Protect intellectual property and limit liability for digital art and NFTs


Lots of things are symbolized, but the growth of NFTs for digital art is booming. This, in part, is due to recent news that Beeple’s iconic digital artwork was auctioned off by Christie’s for $ 69 million. Other digital arts are created to take advantage of pre-existing intellectual property and physical art. This boom creates great opportunities for intellectual property owners who wish to license their intellectual property for use in NFTs. However, for those new to space, there is a lot to consider given some of the unique aspects of NFTs and digital art. Intellectual property owners who can benefit from this NFT boom may include: • brands that have famous brands, logos and other brand identifiers;

  • game companies that have unique game characters or artwork

  • publishers of books, movies and the like that have unique characters and other PIs;

  • the artists who created have physical or digital works;

  • other intellectual property owners

When intellectual property rights are licensed for use in digital art and other NFTs, it is important to be clear about what is and what is unlicensed. The scope of the license should be limited to specific purposes. Various other limitations may also be appropriate. For example, a creator may grant rights to create a specified number of DTVs associated with a copyrighted work, in order to maintain the scarcity (and associated value) of DTV based on such work.

Other examples to consider include imposing limitations on:

  • changes in intellectual property or the art in which it is included;

  • what can be combined with IP based art; and

  • where and how DFTs are distributed.

Considerations for each of these potential limitations are presented below. Limitations on Modifications and Combinations In some cases, the licensors may wish to limit or exercise control over modifications of intellectual property as used in art and / or modification of art based on the property. intellectual itself. Additionally, it may be desirable to consider limitations on what can be combined with this art. To understand the potential need for limitations on modifications and combinations, it is important to understand the range of options that exist with certain forms of DVT (eg digital art). Failure to comply with these options may result in the granting of rights that are too broad and allow your IP address to be modified or combined with other content in a way that you may not wish to associate with your IP address. .

Layered art

For example, a cool feature of NFT-based digital art technology is layered art. This technology allows a single work to include multiple layers of art, each created by a different artist. Each layer can be tokenized and owned by a different entity. And the work as a whole can also be symbolized and this token can belong to a different entity. Due to this characteristic of digital art, you should consider the scope of the license you are granting to prevent art based on your IP from being associated with works that you find undesirable. For example, without appropriate limitations, your licensee may create a layer of such a work based on your IP, while other layers may include offensive material or other content that you would not want associated with your IP. .

Programmable art

Another interesting genre of digital art is programmable art. Programmable art may or may not be stand-alone. In either case, the art is programmed to change based on certain triggers. In a simple case, the work can have two fixed layers and the art can change from layer to layer based on a fixed event. In this simple example, one layer can be presented during the day and the other at night. In this scenario, two fixed layers are displayed alternately. However, programmable art can be much more complex and can transform a single image in a variety of, sometimes random, ways. In some cases, programmability can alter or distort the image. This too could lead to unwanted representations of your IP.

Generative art

Another form of digital art is called generative art. Generative art uses AI or other algorithms to create or modify art. In some cases, an artist specifies some of the inputs or starting points for the art, and then the algorithm takes over. Depending on the effect of the algorithm, if the generative art is based on your IP as an input, it could also lead to unwanted representations of your IP.

Collaborative art

Another form of digital art that is becoming increasingly popular is collaborative art. It is an art form where many people contribute to a single work of art. Layered art (discussed above) is one of the ways collaborative art is created. However, in some cases art is much more openly collaborative in a participatory way. See for example Dada. Due to the open nature of collaborative art contributions, it could also have unintended consequences for your intellectual property if the licensee contributes such work with art based on your intellectual property. Without sufficient knowledge of the digital art landscape and the ever-changing tools and techniques, it is difficult to effectively draft licenses that protect your intellectual property from unwanted modifications or combinations. When you license your intellectual property for digital art or other NFTs, it is important to understand the potential ramifications of these and other technologies. Simply granting a license to use your IP in one or more NFTs can be risky. While this may appear to be a limited license, without other appropriate limitations, it may be much broader than expected. Depending on the intended use, licensors should consider including a language in their license to protect against potentially unwanted results.

License revenue models

Another unique and beneficial aspect of many NFTs is the ability for the creator and / or licensor to charge a fee not only when the NFT is originally sold, but also each time it is resold. This capability can be implemented through smart contracts. Smart contracts typically include stand-alone code associated with a token and handle the sale and resale of the token. They can be programmed to automatically transfer a portion of the sale and resale to a designated digital wallet. To take advantage of this capability, licensors should ensure that the license is properly drafted to cover a royalty or share of the revenue for the initial sale and each resale.

Liability avoidance

While the benefit of IP licensing for NFTs is attractive, there may also be potential liabilities. For example, various potential legal liabilities may arise depending on how and where the TVN is sold. Most of the well-known NFT platforms are aware of and respond to these issues. However, without appropriate limitations, licensees may use alternative distribution methods that do not necessarily comply with regulations.

Securities Laws – Fractional Ownership and Pooling

Most NFTs that are associated with a single wok and sold individually are not likely to be considered a security under US securities laws. However, various sales techniques are used and may involve securities laws. One technique is fractional ownership. In this scenario, the ownership of a single work (or group of works) is represented by multiple tokens with different owners. This allows many people to share ownership of the same work. Depending on how this fractional ownership is structured, it could be of common interest. According to another technique, several artists can pool a collection of their independent works, tokenize this collection and share the proceeds from the sale and resale of the token. In both of these scenarios, depending on how the split or pooling of interests is structured, issues related to securities law may arise. The Howey case is the flagship case on whether a token offering is subject to securities law. This case concerned a pooling of assets (orange groves) and a sharing of the collective product. Whether the aforementioned techniques raise issues related to securities law must be decided on a case-by-case basis, taking into account all the facts and circumstances of the particular offer. However, prudent licensors may include language in their licenses to the creators of NFT that may help prevent or mitigate such liability.

Money laundering and circumvention of sanctions

It is well known that high-value art has been used in money laundering schemes and to circumvent sanctions. The record amounts obtained for some NFTs caught the attention of FinCEN and OFAC. These entities administer anti-money laundering laws and the avoidance of sanctions governing these activities. Intellectual property owners should consider provisions in their licenses to accommodate these possibilities. Requirements for a licensee to ensure compliance with all applicable laws and to indemnify the licensor for breach are common in intellectual property licenses. These requirements are recommended. However, in some cases it may be prudent for licensors to understand and limit where licensed DTVs will be sold and / or to include language in their licenses to exercise some level of control in order to avoid unwanted scenarios. . A certain level of diligence on the methods of distribution and / or the platforms through which a sale of the licensed work will be sold is advised. Conclusion The digital art and NFT markets are fascinating, growing and will undoubtedly continue to evolve. Many fortunes have already been made. Much more chances will be made. But like any other great opportunity, there are potential risks and responsibilities. The above are just a few of the legal issues that should be taken into account when licensing intellectual property to take advantage of these trends while avoiding or minimizing liability.

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.Revue nationale de droit, volume XI, number 84

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