IP Licensing for NFT Avatars

Bored Ape #1798 and Larva Labs' CryptoPunks

In April, Shawn Mendes' media companies, Anonymous Content and Permanent Content, inked an option deal for film and TV appearances for Micah Johnson's Aku character. This is the first time that an NFT property has been optioned by a major production company.

In August, Matt Hall and John Watkinson of New York-based Larva Labs, the creators behind the first NFT avatar project, CryptoPunks, signed a landmark deal with United Talent Agency (UTA). 

UTA is a world renown talent agency representing the likes of Post Malone, Lil' Wayne, Will Ferrell, Angelina Jolie, and Rob Gronkowski. Now, it adds NFTs to it's roster in an industry-first with CryptoPunks, Autoglyphs, and Meebits.

UTA will represent the Larva Labs projects in film and television, licensing, publishing, and video games. In an expansion of it's digital asset portfolio, UTA has brokered NFT releases for it's music and sports roster including Hans Zimmer, Halsey, and Klutch Sports.

Intellectual property licensing for avatar projects has been a hot topic in the NFT community. Several projects allow collectors to exploit the commercial rights of their NFT avatar, to a point where it's becoming an industry standard. In February, Hashmasks, revolutionized NFT collectibles with granting to collectors unlimited, worldwide, exclusive, license to use, copy, and display the purchased art for commercial use. In April, the Bored Ape Yacht Club (BAYC) was the first to grant collectors full commercial rights for derivative works. Since then, other projects have granted a mixture of IP licensing rights. For example, Cool Cats, give non-exclusive license, which means collectors can exploit the IP but Cool Cats are free to license that same IP to other entities.

As the NFT market continues to evolve and avatar projects are released on a daily basis, commercial opportunities for collectors are growing and pushing boundaries. In September, Canadian creative technology firm, Tally Labs, signed a licensing deal with Hollywood talent powerhouse, Creative Artists Agency (CAA), to represent Bored Ape #1798, "Jenkins the Valet". CAA will represent the Jenkins avatar in film, TV, and podcasting, and is currently working on publishing the ape's first novel. The intriguing thing about Jenkins is that Tally has used the BAYC commercial rights to build a brand that will launch the first-ever community-generative book, the Writer's Room NFT. The Writer's Room NFT is a collection of 6942 NFTs that serve as passes to the Writer’s Room give you the opportunity to license characters to stories, vote on the strategic and creative direction of what’s produced, and be inscribed as an author and creator in every piece of work that’s made.

A Mutant Ape NFT owned by 0xb1.

The most recent to garner representation is NFT collector, "0xb1", who signed with CAA in October to monetize their collection of NFTs through licensing and brand partnerships. 0xb1's collection includes Bored Apes, Mutant Apes, Cool Cats, Spunks, among others. The agency will also facilitate "advisory partnerships" between 0xb1 and "blue-chip brands looking to enter the NFT space."

Not to be left out, Williams Morris Agency (WME), the oldest running talent agency adds Pixel Vault to its roster. Pixel Vault is the creator of the Punks Comic and MetaHero Universe NFT collections. The company founded by Sean Gearin is growing its brand into gaming and aims to grow into podcasting, television and film. WME will help Pixel Vault expand its IP business from NFTs to the traditional markets.

Licensing intellectual property increases a company's ability to build its capacity to develop new products and services, and expand their brand into a wider range of geographic markets, including the metaverse. When one thinks about licensing IP, consider the following and understand that NFTs are stretching the boundaries of IP utility in a digital sector that is grossly untapped. 

1. Costs (ex. Lump sum fee vs. recurring fees vs. royalties)
2. Term (ex. Indefinitely vs. annually)
3. Territory (ex. International vs. national vs. regional)
4. Type (ex. Exclusive vs. non-exclusive)
5. Rights (ex. Reproduction, distribution, adaptations)
6. Assignment of rights
7. Infringement
8. Indemnification
9. Governing laws
10. Dispute resolution

The contents of this blog are for informational purposes only and may not be relied on as legal advice.

Roblox Expands Metaverse Music Strategy

Roblox settles $200 million copyright infringement lawsuit filed by the National Music Publishers Association (NMPA), with a new partnership for musicians and songwriters to monetize their music in the metaverse. 

The settlement allows Roblox to broker more agreements with NMPA members on "an industry-wide opt-in" basis. The NMPA is century-old organization that represents music publishers and songwriters like Ariana Grande, Imagine Dragons, deadmau5, among others. This deal will allow a negotiating period for publishers to work out individual licensing contracts with Roblox. 

On September 24th, Roblox debuted a new venture in its metaverse, Listening Party, where "artists [will] premiere a new album in select top experiences giving them access to millions of fans who can listen to their music while they play and hang out with their friends." This new experience alongside their virtual concerts and Launch Party further expands their strategy to integrate music into the global Roblox community of over 48 million daily users. 

In July, Roblox signed a deal with Sony Music Entertainment to offer new commercial opportunities for Sony artists to reach new audiences and generate new revenue streams around virtual entertainment. Sony's Lil Nas X virtual concert in November drew 33 million views. Roblox has a licensing deal with APM Music which has a catalogue of over 820,000 tracks featuring international artists from a broad range of genres. Earlier this year, Roblox debuted as a public company on the New York Stock Exchange. Its IPO was partly funded with $520 million from music industry titan, Warner Music Group. In September, Warner duo, Twenty One Pilots played their first tour in two years, with the opener in Roblox, playing a five-song set as avatars. 

A presence in the virtual universe is now a necessity for publishers, songwriters, artists and labels. As major labels plot their descent into the metaverse, how will independent and unsigned musicians and songwriters create opportunities to monetize this new virtual realm of revenue? An example of one unsigned artist using innovative methods to monetize music is Brooklyn-bred emcee, LATASHÁ. In one day, she earned 10.3 ETH (about $30,000 on 9/24/21) through selling a music video as a NFT. Spotify pays about $0.04 per 10 streams. So, 1000 streams would be around $4, and 100,000 streams would be $400. The music use case for NFTs and has the potential to level out the playing field for musicians to earn substantial profits from their craft without middlemen pick-pocketing cuts.

True Return Systems auctions Patent over Fractional Shares Systems as an NFT

True Return Systems LLC and Accu 2.0 LLC are auctioning the sale of US Patent No. 8,538,860 on the blockchain in the form of an NFT. The auction began on Tuesday, August 17th, and is available on the OpenSea marketplace. The NFT is titled “US Patent No. 8,538,860 Over Robinhood et al. Fractional Share Platforms”. Detailed information relating to the Patent and the technology is available at '860 NFT.

The Patent, filed in 2011 and 2012, is based on foundational solutions to longstanding problems in online brokerage systems including leveraged, inverse, fractional and other fixed-price strategy arrangements. The patent is part of a portfolio owned by Accu 2.0 LLC.

The brokerage firms adopting fractional share systems have consistently highlighted their innovation. These platforms enable each customer to purchase their own unique entry point into $1 of Tesla (“TSLA”) shares, and their $1 unit (different from other $1 units) will faithfully track the real-time price changes of Tesla shares – all while benefiting from an efficient aggregation within the sponsor’s Tesla shares inventory.

Importantly, fractional shares are not comparable to other “dollar-based” or fractional environments such as mutual fund dollar-based investing or digital currencies such as Bitcoin. On fractional shares platforms, unit prices are purposely and systematically dislocated from market prices before, during, and after a market session; the benefits include the ability to both aggregate the $1 units in an inventory, but also separate each $1 unit for its individualized entry, exit, and real-time tracking. Fractional arrangements essentially create “fund within fund arrangements” for customers and a virtual machine processing environment for sponsors.

With the Patent NFT, the purchaser will receive an executed agreement transferring to the purchaser all of rights, title, and interest in and to the Patent. This includes the right to sue for past, present, and future infringement of the Patent and to collect for damages from any past infringement of the Patent.

Copyright Infringement: Fair Use or Substantial Similarity

Copyright is the legal protection provided to creators of original works. It conveys exclusive rights to the creator to reproduce, adapt, publish, perform, and display the work. Copyright infringement occurs when someone else engages in the aforementioned acts without the creator's permission.

Fair use is a defense to copyright infringement, where the infringing party admits to intentionally using the protected work, but for educational purposes, parody, or social commentary.

Copyright infringement is determined by courts, and substantial similarity is the test used to decide whether infringement exists. Substantial similarity is exactly what the name suggests, how much of the protected work was reproduced and how similar is it to the original. The plaintiff has the burden of proving to the court that the defendant had access to the work and that the defendant's reproduction is substantially similar to the original.

Artist Matt Furie, the creator of the Pepe the Frog, has a history exercising legal action to protect the brand of his bulgy-eyed character. In 2017, an assistant principal at a Denton, Texas school self-published a book with a frog character named Pepe, to educate youth on conservative values. Furie threatened a lawsuit and the author settled with a list of concessions, including admitting infringement. In 2018, Furie sued alt-right TV show host, Alex Jones from InfoWars, for selling posters featuring Pepe. The lawsuit was settled for $15,000 in 2019.

Info Wars poster versus Original Pepe

Pepe the Frog was originally created by Furie in 2005 as a featured character in the "Boy's Club" comic. Since that time, Pepe has been the star of Internet meme culture and misappropriated as a figurehead in alt-right political circles. In 2021, Furie faces a new wave of Pepe infringement, this time on the immutable blockchain, in the form of NFTs.

On February 22, 2021, the Non-Fungible Pepes debuted on OpenSea earning $1.8 million in Ethereum. Backlash ensued on Twitter, prompting the project's developers to reach out to Matt Furie to get permission. However, Furie refused and the developers issued a refund. Tyler Ward, the main force behind the project, reported not knowing that the Pepe meme had an original creator. Note, ignorance is not a defense to copyright infringement.

Fast forward to August 9th, and another Pepe-themed project lists on OpenSea, the Sad Frogs District. The project quickly caught fire with total sales of $4 million. The project was even verified with the honorary blue checkmark by OpenSea. Within a few days after launch, OpenSea received a DMCA takedown request from Matt Furie's attorneys citing copyright infringement of Pepe the Frog, and the project was pulled from the marketplace. Though the developers of the Sad Frogs tweeted that they have issued a counter-notice to OpenSea, if they remain anonymous, the counter-notice is moot, because U.S. copyright law does not recognize anonymity for DMCA requests. The DMCA counter-notice must include the infringing party's name, address, and telephone number, and false statements can lead to civil or criminal penalties.

To avoid copyright infringement liability, online platforms are required to respond to DMCA takedown requests. So, before you buy your next NFT, ask yourself is it an original creation, or is it someone else's copyrighted work? If it is the latter, consider saving your ether.

UPDATE: On 8/23/2021 at 11:58am, OpenSea tweeted that the DMCA was withdrawn and the Sad Frogs District has been restored on the platform.

How will U.S. crypto regulations impact NFTs?

by Shekinah Apedo

The U.S. Senate Committee on Banking's hearing, Cryptocurrencies: What are they good for?, echoed varying degrees of FUD (fear, uncertainty, doubt) mostly concentrated on rogue miners, sanctions-evading criminals, and energy consumption. In a bipartisan push for regulation, there were outrageous considerations of identifying software developers and miners as fiduciary players, and that China outlawed mining to strategically force miners to flee to the West, in order to disrupt U.S. financial systems.

On the back of that hearing now comes a draft bill where the White House states that cryptocurrencies will help finance the long-awaited U.S. infrastructure plan: "In the years ahead, the deal will generate significant economic benefits. It is financed through a combination of redirecting unspent emergency relief funds, targeted corporate user fees, strengthening tax enforcement when it comes to crypto currencies, and other bipartisan measures, in addition to the revenue generated from higher economic growth as a result of the investments."

Buried in the hundreds of pages, yet to be made public, is a bipartisan proposal to increase regulations on cryptocurrency transactions. As reported by CoinDesk, the draft legislation redefines broker to include decentralized exchanges and peer-to-peer exchanges, and can be interpreted to apply to "software wallet developers, hardware wallet manufacturers, multisig providers, governance token holders, and maybe even, miners."

More concerning for NFT artists, collectors, and marketplaces is how the bill defines digital assets as "any digital representation of value recorded on a cryptographically secured distributed ledger." The bill has new reporting requirements for crypto brokers, and mandates that crypto transactions exceeding $10,000 be reported to the Internal Revenue Service (IRS). What's the floor for CryptoPunks and Apes? The possibility of NFT marketplaces having to conduct some level of KYC (know-your-customer) and overall due diligence is highly likely. With taxable events already including crypto air drops, liquidity pools, staking, miner's block rewards, and buying NFTs with crypto; this new legislation could further impact participant behavior in NFT markets.

If it passes, the bill is set to raise $28 billion of the $550 billion infrastructure package. As of July 28th, the U.S. Senate has voted with bipartisan support, 67-32, to initiate debates.

UPDATE: On August 10th, the U.S. Senate passed the Infrastructure Bill without editing text that uniquely impacts the cryptocurrency industry. The bill will now head to the U.S. House of Representatives. Minnesota Congressman, Tom Emmer stated: "I, along with bipartisan Blockchain Caucus co-chairs Rep. Darren Soto, Rep. David Schweikert, and Rep. Bill Foster sent a letter to every single Representative in the House raising concerns about the Senate infrastructure bill being paid for by our crypto industry."

The hope is now that crypto industry advocates and like-minded Representatives can create a whole new amendment that addresses the industry's concerns.

NFT Auction Sells Royalties of A Tribe Called Quest

 by Shekinah Apedo

On July 1st, Royalty Exchange, an NFT platform for buying and selling royalties, sold the sound recording royalties of A Tribe Called Quest's first five albums for 40.191 ETH ($84,765), without the group's permission. The winning bid is guaranteed to "collect royalties generated from sales, streaming, and sync fees for any of the included albums, as well as the individual singles, released by the group between 1990 to 1998."

So, how did this happen? A Tribe Called Quest (ATCQ) signed with Jive Records in 1989, and at that time hired Ed Chalpin to review the contract. Unbeknownst to ATCQ, Ed included a clause in the contract giving his company, PPX Enterprises, 1.5% of the ATCQ's royalties. Ed Chalpin is the owner of PPX Enterprises and had been known for shady contract business with Jimi Hendrix, a couple decades earlier. It took ATCQ five albums later to realize what he had done; they struck a deal with Jive Records to help them get out of that contract with Chalpin, in exchange for recording a 6th album. And in being too trusting again, the rights to the five albums were apparently given to PPX by Jive in a settlement to release ATCQ from the original contract. Years later, that settlement was sold to an individual, who partnered with the NFT platform, Royalty Exchange, to conduct the sale.

ATCQ reported to not have known that Jive sold the royalty rights to PPX, or else they would've purchased it themselves. It's an unfortunate tale, but let be a cautious one for all artists alike, read your contracts, even if you hire a lawyer. Also, do your own due diligence on who you're working with on your team. I have to imagine if ATCQ knew about Ed Chalpin and the decades of trouble he gave Jimi Hendrix and the Hendrix estate, they likely wouldn't have signed to be managed by him.

"Stephen F", the name of the top bidder, will own the royalties for the rest of his life plus 70 years, and will receive distribution payments twice a year. The next time you stream an ATCQ track, remember, "Stephen F" is receiving that royalty.

Graffiti Artist vs. North Face: What is Fluid Trademark?

 by Shekinah Apedo

In January 2021, renown New York graffiti artist, Leonard McGurr a.k.a. Futura, filed a trademark lawsuit against apparel company, The North Face, for unauthorized use of his atom design on their product line, FUTURELIGHT™. Due to not registering a federal copyright for the design, Futura couldn’t claim copyright infringement, so he sued under unfair competition and claimed fluid trademark. 

What are those legal terms? Unfair competition is where one business intends to induce consumer confusion by using the similar mark of another. Fluid trademark is a mark, logo, or design that has variations, but maintains the underlying design. The best example of a fluid trademark is the Google Doodle. When the Doodle is used to commemorate a holiday or famous person on the homepage, the Google trademark is still recognizable. 

In March, North Face filed a motion to dismiss stating that Futura's use of atom designs “are merely ornamental and fail to function as a trademark,” that his designs are “artwork, not source indicators,” and his “inconsistent use” and “lack of use” of the designs “undercuts the claim that the designs function as a trademark.” Essentially, because Futura doesn't have a claim to copyright, the defense attacked his claim at trademark, saying he never ascribed the atom design to a specific service (i.e. art services) or good (i.e. t-shirt, sketchbook), as required for trademarks. To break it down, a trademark is a symbol or logo that distinguishes a product from other sources. For example, Nike's swoosh distinguishes its sneakers from Adidas runners. Nike is the source, the sneaker is the good, and swoosh identifies Nike as the source. If Futura doesn't meet the requirements of a trademark, then North Face could not have been on notice that it existed.

In April, Judge Stanley Blumenfeld granted the motion to dismiss, agreeing with North Face, that Futura hadn't sufficiently established that the atom design was a trademark. In a frank opinion, the judge stated, "Plaintiff's novel theory of fluid trademarks, if permitted as proposed here, would give new meaning to federal trademark law with far-reaching consequences." Responding to Futura's comparing his signature styles to Van Gogh and Jackson Pollack, the judge wrote: "While Plaintiff argues that signature artistic elements like Van Gogh’s haystacks or signature styles such as Jackson Pollack’s ordinarily are not source identifiers for the purposes of trademark law, he concludes that contemporary art, especially street art, is different." In short, the judge found that Futura didn't use a consistent underlying design that's required for fluid trademarks, rather he only used variations.

In a turn of events, despite having a good case, The North Face released a statement on June 30th agreeing to discontinue the FUTURELIGHT logo. This is the right PR move.

"While The North Face is confident there has been no infringement in this case, we are committed to supporting creative artists and their communities. As a sign of that commitment and a sincere gesture of goodwill, we will begin to phase out and discontinue the use of the FUTURELIGHT™ circular nanospinning logo design out of deep respect for Futura and his work."

The contents of this blog are for informational purposes only and may not be relied on as legal advice.