NFTs In Sports Industry May Expose “Minty” Fresh Cracks in the IP Legal Landscape

Today’s digital world is evolving constantly and at extraordinary speeds. Along with these evolutions in the digital space, forms of investment and ownership are also advancing to make use of these technologies. The adoption and use of blockchain technology is spreading rapidly across various industries and the sports industry is no exception. The collection of sports cards is nothing new and to the sports enthusiast, there may not be anything more special than owning a rare, valuable collectible card–except maybe now having the ability to not only “own” a card or a still but also special “moments” of exceptional athleticism or sportsmanship of their favorite athletes. For example, today not only can sports fans own a card of LeBron James, but they can “own” the infamous reverse dunk highlight of the Lakers v. Rockets game of Feb. 6, 2020, which sold for nearly $400,000. The sports industry may just be the bastion for the proliferation of blockchain technology, and NFTs and sports memorabilia appear to be a match made in heaven since collectibles and exclusivity go hand in hand.

What are NFTs?

NFT stands for Non-Fungible Token and an NFT is a unique digital asset. The non-fungible nature of the asset means that it is non-interchangeable and the metadata attributed to each NFT is distinctive such that it may be used to verify the inimitability of a given asset. Therefore, while conversations around NFTs often involve cryptocurrencies, the two are fundamentally different: cryptocurrencies are inherently interchangeable as each coin is not only identical but also holds the same value as another of its own kind.

Essentially, an NFT is a digital token that can serve as a certificate of ownership. However, the underlying digital artwork itself is not the NFT. It’s important to note that the two are not interchangeable since only the data describing the digital asset is protected on a secure blockchain. For instance, while a deed or title to real property like a house or a car is a record of title or ownership to that property, it is not itself the real property. This distinction becomes especially imperative in the context of the IP rights associated with NFTs.

IP Law Applicability to NFTs in the Industry

NFTs are already transforming the sports industry where they are revolutionizing sectors ranging from fan engagement to asset management. Some assets that have been the subject of NFTs so far include highlight reels of games, collectibles such as trading cards, and other forms of digital arts. NFTs provide immense opportunities not only for teams and sports associations but also for athletes and sports enthusiasts alike. However, these transfers of rights are significantly limited and are riddled with IP issues, primarily the lack of IP protection.

This has manifested in the pitting of rights of NFT purchasers against the rights of owners of the underlying art. Generally, in the United States, the default copyright rule is that the author retains the copyright in their original creation. Since the token itself and the underlying digital art are two separate things, the sale of an NFT does not generally transfer the same ownership rights that would be expected from the sale of the underlying digital asset itself. The IP right in the underlying digital assets will usually remain with the rightsholder or author, absent any terms stating otherwise. In effect, the rights acquired by the buyer of the NFT are more akin to a license to a unique copy of the content including things like the right to use, display or transfer the content but may or may not contain the right to commercially benefit from it. Therefore, more often than not, while the digital ownership token is owned by the acquirer of the NFT, the right to the underlying digital media is retained by the owner. In practice, this means that organizations like Dapper Labs produce their NFTs of short highlights of NBA games but they do so under license from the NBA which retains the primary IP rights to those highlights. Importantly for purchasers, NBA Top Shop licenses grant owners a non-exclusive right to use, display and copy the digital art but only for personal uses and repudiates the right of commercial exploitation. Consequently, while owners of an NFT pay millions of dollars to have “ownership” of that “moment,” they cannot generally reproduce it or use it in any way they wish.

Certainly, sophisticated parties on both ends of the transaction of an NFT purchase may be aware of the limited ownership rights they receive through their purchase (although there are still general misconceptions about exactly what rights are purchased). Even so, there remains the potential issue of unauthorized use of IP such as copyrighted material in NFT creations (known as “minting”) by the general public. Given the rapid popularization and excitement that exists about NFTs, as well as the exorbitant prices paid for sports NFTs and memorabilia, there is considerable incentive for unauthorized creation of NFTs and the current IP laws may be insufficient to offer proper protection for IP owners. For example, copyright law as it stands today may not sufficiently protect athletes or associations like the NBA from the unauthorized creation of NFTs.

Copyright infringement requires the undertaking of an exclusive right of the author without authorization including the right to reproduction and distribution of copies to the public. Because an NFT exists independently of the work of art and is a code indicating ownership rather than the underlying art itself, the token is arguably not a reproduction of the underlying art and is unlikely to be protected under this exclusive right. Perhaps the most compelling argument for copyright infringement work lies in the assertion that an NFT could be considered distribution to the public. Since it is common practice that the NFT links to the digital copy of the work, the unauthorized linking to a copyrighted work could be considered copyright infringement under the exclusive right to distribute to the public granted to the creator. While this offers some level of protection, a link to the digital work is not necessary for the NFT to exist or be sold and may even be embedded in a smart contract that is hidden. This essentially may create the opportunity for NFT creators to infringe “behind closed doors.” Without the link to access the unauthorized work, it would be difficult to make a successful copyright infringement claim. Because NFT technology can provide a way for people to use unauthorized copyrighted work in this shielded manner, the IP laws may very well be falling behind the technology and thus may need to expand to cover these gaps.

While this new technology created exciting and potentially lucrative opportunities for athletes, sports aficionados, and sports teams, it is imperative for NFT purchasers and creators alike to consider that areas of copyright infringement, trademark infringement, and other IP laws in NFTs are not fully developed. Thus, implications and enforceability of these laws are yet to be determined.