Should Brands be Less Protective of Their IP When it Comes to NFTs?

Thursday, March 24, 2022

When it comes to intellectual property, the focus of most brands is to aggressively protect their assets. However, as certain brands have demonstrated in both the physical and digital worlds, a less protective approach may help creators unlock the long-term value of their IP. The NFT marketplace, in particular, presents interesting opportunities for licensing innovation that loosens the grip on IP in order to leverage the power of the creator community.

A Brief Explanation of NFTs

Non-fungible tokens, or NFTs, have taken the internet by storm. From fine art auction houses to new online marketplaces, sales of NFTs have soared, reaching nearly $25 billion in 2021, up from less than $100 million the year prior.

NFTs are one-of-a-kind assets in the digital world that can be bought and sold like any other piece of property. They are being utilized to monetize assets in the worlds of music, art, and sports memorabilia, among others uses.

Because they are unique and unalterable, NFTs allow for authentication and certification of ownership of a digital asset. A digital asset can be attached to an NFT and this feature enables verification of the digital asset and its ownership, no matter how many times it trades hands, because it lives on the blockchain. The fact that NFTs are non-fungible—each one is an original or one of a set number of copies in a series—distinguishes NFTs from fungible cryptocurrency such as bitcoin.

Brands, NFTs and IP

With so much money being poured into the purchase of NFTs, and given all the buzz around the metaverse, which will allow people to showcase digital forms of art and property, it’s no surprise that many brands are furiously developing strategies to commercialize their products and protect their IP in the digital world.

Indeed, the IP wars over digital goods are heating up. Brands such as Nike, Wal-Mart, and many others have filed trademarks for various virtual goods and services. Hermès sued artist Mason Rothschild over a collection of 100 “MetaBirkin” NFTs—luxury bags for the digital world—he created that Hermès alleges violate its trademark. And Nike, which recently acquired Rtfkt, a digital art studio specializing in NFTs, filed a lawsuit against sneaker marketplace StockX for the unauthorized sale of Nike-branded NFTs on its platform. If, as some predict, people start spending as much, if not more, time and resources in digital worlds as they do in the “real world,” it makes sense why brands are moving so aggressively to protect their interests.

Beyond these IP battles between marketplace competitors, there are also IP questions about what rights are acquired, or not, as between NFT sellers and buyers. For example, a purchaser of NFT artwork may mistakenly assume that the IP rights associated with the NFT automatically transfer as part of the purchase, even though that’s not how things work in the physical world. Just because you buy a physical painting at auction from a hot young artist doesn’t mean you can start selling t-shirts with the image of the artwork on it.

However, NFTs are a new type of asset, emerging as part of the decentralized “Web 3” internet economy, so it’s not surprising that there’s some confusion regarding IP rights in this domain. While Web 3 is a bit of the “wild west,” some semblance of order is emerging as it relates to IP rights between NFT creators and buyers. Three of the main approaches include:

  • Creative Commons Projects. When an NFT is sold with Creative Commons, or CC0, licensing, the buyer receives the rights to use the NFT in virtually any way that it chooses.
  • No Rights Transferred. Many NFTs are sold with no IP rights being transferred to the buyer.
  • Limited Transfer of Rights. The “NFT License” is described as “a more practical middle ground” to the alternatives of either relinquishing all IP rights or none. It allows NFT owners to use their NFT to commercialize merchandise, “provided that you aren’t earning more than $100,000 in revenue each year from doing so.”

One of the most interesting developments in NFT IP licensing involves the differing approaches taken by the creators of profile picture (“PFP”) NFTs such as CryptoPunks and Bored Apes of the Bored Ape Yacht Club. CryptoPunk and Bored Ape NFTs have sold for millions of dollars apiece.

The value of Bored Apes has been surging, and one of the reasons cited for the increase is that every Bored Ape owner receives IP rights to commercialize their unique NFT however they would like. For example, a Bored Ape owner used their ape to create “Bored Ape IPA” at their Michigan brewery. Another has licensed their ape to a comic book creator. Apes have appeared in music videos, and have been licensed by cannabis companies launching new products. Owners of CryptoPunks do not have the same rights to commercialize their NFTs.

Accordingly, it’s not just the scarcity of an NFT that contributes to its value. The extent to which brands allow purchasers to leverage the IP of their NFT may play an important role as well.

Building Community to Build Brand Value in the Digital World

When it comes to their IP, commercial brands tend to be focused on “protection.” For example, we’ve all seen stories about the National Football League sending cease and desist letters to small businesses who mention the term “Super Bowl” in promotional materials. The logic underlying brand protection efforts such as this is that allowing the proliferation of the Super Bowl trademark will create confusion and dilute its value.

But there are instances where brands make a strategic decision to not be so protective. For example, when Quidditch teams, inspired by the Harry Potter franchise, started emerging at American universities in the 2000s, Warner Brothers could have sought to shut this activity down, or attempt to capture value from it through licensing. Instead, Warner Brothers allowed Quidditch leagues to grow, and now there are hundreds of teams across continents, and even an International Quidditch Association which serves as the central governing body for Quidditch worldwide.

An argument could be made that Warner Brothers lost out on an opportunity to generate revenue from its IP by permitting Quidditch leagues to flourish. But the counterargument is that by relinquishing some control over Quidditch, more people become fans of Harry Potter, thereby increasing the overall brand value of the franchise. It’s similar to the bet that Yuga Labs, creators of the Bored Ape Yacht Club, has made by licensing commercial rights to buyers of Bored Apes: Loosening the grip on certain aspects of IP can make the overarching brand stronger and more valuable.

Instead of merely relying on their own creativity and ingenuity, and protecting what derives from it at all cost, an IP owner should at least consider whether relinquishing some control to build and leverage the power of community can result in even more value creation.

As Georgetown University Law Professor Madhavi Sunder explained in a Harvard Business Review article, “[C]ompanies ought to be pinching themselves that their fans want to bring their fictional worlds to life. Fan engagement extends both the lifespan and the value of the work. Fans make the work relevant to themselves and others. Their love and devotion are what creators live for.” Sundar argued that the potential for brand fans and advocates to make a brand stronger and more valuable merits a “more measured approach to asserting intellectual property rights.”

In the decentralized Web 3 economy, in which market participants tend to have a more laissez-faire outlook on IP rights, more brands, both large and small, may want to consider licensing more rights to NFT owners in an effort to unleash the creative power of community and unlock more value. To explain the potential for a community of fans to build upon an NFT in a way that increases its value, rather than diluting it, advocates for less restrictive IP often point to the way music is sampled. For example, in 1985, Slick Rick and Doug E. Fresh recorded “La Di Da Di” as a “B Side” in one take. Through sampling, the song has subsequently appeared in more than 1,000 other tracks that built upon the original work. A more restrictive approach to IP—refusing to allow sampling—likely would have resulted in the song being long forgotten rather than achieving its current status as one of hip hop’s most iconic songs.

When it comes to digital goods, less restrictive IP licensing could give rise to the same sort of creative dynamic, with creators continually remixing the original creative work in a way that increases its value.

“We’re All Gonna Make It”

Like many communities made up of people with a common vision, the crypto community uses slang which is often reduced to acronyms which are not familiar to the uninitiated. One such acronym is “WAGMI,” which stands for “we’re all gonna make it.” It’s meant as a positive statement of conviction about the future of crypto. It can also be seen as a rallying cry for less IP restrictions: If we want to make NFTs more valuable, we’re all gonna make it, not just the original NFT creator.

The Bored Ape creators are demonstrating that it’s possible to build a powerful brand in the Web 3 world by strategically being less protective with its IP. It’s yet to be seen how many others, particularly more established brands that are typically more protective of their IP, will follow suit. On the one hand, a more restrictive approach may be able to maximize revenue in the short term. However, such an approach may stifle creativity and innovation, and erode fan goodwill, which could damage the brand in the long term.

There’s no one right answer. Every brand’s IP strategy hinges on the consideration of a number of unique factors. The creators of the Bored Ape Yacht Club seem to be doing just fine with their strategy. Recent reports suggest that they are in talks to raise $200 million at a $5 billion valuation from Andreesen Horowitz and other investors. It’s hard to argue with their approach to IP.