NFTS – A New Threat to Intellectual Property Rights: An analysis of non-fungible tokens, copyright and trademark infringement

By: Shira Brand

I. Introduction

In 2021, an artist known as Beeple made over $69 million USD for his artwork “Everydays: The First 5000 Days.”¹ The details of the listing included a token ID, wallet address, smart contract address, and minting date.² What Beeple sold was not his actual artwork, but an NFT of it. Selling NFTs of various things from artwork, game tickets, tweets, etc., is rapidly gaining popularity and slowly becoming a new normal. This introduction of a new digital value producing instrument brings with it a host of new challenges. One of these challenges is the intersection of NFTs with intellectual property law. The convergence of a currently unregulated space largely comprised of NFTs of original works and trademarks which have subsisting IP rights, results in potential negative legal implications on the copyright and trademark owners of those very works/marks the NFTs are of.

This paper will discuss the implications that the minting of NFTs of other works/marks in which IP rights subsist can have on copyright and trademark infringement. The specific questions this paper asks are: does the minting of an NFT of a work in which copyright subsists infringe that copyright? And does an NFT featuring a trademark infringe that mark or commits the tort of passing-off?

I will begin with an overview of NFTs as well as an analysis of NFTs as intangible property. This will set the scene for the following analysis of the ways in which NFTs can infringe copyright or trademarks in Canadian jurisdiction. I will conclude with policy implications and recommendations to address these issues in a way that allows NFTs to function harmoniously with other IP.

II. What are NFTS?

NFTs – ‘Non-Fungible Tokens’ – are digital items managed by the blockchain which are used to represent ownership of various items including but not limited to: collectibles, digital art, event tickets, domain names and more.³ In a more technical sense, a non-fungible token is “an encrypted unit of data stored on a digital ledger created and verified on a blockchain representing a unique ‘asset’.”⁴ The blockchain is a network that keeps a record of every transaction made by that network’s users which can be viewed and verified by anyone.⁵ This ledger concept is akin to your bank statements which allow the bank to track all your account activity, except the key difference with the blockchain ledger is that it tracks everyone’s activity and is monitored collectively by the network users.⁶ Regarding NFTs, what is stored on the ledger is the token data that proves the NFT’s existence and ownership.⁷ The data can include information such as: the artist or creator of the NFT, its description, price, creation date, royalties information, as well as its location on the server.⁸

For an NFT to be created it must go through a minting process. Minting an NFT is the “process of turning a digital file into a crypto-collectible or digital asset on the Ethereum blockchain [or any other blockchain],” which is then stored on that ledger.⁹ This digital asset or token cannot be edited, modified or deleted – hence the term ‘non-fungible token.’¹⁰ This is what differentiates NFTs from other assets stored on a ledger such as cryptocurrencies. Cryptocurrencies are fungible in that each bitcoin is the same and is interchangeable.¹¹ NFTs are non-fungible in that only one of each exists, with no two NFTs being entirely identical.¹²

A common process through which NFTs are bought is a smart contract. Smart contracts “serve as digital if/then programs that run on a decentralized ledger and execute automatically.”¹³ Since NFT purchases are done on the internet where parties are usually strangers, smart contracts provide an avenue to transact safely and without the need for an intermediary.¹⁴ The smart contracts could also be programmed to have effects such as the original creator receiving royalties.¹⁵ One drawback however is that smart contracts, unlike physical contracts, cannot be terminated.¹⁶

Another note about NFTs is that there are various types of ways they can be made or stored. For instance, there are ‘on-chain’ and ‘off-chain’ NFTs. ‘On-chain’ NFTs are those that have either both the metadata and the actual content of the NFT uploaded to the blockchain, or just the metadata.¹⁷ ‘Off-chain’ NFTs on the other hand do not have either the content or the metadata stored on the blockchain, but rather use a method called ‘tokenURI’ that creates a public URL which links to either a centralized or decentralized server.¹⁸

III. The NFT as Intangible Property Dilemma

As the concept of digital property is new to the legal field, “many commentators unflinchingly conclude that possession is not applicable to intangibles” and is limited to things that have physical dimensions.¹⁹ This view disregards the current landscape where digital assets are becoming more commonplace, whether it be through cryptocurrencies or through digital databases of our fondest pictures and memories.²⁰ As such, before diving into the main discussion of this paper, it is important to canvass the dilemma around NFTs as intangible property, as this will frame the opposing side to the IP infringement analysis. Not only that but conceptualizing what NFTs are as intangible property will allow Courts to connect NFTs to “robust and well-thought-out legal precedent[s]”²¹ by laying out precisely what a person is in possession of. This clarification would lessen the ambiguity for legislation and the Courts as they delve into the unchartered territories of NFT regulation.

One side of the dilemma can be characterized as those that claim that NFTs are nothing but a mere chain of numbers, or in other words, the metadata on the blockchain. This side of the argument claims that when someone is “purchasing an NFT, they are purchasing the metadata file” and thus the ownership is not of the work itself, but ownership of the signed receipt of the work.²² This view of NFTs further posits that since an NFT “is not the work, but rather a string of numbers that have been generated with a work, the resulting file could not be considered a reproduction of the work or even an adaptation.”²³ Ultimately this means that the NFT itself has nothing to do with the creation of an intellectual/intangible property, and therefore that the process of minting in itself does not create a new work, but rather just a code associated with a work.

The above view of NFTs seems to focus on the technical aspect of the NFT make-up, without considering the implications of such a narrow interpretation. To elaborate, the ‘simply numbers’ view of NFTs fails to address the new market and type of digital artwork that NFTs create. This ultimately distances NFTs away from the current IP rights jurisprudence and creates an ambiguous legal landscape that disadvantages owners of IP against those who minted NFTs of their work.

As such, the other side of the dilemma can be characterized as the side that views NFTs as an “enhanced type of … new media art.”²⁴ This side views NFTs as more than just the metadata, but as works with commercial components, comprising of “still and video imagery…likeness of a well-known figure…[or even a] recognized trademark.”²⁵ This view recognizes the impact of NFTs as a new form of assets which can generate large financial gains for their creators. In order to protect the IP rights of works/marks which may later be minted into NFTs, it is crucial for Courts to recognize the inherent interconnectivity of the art with the metadata. This view is also consistent with the fact that NFTs are not limited to the ‘off-chain’ kind but can also be ‘on-chain’ where the artwork itself is on the ledger and thus is clearly part of the NFT. Simply put, this side of the dilemma views the NFT as the sum of its parts – the art and the code it is attached to – rather than a mere receipt or proof of ownership.

Having laid out the opposing discourses surrounding NFTs, I will now turn to the analysis of whether the minting of an NFT of a work in which copyright subsists infringes that copyright.

IV. NFTS and Copyright

“Given the hype that exists about the technology [NFTs], as well as the prices that are being paid for NFTs, there is considerable scope for legal action” in the area of copyright law.²⁶ These issues have already begun surfacing, in particular

Some artists started complaining on social media that their works were being minted into NFTs without their permission, and there was even an instance of works in the public domain from the Rijkmuseum in Amsterdam there were turned into an NFT.²⁷

In order to protect the rights of creatives, the question to be determined is whether the minting of an NFT can infringe copyright.

A. Copyright Act Overview

i. Introduction to the relevant sections

S. 5 of the Copyright Act (CA) states that “copyright shall subsist in Canada… in every original literary, dramatic, musical and artistic work.”²⁸ The test for originality was clarified by the Supreme Court of Canada’s (SCC) decision in CCH Canadian Ltd v Law Society of Upper Canada, whereby the Court held that “in order to be original, a work must have originated from the author, not be copied, and must be the product of the exercise of skill and judgment that is more than trivial.”²⁹ Once it has been established that a work meets the requisite level of originality, under s.3(1) of the CA, the owner of such a work is given

the sole right to produce or reproduce the work or any substantial part thereof in any material form whatever… and includes the sole right
(a) to produce, reproduce, perform or publish any translation of the work,
…
(f) … to communicate the work to the public by telecommunication.³⁰

Therefore, according to s.27 of the CA, “it is an infringement of copyright for any person to do, without the consent of the owner of the copyright, anything that by this Act only the owner of the copyright has the right to do.”³¹ Simply put, a person cannot reproduce the work or any substantial part of it in any form without the permission of the copyright owner.

ii. Exceptions to infringement

The CA provides certain exceptions for infringement, so it is worthy to first assess whether the minting of an NFTs can fall under one of these exceptions. For the purposes of this paper, I will only touch on the enumerated exceptions that could relate to NFTs.

The fair dealing exception holds that it is not infringement of copyright to use someone else’s copyright for the “purpose of research, private study, education, parody or satire.”³² The minting of an NFT is generally not done for these purposes, but rather for a commercial purpose. However, an argument could be made that someone who is not planning on selling the NFT, but rather doing so for one of the above purposes, would be exempt from infringement.

Following from this, it is unlikely for NFTs to fall under the non-commercial user generated content exception, which holds that

it is not an infringement of copyright for an individual to use an existing work or other subject-matter or copy of one … if (a) the use of, or the authorization to disseminate, the new work or other subject-matter is done solely for non-commercial purposes.³³

Since NFTs are made for commercial purposes, they are unlikely to fall under this exception, unless the NFT is not intended to be sold.

This leads me to the final exception, which is the reproduction for private purposes. This exception states that “it is not an infringement of copyright for an individual to reproduce a work…if… (d) the individual does not give the reproduction away; and (e) the reproduction is used only for the individual’s private purposes.”³⁴ As mentioned above, NFTs may fall under this exception if made for the individual’s own use and not for commercial gain.

B. Types of Infringement

The types of infringement I will discuss include reproduction, publication, and communication to the public, as these are the one that could potentially arise in NFT infringement disputes.

i. Reproduction

“The right to reproduce a work is one of the most important economic rights held by copyright owners.”³⁵ In Galerie d'art du Petit Champlain inc c Théberge, the SCC defined reproduction “as the act of producing additional or new copies of the work in any material form.”³⁶ The Majority also noted that

The legal concept [of reproduction] has broadened over time to recognize what might be called metaphorical copying (transformation to another medium, e.g. books to films). It is recognized that technologies have evolved by which expression could be reproduced in ways undreamt of in earlier periods, such as evanescent and "virtual" copies in electronic formats. Transformation of an artistic work from two dimensions to three dimensions, or vice versa, will infringe copyright even though the physical reproduction of the original expression of that work has not been mechanically copied.³⁷

It is evident from this passage that there are a variety of ways a work can be reproduced, however, the Majority in Théberge concluded that it was not reproduction to change the substrate of a work by transferring ink from one substrate to another because this did not multiply the work.³⁸ Moreover, a “copy is that which comes so near to the original as to give every person seeing it the idea created by the original.”³⁹

There is also the principle of media neutrality emanating from s.3(1) of the CA, which holds that the CA “should continue to apply in different media, including more technologically advanced ones…to protect the rights of authors and others as technology evolves.”⁴⁰ This principle also extends to communication to the public discussed below.

ii. Publication

Publication is defined as “making copies of a work available to the public…making copies of a sound recording available to the public, but does not include … the communication to the public by telecommunication, of a literary, dramatic, musical or artistic work or a sound recording.”⁴¹ The CA does create a unique publication rule for the purpose of right to remuneration of sound recording makers or performers, which is intended to ensure that sound recording makers and performers are entitled to remuneration when their works are made public through telecommunication.⁴² The section holds that

a sound recording that has been made available to the public by telecommunication in a way that allows a member of the public to access it from a place and at a time individually chosen… or that has been communicated to the public by telecommunication in that way, is deemed to have been published for the purposes of subsection 19(1).⁴³

Additionally, it has been established that a hyperlink on its own does not amount to publication of the content to which it hyperlinks, as it only makes a reference to the existence of the content.⁴⁴ However, if a hyperlinker presents the content from the hyperlinked material in a way which repeats that content, this would be considered a publication.⁴⁵

iii. Communications to the public via telecommunication

Telecommunication is defined in the CA as “any transmission of signs, signals, writing, images or sounds… by wire, radio, visual, optical or other electromagnetic systems.”⁴⁶ One such electromagnetic system is the internet.⁴⁷ Further, communication to the public by telecommunication “includes making it available to the public by telecommunication in a way that allows a member of the public to have access to it from a place and at a time individually chosen by that member of the public.”⁴⁸ Establishing when something becomes a communication to the public has been a contentious issue that has been elaborated on as follows.

A communication is made to the public when a significant segment of the public has access to it.⁴⁹ Additionally, there must be intention for the work to be communicated to the public, which requires receipt of the communication by at least one person.⁵⁰ A communication to the public can occur through multiple single transmissions, such as when repeated transmissions through fax of the same work to different persons are made.⁵¹ When it comes to the internet, “a work is communicated to the public using the Internet, even if it is transmitted only once, if it is made available on a site that is accessible by a segment of the public.”⁵² Regarding determining whether such ‘point-to-point’ transmission becomes ‘to the public’, one must look to the context of the overall transmission.⁵³ One such example that is considered to be ‘to the public’ is when a person uploads a ringtone on a website where members can then download this ringtone.⁵⁴

C. Application

For the purposes of this paper, it is assumed that the works which were minted into NFTs meet the requisite standard of originality as outlined in CCH above, and that there was no consent given to reproduce, publish or communicate the works.

Starting off with the reproduction right, proponents of the view that an NFT is just a chain of numbers would reject the claim that NFTs are a reproduction of a work and thus infringe its copyright. The strongest argument in favour of this position is that the original work is not reproduced in the NFT itself.⁵⁵ Particularly, it has been held that “the token is not a reproduction of the work in any sense of the word: there is no literal embodiment of anything resembling the original in the NFT.”⁵⁶ Since a reproduction must be so similar to the original as to give every person seeing it the idea of the original work, it is evident how a construction of NFTs as just a chain of numbers would mean that an NFT does not resemble the original work.

However, it cannot be ignored that the minting of an NFT “cannot be possible without reproducing the original work.”⁵⁷ In order for an NFT to be created, a digital file must be made of a work which then goes through the minting process that turns the work into a crypto-collectible. The work hence becomes part of the minting process and the NFT cannot be made without it. Additionally, the process of turning works which may originally be physical works into digital files is a reproduction in itself, as additional copies are being made of the work for commercial purposes. Thus, even if one is to view NFTs as strictly a chain of numbers, a step in the minting process creates infringing reproductions of a work. This is even more so when dealing with ‘on-chain’ NFTs where the work itself is uploaded onto the blockchain. In those cases it is evident that the work is being reproduced.

Additionally, the concept of metaphorical copying (transforming to another medium) outlined in Théberge is useful in understanding how and why the minting of NFTs should be viewed as creating infringing reproductions. As noted above, the law has evolved to recognize that technologies can change the ways in which works are expressed, and that transforming a work from 2D to 3D or vice versa will amount to a reproduction even though the physical reproduction of that work was not mechanically copied. NFTs in a sense, take a work that is a 2D digital file, and transform it into a work that is now expressed as metadata. Even though the work was not mechanically copied in a sense of creating multiple copies of the 2D image, the work itself was still metaphorically reproduced by expressing it into a new form. This, coupled with the principle of media neutrality, shows how important this conceptualization of NFTs is in order to protect the rights of copyright owners in this new digital space. To reiterate the principle of media neutrality, the CA should continue to apply in different technologically advanced media – such as NFT technology in this case – to protect the rights of authors as technology evolves.

Moving on to publication, since this right does not include communication via telecommunication, NFTs on their face do not qualify as a publication of a work. However, the exception for the right to remuneration raises important considerations for music NFTs. Music NFTs that feature sound recordings such as single song files or albums, give the buyers of the NFT, on top of ownership of the NFT, the ability to listen to that music.⁵⁸ As such, there could be situations where a sound recording maker/performer has an NFT minted of their songs/albums without their consent, which is then communicated to the public and thus published, triggering the right to remuneration. An NFT dispute involving sound recording makers/performers has already arisen between Jay-Z’s record label and Dash involving auctioning off ownership of a Jay-Z album as an NFT.⁵⁹

Conversely, it could be said that if an ‘off-chain’ NFT is just the tokenURI then there is no publication via telecommunication. The law of hyperlinking raises further debate about this issue, since a hyperlink on its own is not considered a publication of a content, it could potentially mean that even if there is a tokenURI with the NFT directing to the location of the song, this would not amount to publication via telecommunication. The other issue emanating from this is whether the minting of a song NFT would amount to a communication to the public in order to meet the test for the right to remuneration, which leads me to the next type of infringement.

For the minting of an NFT to amount to communication to the public it must meet this criteria: be made available to the public in a way that provides access to anyone at any time/place, must be a significant segment of the public, and there must be an intention to communicate the work to the public.

When someone mints an NFT, it is added to the blockchain where all users of that blockchain can see its record. Additionally, any user of the blockchain can access the work associated with the NFT, whether because its ‘on-chain’ or because there is a tokenURI leading to the ‘off-chain’ NFT. Additionally, the users of a blockchain would arguably be a significant segment of the public, given that the SCC in CCH ruled that even repeated fax transmissions – which would likely be fewer than the plethora of users of a blockchain – would amount to a communication to the public. This evinces that the NFT is made available to a significant segment of the public to access at any point/time they choose. Furthermore, there is a strong argument for proving intention to communicate. An NFT minter must understand the science surrounding blockchain technology, and thus would know that anyone with access to the blockchain would have access to the ‘on-chain’ work or the tokenURI. Moreover, even if the minting is a single ‘point-to-point’ transaction, the case law principles outlined above show that in cases where one upload gives a range of users access to material (such as downloading ringtones), this would be a communication to the public. This is analogous to NFTs, where a single minting makes the NFT available for all to access.

An issue arises when considering whether the tokenURI constitutes a communication. If a hyperlink only references that content exists, can it amount to a communication? Canadian Courts have only ruled thus far that a hyperlink (alone) to defamatory content is not defamation,⁶⁰ and that when a work is posted on a personal website by the author, a hyperlink leading to it is not an infringing communication.⁶¹ A European Court of Justice in contrast has held that

where an individual knew or should have known that the hyperlink posted provides access to a work illegally placed on the Internet or without the consent of the copyright owner this…would constitute a communication to the public.⁶²

The above could provide some guidance to Canadian Courts as they grapple with NFTs. As of now, it appears that the linking issue may set up the law in an unfavourable way to those whose works have been minted without authorization.

D. Conclusion

On balance, there are strong arguments that the minting of an NFT infringes both the reproduction and communication to the public via telecommunication rights. Although the law on hyperlinking is unclear, there is also a strong position for the right to remuneration being triggered when a song/album NFT is made. However, the finding of infringement on these points would largely depend on the Courts construction of an NFT.

V. NFTS and Trademarks

Besides the copyright space, disputes have begun to surface dealing with trademark infringement. Among the notable disputes is the Hermès METABIRKINS dispute, whereby an artist began selling NFTs of his artwork depicting the famous Hermès handbags designs, after which Hermès filed a trademark infringement lawsuit.⁶³ Another dispute involves Nike, who is alleging that an online retailer StockX, infringed their trademark by minting a sneaker NFT featuring the Nike mark.⁶⁴

Big companies are clearly being faced with issues they never foresaw, and with the importance that is placed on protecting the value of a trademark, the question to be determined is whether an NFT can infringe a trademark or commit the tort of passing-off.

A. Overview of Trademarks and their Protection

The Trademarks Act (TA), defines a trademark as “a sign or combination of signs that is used or proposed to be used by a person for the purpose of distinguishing or so as to distinguish their goods or services from those of others.”⁶⁵ The word sign is further defined in the TA to include anything from words, designs, letters, modes of packaging goods, and more.⁶⁶ Trademarks serve two major purposes. In the consumer realm, trademarks ensure “consumers that they are buying from the source from whom they think they are buying and receiving the quality which they associate with that particular trade-mark.”⁶⁷ In the commercial realm, trademarks protect the investment of their owners “in the goodwill associated with their marks.”⁶⁸

The type of protections available for trademarks vary depending on whether a trademark is registered or not. For the purposes of this paper, I will cover those which protect a trademark owner from unauthorized use of their mark or a confusing one, as these are more prevalent to NFT litigation. Simply put, an owner of a registered trademark can avail themselves of the rights under the TA, whereas an owner of an unregistered trademark would have to rely on the common law tort of passing-off.

i. Passing-off

“Passing-off is a tort action that is available in certain circumstances of unfair competition.”⁶⁹ This action is intended to protect unregistered trademark owners from those who may try to sell goods and ‘pass them off’ as those of the trademark owner to obtain a financial benefit from that company’s goodwill or reputation.⁷⁰ In other words, this tort protects trademark owners from those who try to piggyback off the company’s success in attempt to profit.

In Ciba-Geigt Canada Ltd v Apotex Inc, the SCC outlined the following test to establish the tort: “the existence of goodwill, deception of the public due to a misrepresentation and actual or potential damage to the plaintiff.”⁷¹

The first part of the test requires the plaintiff to establish that the ‘get-up’ (brand name/packaging) of the product has attained a goodwill or reputation with the public in that the public associates that ‘get-up’ with the plaintiff’s goods and services.⁷²

The second part requires the plaintiff to demonstrate a misrepresentation by the defendant that the defendant’s goods/services are those of the plaintiff’s, whether intentionally or negligently.⁷³ This part seeks to protect consumers from confusion, and thus the question is whether the misrepresentation is likely to cause confusion in the public’s mind.⁷⁴ When assessing confusion, the Court should think of an “average or ordinary consumer for the goods or services at issue.”⁷⁵ The ordinary consumer is not one with a perfect familiarity with the company, but rather a vague recollection.⁷⁶

Lastly the plaintiff must demonstrate that suffering damage from the misrepresentation is likely.⁷⁷ It has been held by a British Columbia Court that this does not require proof of actual financial loss, but that the “unauthorized use of goodwill, standing alone, may support an inference of damage… [and that] damage may be inferred from the loss of control over goodwill.”⁷⁸

Passing-off in the internet context has arisen in cases involving meta tags. A meta tag is a “word or small phrase that is embedded in the source code of a website… [but] is not visible on the page itself.”⁷⁹ When meta tags are used, a google search with a phrase which includes those meta tags triggers the algorithm to bring that page up in the search results. This area of law is still unclear, but the trial court in the landmark case on metatags Red Label Vacations held that a meta tag which includes a trademark “does not, by itself, constitute a basis for a likelihood of confusion” because the consumer still has a choice between purchasing goods/services, but rather what must be shown is “confusion as to the source of the entity or person” providing goods/services once the consumer reaches the website.⁸⁰ This case went up to the Federal Court of Appeal (FCA) where although the Court did not find infringement, they noted that there could be situations in the future where advertisements in meta tags can lead to infringement.⁸¹

ii. Trademark Infringement

I will focus on 3 ways that a registered trademark can be infringed: an unauthorized use of the trademark, use of trademark that is confusingly similar, and depreciation of goodwill.⁸² These three rights are outlined in ss 19, 20(1), and 22 of the TA as follows:

19 … the registration of a trademark…gives to the owner of the trademark the exclusive right to the use throughout Canada of the trademark in respect of those goods or services.
20 (1) The right of the owner of a registered trademark to its exclusive use is deemed to be infringed by any person who is not entitled to its use under this Act and who (a) sells, distributes or advertises any goods or services in association with a confusing trademark or trade name;
22 (1) No person shall use a trademark registered by another person in a manner that is likely to have the effect of depreciating the value of the goodwill attaching thereto.⁸³

For the purposes of s.19, a mark is in ‘use’ when

at the time of the transfer of … the goods, in the normal course of trade, it is marked on the goods themselves or on the packages in which they are distributed or it is in any other manner so associated with the goods that notice of the association is then given to the person to whom the property or possession is transferred.⁸⁴

The case law has elaborated on this by holding that a trademark used in a promotional flyer was not a ‘use’ since a flyer is not the good itself or the packaging in which those goods are distributed.⁸⁵ In contrast, ‘use’ has been established in a sale of a software license, whereby the mark is visible throughout the transaction (which involved payment of subscription fee, being granted login credentials).⁸⁶ Additionally there is no requirement to prove intention in trademark infringement actions.⁸⁷

For the s.20 analysis of confusion, s.6(5) of the TA includes the following factors for a court to consider

(a) the inherent distinctiveness of the trademarks or trade names and the extent to which they have become known;
(b) the length of time the trademarks or trade names have been in use;
(c) the nature of the goods, services or business;
(d) the nature of the trade; and
(e) the degree of resemblance between the trademarks or trade names, including in appearance or sound or in the ideas suggested by them.⁸⁸

This test is assessed from the point of view of the average consumer noted above, but it is important to add that in a situation where a consumer is shopping for luxury goods, they may be more attentive and thus less likely to be confused, although confusion is still possible.⁸⁹

The case law has added the following principles to the above test. Firstly, resemblance involves looking at the aspects of a trademark which are striking or unique.⁹⁰ Secondly, if the two parties operate in different channels of trade, this decreases the likelihood of confusion.⁹¹ Additionally, fame is an important consideration as it “presupposes that the mark transcends … the wares with which it is normally associated.”⁹²

S.22 is concerned with the goodwill of a mark, which refers to the whole advantage of the business such as: reputation, connection, loyal consumer base and years of work.⁹³ Claiming infringement under this section requires that the mark or a confusingly similar one was used,  linkage in the mind of the consumer was made, that it has goodwill, and that the use of such mark is likely to depreciate said goodwill.⁹⁴ Additional factors which a Court may take into consideration in this analysis include: fame of the mark, recognition among consumers, sales, distinctiveness, nature of trade and quality of the product.⁹⁵ On the last part of the test, a plaintiff must show likelihood of depreciation either through the decrease in value of the mark or its distinctiveness in a sense of being used by different people.⁹⁶ For example, depreciation did not occur when dealing with a luxury champagne trademark and a similar clothing store trademark.⁹⁷ In contrast, a Court found that use of a competitors trademark on packaging of hair dye was a depreciation.⁹⁸

Application

For the purposes of this paper, geographical considerations have been omitted and it is assumed that the trademarks featured in the NFTs are valid, have attained the requisite goodwill/reputation, and that they have been minted by someone other than the trademark owner.

Beginning with the tort of passing-off, can an NFT of a trademark constitute a misrepresentation to the public that the NFT is associated with that company? The proponents of the view of NFTs as a chain of numbers could raise a similar argument as noted in the copyright section, whereby since the NFT is just metadata, there is no trademark used and thus there could be no misrepresentation. However, since a consumer decides to buy an NFT based on what the collectible actually represents, it is hard to claim that the NFT metadata/tokenURI should be isolated from the image which it includes and thus the trademark. For instance, a consumer interested in luxury handbags, browsing NFT stores, would be more likely to purchase an NFT featuring a luxury handbag trademark because of its reputation/goodwill. The fact the content of the NFT showcases the trademark, would lead to a likelihood that the ordinary consumer of luxury handbags would be misled to think that the company was associated with the NFT. This provides added justification as to why an NFT should be viewed as the content intertwined with the metadata/tokenURI. Not only can the NFT not be created in this instance without the associated handbag image, but the trademark itself is used to profit off the company’s reputation/goodwill. Given how costly many NFTs are, the profit would be considerable.

A counterargument could be made that there is no misrepresentation since the purchaser of an NFT, at the time of purchase, is provided details (such as the artist who created the artwork) and thus would be given all the details to know whether the NFT is associated with the company whose trademark is featured. Additionally, since most NFTs are expensive, the average consumer of these goods would be more attentive to the details relating to the NFT and thus less likely to be confused. However, confusion can still be made out as a purchaser may assume that the owner/artist associated with the NFT is perhaps involved with the company whose trademark it features and thus authorized to use it.

On the damages part of the test, since the unauthorized use of goodwill and loss of control over goodwill alone may satisfy an inference of damage, it appears that this will easily be met with NFTs. Although NFTs are non-fungible, one artist may create multiple variations of an NFT using the same trademark. With these collectibles being sold to the highest bidder, and then potentially resold to others, it is evident how the trademark owner’s control of their goodwill would depreciate.

Moving on to trademark infringement, there is a strong argument in favour of s.19 unauthorized use. Although there is no physical packaging on which the trademark can be placed when dealing with NFTs, s.4 includes situations where the trademark is associated with the goods in any other manner that would give notice to the purchaser. Additionally, drawing on the software license case, it has been established that with intangible property, seeing the trademark throughout the transaction is a ‘use’. Analogizing this with NFTs, when a consumer is in the process of purchasing an NFT featuring a trademark, this trademark is being presented to the consumer during that transaction and thus is associated with the goods in a degree which provides notice to the consumer. It is assumed that if per se, a consumer is purchasing an NFT of a Nike sneaker with the trademarked logo, the trademark is clearly visible to them and thus unauthorized use is made out.

Regarding s.20, this infringement could be claimed when you have a situation such as the Hermès case, whereby an NFT name such as METABIRKINS could be confused with the Hermès registered Birkin trademark.⁹⁹ Based on the 5 criteria that a Court will take into consideration, registered trademarks of companies will generally have a stronger position on distinctiveness and length of time in use than a confusing trademark in an NFT since NFTs haven’t been around for as much time. The nature of the goods and the trade is where things become complicated, since NFTs are a crypto-collectible and trademarks – such as Nike or Hermès for example – are associated with sneakers and luxury goods respectively. However, as the companies whose registered trademarks are likely to appear in NFTs are famous companies with significant goodwill, their fame can mean that their marks transcend these specific goods and thus could fulfill that branch of the confusion analysis. On the degree of resemblance, a Court would look at the striking aspects of a trademark. Thus, with METABIRKINS for example, the word birkins is not only the striking word, but also is identical to the registered trademark of Hermès. Confusion would likely be made out in cases with similar circumstances.

The depreciation of goodwill analysis is akin to the one undertaken in the damages part of the passing-off analysis above. With registered trademarks, establishing reputation and loyal consumer base would most likely be easier and thus lead to a greater likelihood of a finding of depreciation.

Lastly, I draw attention to the meta tags case, as it comes the closest to the digital nature of NFTs and can provide a potential avenue for recourse for Courts if NFTs are to be constructed as ‘only numbers’. Trademarks in meta tags are invisible, as could be argued about ‘off-chain’ NFTs where the only part on the blockchain is the tokenURI which leads the consumer to the decentralized server where the collectible is stored. Red Label left it open for future Courts’ consideration whether there should be instances where a trademark in a meta tag – that leads consumers to a website where they become confused as to the source of the goods – would be infringement. This reasoning could be analogized to NFTs in that a tokenURI, like a metatag, would lead a consumer to a location where trademarks can be presented to them and thus cause confusion as to the source of the goods.

Conclusion

Based on the case law analysis above and a balancing of the counterarguments raised, there is a strong case for passing-off and trademark infringement for NFTs which feature trademarks.  

VI. Policy Implications and Recommendations

The above discussion raises significant policy implications for IP law. It has become evident that not recognizing NFTs as the sum of their parts rather than just the tokenURI/metadata can have a significant impact on copyright and trademark owners. If NFTs are not structured through the legal lens I have outlined in this paper, the consequence becomes such that anyone can infringe an author’s copyright and profit significantly off it, without the copyright holder obtaining a single benefit. This has the effect of decreasing the value of copyright but also the statutory intention to protect such works. Similarly, trademarks could lose their inherent value if NFT creators are able to abundantly use trademarks in their NFTs and profit off a company’s reputation/goodwill.

It is thus crucial that the respective acts outlined in this paper (TA, CA) are amended to address NFTs and the legal challenges they present. Parliament should weigh heavily what impact a different definition of NFTs will have and set a precise definition in the acts which Courts can later refer to as they grapple with these novel issues.

VII. CONCLUSION

In a recent case, the FCA noted that “to remain relevant, the law must adapt to the evolving digital environment, the channels through which artistic endeavour is expressed and the means by which copyright may be infringed”,¹⁰⁰ and the same could be said about trademark infringement. This principle strikes at the core of this paper, which has grappled with the current law of copyright infringement, tort of passing-off, and trademark infringement, as it applies to the technology surrounding NFTs. NFTs raise a host of new considerations and policy implications which are novel to both Parliament and the Courts. As such, it is imperative that the law adapts to address this new digital environment of NFTs, which are a commercial asset and new form of artistic endeavour, that can infringe copyrights and trademarks.

Endnotes