.

  • Working with 3rd Parties to Create and Host NFTs. At this point in time, most brands are not likely to have the experience to create and manage NFTs in-house, and will need to engage with a third party.

    • These relationships present unique contractual challenges, including delineation of NFT ownership as well as protection and management of the private keys associated with each NFT, and trusting the reliability of the systems that host and provide access to NFTs.

    • When creating NFTs that involve rights of multiple parties, these issues become increasingly complicated.

  • Establishing “Realness.” In order to have a certain stability in how “real” an NFT is, there needs to be a commonly held understanding of what makes an NFT a true asset. Some blockchain platforms are working quickly to develop standards and common understandings.

    • There is an Ethereum smart contract standard (ERC-721) that works for NFTs. As the NFT platforms develop or facilitate standard contracts and ownership rules, creators and purchasers will be more comfortable joining in.

  • Sales to End Users. If a brand wants to sell an NFT (or give it away as a prize), there are a number of new issues to consider.

    • For example, what permissions will it include? Has it adequately disclaimed warranties and representations? Could a company be liable if an NFT disappears from the Internet?

  • False Savior. NFTs have potential to give more power and control to content creators, however the trend also leaves artists concerned that, as with many other technologies, simply having the ability to purchase from artists directly will not be enough to compete with greater affordability and convenience. Larger companies and platforms have far more resources to leverage this technology, and there is legitimate concern that artists will be left in the same position or similar as they are now.

    • For example, the Internet created mass potential for self-distribution, but because larger platforms offer affordability and convenience for users, major platforms (such as video or music streaming platforms) continue to control much of distribution while artists receive a smaller cut of proceeds.

Tokens for Consideration

While not yet clear how thoroughly disruptive NFTs will be in media and entertainment, it is clear that we are only scratching the surface. The challenges and questions they raise are not insurmountable, and we are excited to see the many ways in which NFTs will evolve and be utilized to drive brand protection, brand presence, and consumer engagement.

Our series on modern brand protection has traveled a lot of ground – from the initial ideation of the brand, through trademark registration, brand monitoring, enforcement of rights, and into the future. But the evolution of brand protection is nowhere near complete. Changing technology and the ever-increasing access to information and others’ materials will continue to propel brand owners forward, advancing both their own options and capabilities, as well as those of counterfeiters, infringers, and even well-intentioned but misguided fans. Brand owners would do well to stay abreast of developments and leverage new technologies where it makes sense to do so, and we look forward to bringing you more insight on cutting edge issues in brand protection to help you do just that.

Originally published by InfoLawGroup LLP. If you would like to receive regular emails from us, in which we share updates and our take on current legal news, please subscribe to InfoLawGroup’s Insights HERE.

 

Previous Brand protection today post

Article 8 – The Future of Brand Protection: Blockchain