Three issues that brand owners should consider with their NFT licence terms

More and more brands are entering the metaverse.  But their presence in the metaverse could manifest in a multitude of ways.  It could mean that they have a virtual store on a platform or that they release a line of virtual fashion clothing.  However, for many brands, the first step into the metaverse involves the launch of an NFT collection.

Coach, the luxury handbag brand, has offered a limited edition NFT for the existing Coach community.  They collaborated with a well-known New York-based artist SHXPIR in the luxury fashion space and the release of the NFTs took place at a physical event, NFT.NYC.  Coach Insider Members were rewarded with exclusive access to the limited edition NFTs.  The aim was to drive brand loyalty, and many Coach handbag owners took to social media to express their appreciation for a traditional brand using emerging technology.  It was so successful that Coach launched a second NFT campaign not long after.

Before embarking on a NFT campaign, brand owners should consider who they are collaborating with and understand the intellectual property (IP) implications.

There are three main IP issues to consider with an NFT project:

• IP in the related artwork will not automatically transfer when the NFT is first release (a process known as 'minting').
• Not all IP licences (which transfer various IP rights in the artwork) are appropriate for each project.
• It is important to consider the legal formalities required in order for the licence/assignment to be valid.

IP in the artwork

Brand owners should be aware that once an NFT is minted, the IP in the related artwork does not automatically transfer to the new NFT owner.  The smart contract, which usually incorporates the terms and conditions regarding the sale, will require IP-specific provisions in order for the IP to be transferred.

This is important for two reasons:

• It is important to ensure that the brand owner owns the relevant IP.  If the artwork has been created in collaboration with an artist, then the agreement will need to have an assignment transferring ownership of the IP to the brand. 
• As there is no automatic transfer of IP, the terms under which the IP is transferred will determine what the new owner can do with the artwork once they own the NFT.

Many new owners of NFTs may think they can exploit the artwork as they see fit, but the underlying licence terms often tell a different story.

IP Licences and assignments

Various licences have been made available for use with NFT projects, but brand owners should be aware that the licence should be specific to the goals of the project. 

Some projects will be about commercialising the artwork and enabling NFT holders to exploit the IP rights.  In this situation an exclusive licence with commercialisation rights would be appropriate.  Some projects will place more importance on the collection of the NFT rather than the use of the artwork.  Such NFTs can be used as proof of ownership including as entry to events, etc.  In this case a broader licence will be more appropriate, as the NFT holder is unlikely to have issue with anyone copying and sharing the artwork.  They may in fact appreciate the artwork being shared as this is publicity which may enhance the value of the NFT.

'Creative commons' licences have been used by some NFT collections, but brand owners should be aware that once a creative commons licence is used, the work in question becomes part of the public domain and so anyone can use the work without restriction.

Brand owners may also want to consider what (if any) restrictions are placed on the new owner of the NFT.  For example, in the 'Can't be Evil' licences, certain licences have termination provisions in the event of hate speech by the new owner.

Assigning the IP is another method of transfer, but this would involve ownership in the IP passing to the new owner of the NFT.  The 'World of Women' NFT project uses an assignment in their terms and conditions.  Brand owners may favour this, but it can raise issues if and when the new owner of the NFT seeks to transfer the NFT and results in less control from the original brand owner.

Legal formalities

Brand owners should be clear at the outset of a marketing project involving NFTs of their ultimate objective and agree this with their legal advisors. They may wish to control future sales of the NFTs therefore not only do the agreements need to deal with the transfer of IP but also with any restrictions on the new owner they may wish to include.

Some projects may attempt to assign the IP to the new owner but for a transfer to be valid under English law, this must be in writing and signed by both parties.  Some projects may attempt to bind new owners or set up ownership structures using smart contracts.  Whatever the goal, it is crucial to understand that you should always have an appropriate contract in place, the form of which may vary depending on the jurisdiction concerned but you should also ensure it contains any specific requirements of the brand owner so it functions as intended. 

Conclusion

NFTs represent a new opportunity for brand owners, not only to collaborate with exciting artists in creating digital work, but also to reach out to their loyal customer base and provide something unique.

Ensuring that care is taken in relation to the IP provisions of any NFT licence is important to make sure that the project functions as intended and that new NFT owners get what they are paying for.

It will be interesting to see how NFTs evolve in the metaverse and as more brands catch onto the possibilities, the space and demand is likely to grow.

John Shaw, Associate in the IP team, says, "NFTs represent a new and unique opportunity for brands to 'enter the metaverse' and reach new audiences, but caution should be advised so that all necessary legal steps are taken with the IP so that there is no harm to the reputation of the brand."

For further information on brand collaborations, please see our article here.