Non Fungible Token licensing – what are the commercial legal issues?

Introduction

Fashion brands are investing heavily in the metaverse with new digital collections, but what are they actually selling? Previously, we considered some of the trade mark issues in play when the fashion industry and the metaverse combine here.

We look now at three key areas associated with licence and ownership agreements in relation to Non Fungible Token (NFT) collections that have been minted by big brands and what other brands looking at entering the NFT world can draw from this.

Adidas, Nike and NFTs  

Adidas ventured into the metaverse off the back of the Bored Ape Yacht Club NFT collection. Initially it purchased an NFT ape from the collection and then released a limited edition NFT collection in collaboration with the project.

Following suit, Nike purchased RTFKT, creators of virtual sneakers and other digital work. Professional basketball player Steph Curry and Under Armour have released a collection, with even Ralph Lauren venturing  into the Roblox corner of the metaverse.

Usually these NFT ownership  / licence agreements deal with:

• Intellectual property (IP) and other rights attached to the NFTs
• Commercialisation of the NFT
• Termination

Intellectual property and other rights attached to the NFTs                                     

Creators who are in a rush to get to market, often do not pass a glancing eye on the concepts of IP rights and NFT ownership rights.

When releasing an NFT collection, a brand does not want to be in the unenviable position of retroactively trying to prove its ownership of the intellectual property in the NFT’s artistic work.

The current approach in many countries is to take existing IP rules and apply them to the metaverse. When reviewing agreements used by fashion brands to bind owners of these NFTs, lawyers can see familiar language and terms.

As a result the underlying NFT (which is ultimately recorded on a blockchain), is distinguished from the artwork “associated” with the NFT. A common approach is to make clear that the purchaser is acquiring only the actual token that is associated with the artwork, whilst the brand retains all rights to artistic creation.

This results in clauses such as:

• Nike – “RTFKT retains all right, title and interest in the RTFKT-Owned Content and all copyright or other intellectual property rights in any RTFKT-Owned Content”;
• Under Armour – “The Digital Object(s) provided pursuant to this Owner Agreement are licensed, not sold, and Owner receives no title to or ownership of the Digital Object(s) or the intellectual property rights therein. Except for the license expressly set forth herein, no other rights (express or implied) to the Digital Object(s) are granted”; and
• Adidas – “You acknowledge and agree that adidas AG (“adidas“) (or, as applicable, its licensors) owns all legal right, title and interest in and to the Art, and all intellectual property rights therein. The rights that you have in and to the Art are limited to those expressly stated in Section 3 of these Terms and Conditions (these “Terms“) below”.

For fashion brands it is important to retain all rights to the artwork for the purpose of brand protection. So, what are brands actually allowing NFT owners to do with the underlying artwork?

• With Nike, RTFKT grants the owner “a limited, personal, non-exclusive, non-sublicensable, worldwide license under any copyright owned by RTFKT in any RTFKT-Owned Content to: (a) copy and modify the RTFKT-Owned Content (as modified, “Modified Content”) for non-commercial, personal use; and (b) display and perform the RTFKT-Owned Content and Modified Content for non- commercial, personal use.”
• Under Armour grants “a limited, transferable, non-sublicensable, royalty free license to use, publish and display the Digital Object(s) associated with the Main Asset during the Term, subject to Owner’s compliance with the terms and conditions set forth herein, including without limitation, the restrictions in Section 1.4 below, solely for the following purposes: (a) for their own personal, non-commercial use; or (ii) to display the Main Asset for resale. Upon expiration of the Term or breach of any conditions of this Owner Agreement by Owner, all license rights shall immediately terminate.”
• Adidas grants “a worldwide, non-exclusive, revocable, royalty-free license, with no right to sub-license, to display the Art for your Purchased NFTs, solely for the following purposes: (i) for your own personal, non-commercial use (for example home display, display in a virtual gallery or as an avatar); (ii) as part of a marketplace that permits the purchase and sale of your NFTs, … (iii) as part of a third party website or application that permits the inclusion, involvement, or participation of your NFTs.”

NFT holders are also allowed to do the following:

• Personal use – taking the above Adidas clause as an example, this can be in the form of using the NFT as a profile picture across social media or a virtual avatar in the metaverse.
• Derivative works – On one side, Nike has permitted owners to create derivative works and to own the copyright in these works (importantly the underlying RTFTK content still belongs to Nike). On the other, Adidas and Under Armour have not taken the same approach – the owner is not allowed to make any derivatives with their NFTs.

In short, owners are not granted much from a commercial perspective. The main use is either personal or to sell the NFT on a secondary marketplace (for example, OpenSea) which permits NFT owners to buy and sell NFTs. In essence brands are trying to ringfence the commercial elements of NFT collections in order to ensure that they can continue to profit in the metaverse.

Commercialisation

A varied approach has been taken here. Many companies do not allow any commercialisation of the NFT for the reasons already discussed. Nike however, has allowed owners of its NFTs to apply for a commercial licence which grants them specific rights to commercialise the modified version of their NFT.

These rights are limited mainly to physical merchandising (note that this does not extend to footwear or apparel) and the owner, using generally accepted accounting principles, is only allowed to make an aggregate of $1 million gross revenue.

After this threshold is reached, the NFT owner will have to request further permission from Nike to continue benefiting. This is certainly a novel approach, allowing both the owner to profit but also to retain control over the commercialisation of the NFT.

In respect of the sale of an NFT – all three brands have stated that a valid transfer of the NFT will only occur:

• if the seller notifies the buyer of the associated terms and conditions
• the buyer agrees to these terms

In contrast to Nike, both Adidas and Under Armour have restricted use to non-commercial purposes. However, this raises the question of what happens if a professional services provider uses the NFT as part of an avatar, or if someone uses the NFT as part of a profile picture or avatar for their business in the metaverse?

It should also be noted that brands have recognised the need to address inappropriate use of NFTs. Both Nike and Adidas have taken a firm stance on the way that owners may use their NFTs.  Any use that may be construed as a hate crime, for instance, will result in a breach of the agreement. Adidas has also prevented owners from using the NFT in a way that damages its brand.

Termination

If the NFT is sold, the previous owner’s rights to the NFT (and any restrictions, unless they extend beyond ownership) terminate upon transfer. There is nothing unusual about this.

However, if an owner breaches the terms of the agreement whilst still in possession of the NFT, then the companies have stated in no uncertain terms that the agreement will be terminated and all rights under the agreement rescinded. What this means from a practical sense will be hard to predict.

When brands mint large collections of NFTs (Adidas minted 30,000 NFTs), even with the use of a blockchain it will be difficult to supervise proper use. Furthermore, it will be equally challenging to enforce any sanctions against individuals where identity and ownership are not easy to ascertain.

Already, specific NFT owners have had their NFTs blacklisted because they have acquired them through illicit means, for instance when OpenSea froze $2.2 million worth of stolen Bored Apes NFTs. However, it is extremely difficult to physically remove the actual NFT from someone’s possession. Being blacklisted means that you may not be able to sell the NFT on specific marketplaces like OpenSea, however there are ways to circumnavigate this, especially if the NFT remains in your wallet.

Take home points

For fashion brands that are considering entering the metaverse:

• Make sure you clearly define the rights you retain, and the rights are you giving away.
• Make these rights visible and accessible! It is no good to have carefully drafted terms and conditions, if no one reads them or can easily access them.
• Enforcement may be prejudiced if the brand is unable to demonstrate that the purchaser (or transferee) saw the terms to which they were agreeing.
• Ensure that the ownership agreement / licence is in the footer of the webpage, can be found on the minting page for the NFT, and is on the marketplace when the NFT is being purchased.
• Be clear what happens if there is a breach. Even if you do not want to limit an NFT owner’s ability to commercialise their NFT, it is still prudent to set out terms and conditions which if breached will terminate the owner’s right to commercialise the NFT( that is, if the NFT is being used inappropriately.)
• Be familiar with the tools available to you (via 3^rd party sites) to enforce action against such breaches. For example, intellectual property take down requests or reporting fraudulent activity on OpenSea.

Contact us

If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.