Brands and the Sale of NFTs; A Legal Overview

Non-fungible tokens, better known as NFTs, have infiltrated mainstream news and conversation on an accelerated timeline, bringing with it yet another example of the quickly digitalising world. The global corporate stage has not ignored this compelling trend and have adapted quickly to incorporate these digital assets into their brands. However, such incorporation begs the question of, in this Web3 era, when a company creates or sells an NFT- who really owns which aspects of it?

This blog aims to explore the intersection of NFTs, branding and IPR with a focus on the Indian landscape governing such ideas, as well as international case studies.

What is an NFT?

On stripping away its technical aspects, at it’s core an NFT is a unique digital token- art, music, images etc that are stored using blockchain technology. Creating an NFT involves ‘minting,’ where a digital asset is transformed into a unique token on the blockchain. The “non-fungible” nature of NFTs entails a unique and not interchangeable property. Unlike their commonly addressed counterparts in cryptocurrency like bitcoin, they cannot be exchanged one-to-one at the same base value.

NFTs themselves are digital, but they are based on underlying tangible assets. Thus, if the creator is not the owner of the tangible asset, or does not have a license to utilise it, and if said asset is protected via intellectual property laws, the usage amounts to an infringement of the owner’s rights. The sale of an NFT does not pass on copyright or trademark rights by default. While it confers ownership of the token, it does not give with it that of the actual content it represents and that is where a majority of the legal complexities lie.

Corporate employment of NFTs

Through the process of minting, companies are able to tokenize their logos, products, artwork etc. Through this, they put themselves in a position to capitalise on digital and decentralized markets and reaching younger or more tech-oriented user bases that may deviate from their regulars.

Many global brands have ventured into this market. Coca-Cola released collectibles, Taco Bell minted meme-based NFTs, and McDonald’s launched NFTs of art of their own burgers.

Prada entered the NFT space with a digital fashion collection linked to their physical products, creating a hybrid experience that enhanced brand visibility and consumer trust. Nike’s RTFKT NFTs generated $1.4 billion in trading volume and $170 million in revenue by targeting sneakerheads and crypto communities. Similarly, McLaren F1’s 2024 NFT series, minted during each race, offered fans exclusive perks like race attendance, strengthening brand engagement and fan connection and loyalty.

Who Owns The IP When Dealing With NFTs?

Grappling with trademark law may prove difficult while engaging with the creation and sale of these tokens, especially given the decentralised and user-focused nature of Web3 platforms.

Companies more often than not retain copyright and trademark rights of the underlying content on which the NFT is generated, and the purchaser receives a limited license to display or use the token for generally non-commercial purposes. However, it is important to note that different contracts allow for different relations and exchange of rights.

[Image Sources: Shutterstock]

For example, when an individual buys a collectible NFT of a Coca-Cola bottle, the company retains the copyright. The buyer may only use such assets on social media or merchandise if the license allows it. Coca-Cola may also issue the same image in another NFT unless exclusivity was contractually granted. This also leads to emphasis on the value of well-defined smart contracts supported by clear legal agreements that explicitly define IP rights and terms.

Case Laws as Precedents

In the US based case of Hermès V Rothschild, dispute arose regarding a series of NFTs titled “MetaBirkins”, depicting virtual fur covered versions of the iconic Hermès Birkin Bag. The brand sued for trademark infringement and in 2023 was awarded damaged, establishing recognition of trademark protection in the NFT space.

In China’s first case involving NFTs, Shenzhen Qice Diechu Cultural Creativity Vs. Hangzhou Yuanyuzu Technology, defendant being an NFT Trading Platform had been sued for infringement of the artwork “Chubby Tiger having its Shot”. The defendant claimed being merely a third party, but the court rejected this argument stating that defendant charged a GAS fees along with commission for the minting and sale of the NFT concerned on its platform, and thus was bound by a duty to verify that the NFTs being listed on its platform are not infringing the copyrights of any other person.

In Juventus FC Vs. Blockeras, Europe’s first trademark infringement case involving NFTs, the court held that protection in the non-digital space may be sufficient to grant protection in the digital space if the trademark owner can prove the actual use of the mark.

 

Obstacles Faced When Incorporating NFTs Into A Business Model

Certain obstacles hinder the growth and accessibility of non-fungible tokens. Firstly, they rely on smart contracts operating on blockchain technology. The idea of regular dealings through blockchains still remains an abstract idea to many companies. The lack of developers to begin implementing and exploring the opportunities presented by Web3 technology and the relatively high cost of entering into such spaces provides the earliest hinderance.

An emerging area of tension lies in the concept of employees or freelancers generating the branded digital content for corporations. Under Indian as well as most global provisions, IP created in the course of employment rests ownership with the employer, but in freelance or start-up environments ownership may become blurred if contracts do not specifically address rules for NFTs and tokenisation.

NFTs are also traded usually on global platforms, bringing with it jurisdictional issues. 

Indian Provisions Regarding NFTs

There currently exist no specific laws in India regarding the use and sale of NFTs, but some existing provisions may govern such transactions.

Section 115BBH of the Income Tax Act levies tax at a rate of 30% on Virtual Digital Assets dealing which may cover NFTs as well. Transactions involving NFTs may be governed by the Indian Contract Act, 1872 if the prerequisites of a valid contract are fulfilled by the transaction.

Section 2(7) of the Sales of Goods Act, 1930 defines a “good” as “Every kind of movable property other than actionable claims and money”. Section 3(36) of the General Clauses Act, 1897 defines moveable property as “property of every description except immovable property” and Section 3(26) of the General Clauses Act, 1897 defines immoveable property as “Immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.”  In light of these provisions, one may say that NFTs could be governed under the definition of Goods and the provisions of Sales of Goods Act may be applied to them as well.

Aside from these provisions, the Consumer Protection (E-Commerce) Rules, 2020  also undertake regulation of the goods and services exchanged over digital or electronic network including digital products. These can even apply to entities not established in India but having consumers in India as well and may apply to the sale of NFTs.

NFTs certainly present new horizons and relatively unexplored markets for companies to expand into and breach a whole new bracket of consumers, but with its benefits and excitement come legal intricacies and a new set of unexplored areas with regards to IPR and licensing. Thus, it is essential to understand and act with existing precedents and provisions in mind when dealing with NFTs.

Author:  Tarini Patki, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References:

1.      https://www.ramotion.com/blog/nft-branding/

2.      https://taxguru.in/finance/legal-aspects-non-fungible-token-nfts.html

3.      https://www.emurgo.io/press-news/how-nfts-add-value-to-businesses/

4.      https://www.moneycontrol.com/news/trends/mcdonalds-drops-mcrib-nfts-says-almost-as-saucy-7668151.html