3 Questions For An IP NFT Pioneer (Part II)

The legal issues around NFTs are myriad and complex.

Before we get into this week’s column, a quick programming note. I am very interested in hearing about how other IP professionals and law students navigated the COVID-19 pandemic, so I welcome emails sharing any experiences that readers are willing to discuss. I also invite IP associates and law students interested in IP practice to email me for tips on how to succeed in the law firm environment as we, thankfully, enter the post-COVID era. Now back to my interview on a timely and fascinating topic.

This week, we continue my written interview with Jeremy S. Goldman, a partner at Frankfurt, Kurnit Klein + Selz PC. Please see below for Jeremy’s answer to my last question, focused on the types of legal issues raised by Non-Fungible Token (NFT) commercial activity.

As usual, I have added some brief commentary to Jeremy’s answer below but have otherwise presented his answer as he provided it.

GK: What legal issues do NFTs raise?

JG: Not surprisingly, the law has not yet caught up with NFTs. While federal and state regulators have issued guidance and brought enforcement actions in connection with cryptocurrency projects, I’m not aware of any NFT-specific laws, regulations, or enforcement actions yet on the books.

That said, NFTs raise a host of legal issues. Here are a few of the top ones:

Intellectual Property. At a fundamental level, it is important to understand that an NFT is not the same thing as the digital object with which the NFT is associated. When you buy an NFT, you own the digital token, but you do not own the digital object, much less any copyright or other interest in the digital object. That default rule may be changed by the NFT’s terms, but absent those terms, you are just acquiring a token — like a receipt — that points to the object.

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Once you get past that distinction, the IP issues tend to fall into two categories: inbound rights and outbound rights. Inbound, the question is whether you have all the rights that are necessary and prudent to mint an NFT associated with the digital object. Is the work original, or does it incorporate third-party material arguably protected by copyright, trademark, or right of publicity? If so, do you need a license or is there a fair use/First Amendment argument? If you are not the individual who created the work, do you have the necessary work-for-hire, transfer, or license to mint and sell the NFT?

Outbound, you are asking what IP rights — if any — are being granted to the NFT owners. While NFTs typically authorize no more than personal use of the IP and the right to market and sell the NFT, some go further, allowing commercial use and even granting exclusive rights.

Then there’s the issue of unauthorized NFTs: what happens when someone mints and sells an NFT associated with another person’s work without permission? DC Comics circulated a letter to its freelancers asking them not to mint NFTs of their superhero art, and the Basquiat estate shut down an unauthorized NFT auction. Given the immutability of the blockchain, IP enforcement raises some vexing questions in this field.

Financial — Whenever you are dealing with blockchain-based projects, you have to consider securities, banking, tax, and other finance-related issues. Is your NFT project creating or facilitating an “investment contract” and thus triggering securities law requirements? A class action lawsuit recently filed against NBA Top Shot claims just that. Is your platform subject to anti-money laundering (AML) and know your customer (KYC) requirements? What are the tax implications of your enterprise? Some NFT projects are riskier than others, and it’s very important to identify, address, and mitigate these risks upfront.

Consumer — It is important that you communicate to consumers what they are buying and what they are not buying when they purchase an NFT. This involves publishing clear and conspicuous disclosures, and understanding any laws or regulations that may apply to the NFT offer. It is also vital to structure the user experience in a way that will maximize the likelihood that a court will enforce whatever terms and conditions you wish to govern the transaction.  This can get tricky given the decentralized nature of blockchain transactions, where intermediaries are not required, and tokens may be sold on the secondary market.

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GK: As we can see from Jeremy’s response, the legal issues around NFTs are myriad and complex. What does that mean for IP lawyers who may not be practicing in the area yet? At a minimum, developing as deep an awareness as possible around potential issues that their clients may face. Along with developing the conviction to warn clients to avoid the temptation to rush headlong into the NFT market before developing a holistic understanding of all the legal issues involved. We all know that what follows market interest in a particular area — and NFTs surely qualify on that front — is often the twin challenges of regulation and litigation, with some of that litigation surely to have some kind of IP component. As a result, the more initiative IP lawyers show in educating themselves on the NFT phenomenon, the better. Hopefully, this series of columns and Jeremy’s insights will help advance that educational experience for this readership.

My thanks to Jeremy for the insights and cooperation, and I wish him the best of luck with continuing to build his practice in this fascinating area. It is always great to see lawyers jump at the opportunity to service others with respect to a fast-developing area of IP law. I am always open to conducting interviews of this type with other IP thought leaders, so feel free to reach out if you have a compelling perspective to offer.

Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.


Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.