Intellectual Property Issues to Consider When Launching Metaverse Offerings

It is and always has been a fundamental best practice for companies to align their intellectual property (IP) legal strategy with their business strategy. 

The most successful companies and brands (think Apple, Nike, or Disney) do this extremely well. Their IP, whether that is patents, trademarks, or copyrights, protects the core commercially valuable products, services, and brands of the company that differentiate them from their competition. Their business and IP strategies, operationalized by various agreements that dictate how that IP can be used and by whom and in exchange for how much money, are tightly coupled to together ensure that those assets are most effectively monetized. 

 

The unsupported but nonetheless still popular notion that the decentralized world of web3 and blockchain is so new and different that “web2 laws don’t apply” has it precisely backwards. (And also, holy déjà vu! I’m old enough to remember back to the late 1990s, when “old laws” weren’t going to apply to the then newfangled Internet. That didn’t exactly come to pass. Not at all.) 

 

In fact, in the brave new world of NFTs and the metaverse, it is now more important than ever to have a good understanding of intellectual property laws and to ensure alignment between IP strategy and business strategy. This is because what is fundamentally most exciting about blockchain technology and NFTs are the twin truths that (1) we are creating more and more digital “stuff” and spending more and more time in digital spaces; and (2) blockchain and NFTs allow for the monetization of digital “stuff,” addressing a long felt need and thorny problem. 

 

The most fundamental reason folks are excited about NFTs is because they provide a viable mechanism to monetize digital assets (which have always been very hard to monetize). In a digital world, IP becomes more important, not less. As I was fond of saying back in the old days before 3D printing became a reality, “in the future, when all you need is the digital design file to go home and 3D print yourself a pair of sneakers, the IP covering that digital design file is the most fundamentally – and really only – valuable thing to protect.” That, my friends, is the world we are very close to living in today.

The world’s most sophisticated and successful brands understand this. That is one reason they are investing in and rushing to occupy the metaverse, and to extend their brands into these spaces.

 

Below, I outline four areas for brands and creators focus on to best align IP and business strategy in web3:

 

1. IP Acquisition

Alignment of business and IP strategies begins in the IP acquisition phase. It is important to identify critical IP at the outset and to seek and obtain the strongest IP protections for that IP. 

This could mean registering key copyrights and key trademarks or filing patent applications on the most critically important technological features of your system or platform. 

 

While registrations are not necessary for you to have copyright or trademark rights, they do significantly strengthen those forms of IP protection.  For copyrights, registration provides the holder with the right to sue for copyright infringement and also allows the holder to pursue statutory damages, which can be significant.  For trademarks, registrations provide national rights and the potential for a mark to become incontestable and harder for an opposing party to challenge. 

 

2. Choosing When to Enforce IP

Part of business strategy is choosing how, when, and whether to enforce IP.

IP Owners interests aren’t always best served by always being as aggressive as possible in enforcing the IP.  For example, MLB isn’t best served by shutting down every Twitter user that does a breakdown of a baseball highlight, even though it may technically be copyright infringement, because those breakdowns make the sport more popular.   It’s one thing to obtain IP.  It’s a separate thing to determine what to do with it.

 

3. Baking IP Strategy into Business Strategy - Agreements

IP strategy and business strategy are integrated in all sorts of agreements, including terms of service for software or NFTs, licenses, and sale agreements.  Because literally any digital file of any sort may be tokenized into an NFT and because “smart contracts” and digital terms of service that govern NFTs allow for a flexible and wide array of rules and functionality to be attached to an NFT. NFTs are an incredibly broad and flexible asset class. 

 

This means that different and flexible IP strategies may be employed for NFTs depending on the business model and use case. For example, for many sales of NFTs associated with digital art, only very limited IP rights are conveyed to the buyer.  All the buyer may purchase is a limited license to display the digital art.  In other situations, broader IP rights may be conveyed, which may make the NFT more valuable to a buyer and increase the price buyers are willing to pay sellers.  For example, in Yuga Labs’ Bored Ape Yacht Club, one of the most famous and pricey NFT collections, Ape buyers acquire all of the IP rights – including the rights to commercialize and create derivative works from the IP in the buyer’s Ape – in the form of a Bored Ape movie or book or to be hired out for all manner of work for brands.  Not surprisingly commercialization rights in the IP, in one form or another, are a feature of the priciest and most well-known NFT collections considered to be “blue chip,” including Gutter Cat Gang, Doodle’s, and RTFKTS’ Clone-X. 

 

As noted earlier, there are many new use cases and business strategies, and each may lead to a different IP strategy.  For example, Pearson, the academic book seller, announced that they would be selling digital books as NFTs.  Pearson said, “Educational books are often sold more than once, since students sell study resources they no longer require. Publishers have not previously been able to make any money from secondhand sales, but the rise of digital textbooks has created an opportunity for companies to benefit…’In the analogue world, a Pearson textbook was resold up to seven times, and we would only participate in the first sale. Technology like blockchain and NFTs allows us to participate in every sale of that particular item as it goes through its life.’” 

In the music industry, NFTs are being employed as digital tickets to combat the scalping problem. This allow increased fan engagement and the waterfalling of secondary sale revenues to artists or venues. NFTs are also seen as a way to shift the power from large record labels back to the artists and creators.  With the buying or licensing of clothing, accessories, or digital real estate, vibrant and large economies are being created inside of video games and other virtual spaces inside the so-called metaverse. NFTs are also disrupting stodgy real-world industries like real estate and insurance.  Each of these use cases have complicated and diverse sets of IP strategies that could be employed and needs to be thoughtfully considered and implemented.

 

4. Understanding and Addressing Risks and Trade-Offs 

Finally, it is important to understand and recognize the repercussions of various IP strategic choices. Pursuing a particular IP strategy comes with trade-offs and risk-factors that should be understood and, if possible, addressed and mitigated.

 

One high profile example of this was revealed in the recent lawsuit brought by Yuga Labs against artist/provocateur Ryder Ripps. Ripps, for lack of a better word, ripped off the Bored Ape Yacht Club collection, copying the various Apes in the collection identically and calling his collection RR-BAYC.  An examination of the Complaint, however, reveals that Yuga Labs only sued Ripps on trademark theories, not for copyright infringement, which would have been a far easier claim to prove.  Because Yuga Labs chose to pursue an IP strategy in which the buyers of the Bored Ape Yacht Club collection acquired copyrights in their Bored Ape, Yuga Labs is no longer the copyright holder and was left without standing to sue for copyright infringement. A smart, business aligned IP strategy recognizes those tradeoffs and would examine what options are available to protect the Bored Ape Yacht Club holders from being knocked-off.

 

Conclusion

The nascent world of NFTs and the metaverse makes aligning business and IP strategy more important than ever.  Considering the above four areas will put brands and creators in the best position to set up their NFT projects and metaverse offerings for success.

profile
Michael J. Kasdan Partner at Wiggin and Dana LLP, Adjunct Professor of Law at NYU School of Law | Contributing Writer Mike Kasdan is a partner in the Intellectual Property Group of Wiggin and Dana LLP in its NYC office and an Adjunct Professor of Law at NYU School of Law. He is also the co-chair of Wiggin and Dana’s Blockchain and Digital Assets Group, and actively partners with Wiggin’s Emerging Companies and Venture Capital Group to provide start-up clients and entrepreneurs with legal services in the IP and corporate areas. Mike is perennially listed as a Super Lawyer and as one of IAM Magazine’s IAM Strategy 300 as one of the top IP strategists in the world. Michael writes and has been published in many of the industry’s leading publications and speaks extensively.as a panelist, lecturer, and presenter at conferences, law schools, business schools, and technology incubators. He graduated from University of Pennsylvania with a degree in Electrical Engineering and received his JD from NYU School of Law.

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call 855-425-7426 or visit our website at www.fountetfs.com. Read the prospectus or summary prospectus carefully before investing.

Exchange Traded Concepts, LLC. serves as the investment advisor to the Funds. The Funds are distributed by SEI Investments Distribution Co., (SIDCO) 1 Freedom Valley Drive, Oaks, PA 19456. SIDCO is not affiliated with Exchange Traded Concepts, LLC. or Fount Investment Co. Ltd.

Risk Disclosure:

 

Investing involves risk, including possible loss of principal. There is no guarantee the Funds will achieve their stated objectives. In addition to the normal risks associated with investing, international investments may involve the risk of capital loss from unfavorable fluctuation in currency values, differences in generally accepted accounting principles, or social, economic, or political instability in other nations. Emerging markets involve heightened risks related to the same factors, as well as increased volatility and lower trading volume. 

 

The Funds’ concentration in an industry or sector can increase the impact of, and potential losses associated with, the risks from investing in those industries/sectors. For MTVR, the Fund may be concentrated in the entertainment and interactive media & services industries. The entertainment industry is highly competitive and relies on consumer spending and the availability of disposable income for success, which may cause the prices of the securities of companies to fluctuate widely. The prices of the securities of companies in the interactive media & services industry are closely tied to the overall economy's performance. Changes in general economic growth, consumer confidence, and consumer spending may affect them. MTVR may also be subject to the specific risks associated with metaverse companies. These risks include but are not limited to small or limited markets, changes in business cycles, world economic growth, technological progress, rapid obsolescence, and government regulation. Smaller, start-up companies tend to be more volatile than securities of companies that do not rely heavily on technology. Metaverse Companies may rely on a combination of patents, copyrights, trademarks, and trade secret laws to establish and protect their proprietary rights. There can be no assurance that these steps will be adequate to prevent the misappropriation of their technology or that competitors will not develop technologies that are equivalent or superior to such companies’ technology.

 

For SUBS, the Fund may be concentrated in the software industry. Technological changes, pricing, retaining skilled employees, changes in demand, research & development, and product obsolescence can affect the profitability of software companies causing fluctuations in the market price of company securities. 

 

Both Funds are subject to communication services sector risk, which can involve the same risks as being concentrated in the software industry. Network security breaches, potential proprietary or consumer information theft, or service disruption can negatively affect companies’ stock prices.

 

The Funds are non-diversified. The Funds are new and have limited operating histories for investors to evaluate. New and smaller funds may not attract sufficient assets to achieve investment and trading efficiencies. In addition to the normal risks associated with investing, investments in smaller companies typically exhibit higher volatility.