Companies face legal uncertainties defending against NFTs

Companies face many legal uncertainties when protecting their intellectual property, copyrights and trademarks against NFT makers. At least one legal expert is calling for congressional action to address the confusion.

Companies like luxury fashion house Hermes and sneaker maker Nike have taken legal action against alleged infringements of their intellectual property in the NFT space. However, the legal ambiguities around the emerging technology make it difficult for companies to assert their claims, said Emily Behzadi, an associate professor at the California Western School of Law.

"We're still in this very, very gray area," she said. "It's almost legal purgatory."

NFTs are unique pieces of data stored on the blockchain to verify ownership of digital assets. Popular art projects like the Bored Ape Yacht Club and CryptoPunks sell NFT images for millions of dollars. Later this month, Sotheby's will auction off 104 CryptoPunks NFTs that could collectively reap $20 million to $30 million.

Researchers predict NFT sales will grow substantially in the coming years. The global NFT market surpassed $40 billion in 2021, according to blockchain data company Chainalysis. Investment firm Jefferies believes the market will hit more than $80 billion in 2025.

However, NFTs' impact on intellectual property, copyright and trademarks isn't clear. Companies protecting themselves against infringement from NFT makers will face federal judges with no precedent to reference in making decisions, Behzadi said.

In deciding NFT cases, judges will have to determine which, if any, action by a defendant violates the law. NFTs function much like hyperlinks in that they both point to online assets. The courts have previously ruled that hyperlinks do not breach copyright law because they don't contain copyrighted or derivative works, Behzadi said.

Under that interpretation, the NFTs would not violate copyright, so companies would have to prove the defendant uploaded the infringing material. Given the lack of precedent and NFT legislation, though, a judge might disagree and decide the NFT violates the law by itself, Behzadi said.

Because NFTs create new issues with trademarks and copyright, lawmakers will have to draft legislation that protects corporate property and rights, Behzadi said. The current laws don't reasonably address the intricacies of the new technology.

"It's difficult to put a square peg in a round hole," she said.

In January, Hermes filed suit against artist Mason Rothschild in New York federal court, claiming he sold NFTs that traded off the brand name of its Birkin handbags. The lawsuit claimed the artist's MetaBirkins, digital images of furry handbags inspired by the Hermes Birkin bag, diluted the company's trademark.

Rothschild claims his creation is no different than Andy Warhol's Campbell's Soup Cans paintings. His lawyer, Rebecca Tushnet, said in an email that artists have the freedom "to represent and comment on the world they see around them."

This month, Nike sued the online marketplace StockX for its NFT program. StockX, which allows people to buy and sell collectible items, created an initiative that lets customers buy NFTs tied to material things stored in a vault. StockX has based eight of its nine NFTs on Nike products.

In its lawsuit, Nike claims that the prominent use of its trademarks in the StockX NFTs might confuse customers into believing the sportswear product endorses the program. Nike said the confusion might hurt its future efforts to sell digital products in the metaverse.

Mike Gleason is a reporter covering unified communications and collaboration tools. He previously covered communities in the MetroWest region of Massachusetts for the Milford Daily News, Walpole Times, Sharon Advocate and Medfield Press. He has also worked for newspapers in central Massachusetts and southwestern Vermont and served as a local editor for Patch. He can be found on Twitter at @MGleason_TT.