In part 1 of this series, we explored the basic definitions of non-fungible tokens (NFTs), the blockchain and provided a brief overview of the wider practical implications in the metaverse. In this article, we look at the interplay between NFTs and specific intellectual property (IP) rights that subsist in the UK.

Copyright

Under UK law, copyright arises automatically when an original literary, dramatic, musical or artistic work is recorded.[1] The work must be original in the sense that it is the “author’s own intellectual creation”[2]. The threshold is low. The author of a copyright work is also generally the owner, unless they are an employee. The copyright owner has the exclusive right to reproduce a substantial part of the work.

An important distinction to be drawn is that owning an NFT does not automatically mean you own the copyright to the associated asset. One of the most common misconceptions of owning an NFT is that the NFT buyer has the proprietary right to stop others using the underlying asset, or making copies/versions of the work.

In our experience, we have observed that many NFT market-places result in the underlying copyright remaining with the seller, whilst the buyer has a right to display the underlying asset. In other words, a non-exclusive and non-sublicensable licence to use, copy and display the creative work is generally granted in consideration for a fee in the form of a crypto payment. When reviewing a smart contract, terms and conditions or terms of sale relating to the NFT and underlying asset, it is important to understand which IP rights are protected and transferred or licenced as part of the agreement. We will look at this point in more detail later in this series.

In reality, there is no “standard” regime for the ownership or licencing of NFTs. For now, it is therefore important to be aware that there is a wide variance in rights associated with owning an NFT and the contractual terms should be carefully reviewed.

Moral rights

Tangential to copyright, which protects economic rights in the works, moral rights protect non-economic interests. Moral rights relating to the digital asset should equally be respected, to avoid the risk of an infringement. However, unlike economic rights, moral rights cannot be sold or otherwise transferred. The rights holder can nonetheless choose to waive these rights.

Trade marks

A trade mark is essentially an indication of origin, which protects the brand.

An NFT may infringe a registered trade mark where the NFT (or digital asset which the NFT “points to”) is used in relation to certain goods or services for which the registered mark protects, without the proprietor’s consent, resulting in a likelihood of confusion for the consumer.

The NFT may also infringe a mark if the business has a reputation in the relevant territory. It may be possible to also protect goods or services which aren’t similar, where the use of the NFT leads to an unfair advantage or dilution of the earlier mark. This may be particularly relevant where the ‘infringing’ asset is a digital item, but where the registered mark is only protected in relation to physical goods.

The EUIPO has published guidance notes[3], since it has recognised a spike in the number of applications which contain the terms “virtual goods” and “non-fungible tokens (NFTs)”.

The approach taken by the EUIPO is summarised below:

– Virtual goods (digital content or images) should be applied for in class 9. However, “virtual goods” on its own lacks clarity and precision and so the Applicant must specify the digital content the virtual goods seeks to protect. For example, downloadable virtual goods, namely, [insert items EG virtual shoes, virtual alcoholic beverages etc].

– The 12th Edition of the Nice Classification will incorporate the term downloadable digital files authenticated by non-fungible tokens in Class 9.

– NFTs will be treated as unique digital certificates registered on a blockchain, which can authenticate digital items but are distinct from those digital items. Efforts must be made to specify the type of digital item.

– Services relating to virtual goods and NFTs will be classified in line with the established principles of classification for services. 

UK IPO trade mark classification update – 3 April 2023

Given the increasing number of applications that relate to NFTs and virtual goods/services, the UK IPO has released practice amendment notice 2/23: The classification of non-fungible tokens (NFTs), virtual goods, and services provided in the metaverse.[4]

A summary of the key updates relating to 1) NFTs and 2) virtual goods and services are set out below.

1) NFTs

Class 9

“NFTs will not be accepted as a classification term alone”. This is because the term is inherently vague and requires an indication as to the underlying asset which it relates to. For example, the UK IPO would accept the following in class 9:

digital art authenticated by non-fungible tokens [NFTs]; downloadable graphics authenticated by non-fungible tokens [NFTs]; downloadable software, namely, [list the type of goods], authenticated by non-fungible tokens [NFTs]; digital audio files authenticated by non-fungible tokens; downloadable digital files authenticated by non-fungible tokens [NFTs].

This is in line with the 12^th Edition of the Nice Classification which includes class 9 ““Downloadable digital files authenticated by non-fungible tokens [NFTs]”.

What about other classes?

“Whilst NFTs relate primarily to digital assets, it is feasible that NFTs can be used to authenticate anything, including physical goods.” This means that physical goods can also be accepted as being authenticated by NFTs. For example:

artwork, authenticated by non-fungible tokens [NFTs] [Class 16]

handbags, authenticated by non-fungible tokens [NFTs] [Class 18]

Training shoes, authenticated by non-fungible tokens [NFTs] [Class 25]

Additionally, “NFTs can be retailed and/or provided via online marketplaces, in the same way as other goods and services.”  The following are therefore accepted:

Retail services connected with the sale of [e.g. virtual clothing, digital art, audio files] authenticated by non-fungible tokens [class 35]

Provision of online marketplaces for buyers and sellers of goods and services which are authenticated by non-fungible tokens [class 35]

For certain services, it might be possible to link a membership or entry to an event to an NFT. However, this would not fall within class 41 as an entertainment service.

The UK IPO states that other uses of NFTs will need to be considered on a case-by-case basis.

2) Virtual goods and services

Virtual goods – class 9

A virtual good essentially consists of data such as a digital image. Examples of acceptable terms in class 9 would be:

downloadable virtual clothing, footwear, or headgear

downloadable virtual handbags

What about virtual services? (including those provided in the metaverse)

For an explanation of what the metaverse is and how it may interact with virtual goods/services, please see  part 1  of our series. In principle, where practicable, there is no reason why services aren’t capable of being conducted virtually, such as through video-conferencing. Examples of acceptable terms include:

education and training services delivered by virtual means [class 41]

conducting interactive virtual auctions [class 35]

education and training services provided via the metaverse [class 41]

conducting interactive auctions via the metaverse [class 35]

That being said, there are certain services where it may not be possible to facilitate the same form of delivery as its traditional counterpart. An interesting example here is the food and drink industry. It may be possible to order food virtually, however, consumption by a virtual avatar in the metaverse wouldn’t fall in the same category. Where it isn’t immediately apparent, clarification may be sought by the UK IPO.

To circumvent this issue, one solution may be to cover a more general category of services. The UK IPO states: “what is actually being provided is the access to a virtual world or the metaverse for the purpose of entertainment” (allowing an avatar to consume food/drinks). As such, the following type of terminology may be more appropriate:

entertainment services, namely, provision of a virtual reality or metaverse based simulation gaming service

In summary, the newly published UK IPO guidance follows in the EUIPO and USPTO’s footsteps, seeking to assist trade mark applicants in navigating the registration process.

Given its infancy, we’d suggest seeking professional advice for those considering filing a new application in the NFT / virtual goods/services space.

Designs

Designs protect the look and feel of products and can be beneficial for rights holders because they are not limited to a certain class of goods and services. The Registered Designs Act 1949, section 1 states:

– “design” means the appearance of the whole or a part of a product resulting from the features of, in particular, the lines, contours, colours, shape, texture or materials of the product or its ornamentation”; and

– “product” means any industrial or handicraft item other than a computer program; and, in particular, includes packaging, get-up, graphic symbols, typographic type-faces and parts intended to be assembled into a complex product.

In the context of virtual designs and the metaverse, it is difficult to say definitively whether a digital design is a “product”. The EUIPO office has taken a proactive approach and its definition states:

Designs of screen displays and icons and other kinds of visible elements of a computer program are eligible for registration (see Class 14-04 of the Locarno Classification).[4]

Designs are very much an unexplored territory in the NFT sphere and key stakeholders recognise this issue. The European Commission are currently undergoing a public design consultation which concerns a review on the law of designs. From a UK perspective, the Government’s response in this years’ “calls for views” with respect to design rights is that it recognises advancements in technology and that the legislative framework needs to be flexible enough to support those developments in technology.

Conclusion

To conclude, businesses should remember that existing unregistered and registered IP rights still apply in the same way to digital content. Given that NFTs are very much an unchartered territory but have drastically risen in interest, IP offices and governments are seeking to ensure the legal framework does not lag behind innovation. Stay tuned.

To follow in Part 3, keep an eye out for an update on some of the key court disputes in the context of NFTs in an IP infringement action, that we have been closely monitoring.

[1] Copyright, Designs and Patents Act 1988 (CDPA)

[2] Infopaq International A/S v Danske Dagblades Forening [2009] ECR I-6569 [37]

[3] https://euipo.europa.eu/ohimportal/en/news-newsflash/-/asset_publisher/JLOyNNwVxGDF/content/pt-virtual-goods-non-fungible-tokens-and-the-metaverse

[4] EUIPO Guidelines, Design Guidelines, paragraph 4.1.3 – https://guidelines.euipo.europa.eu/1803372/1785348/designs-guidelines/4-1-3-icons