In Part I of our series on Non-Fungible Tokens (NFTs), we discussed the fundamental of NFTs – what an NFT is, how NFTs are managed, and how NFTs are treated with respect to intellectual property rights. But what lies beyond? How are businesses harnessing this increasingly popular technology? What does the future of NFTs look like?

SHOES AND NFT PATENTS

As discussed in our article on blockchains, there are many ways to utilize and extend blockchain technology, such as NFTs. Some of these blockchain applications can be quite innovative and worthy of patent protection. As the number of patent applications on blockchain technology continues to increase, patent filings related to NFTs are picking up steam. As an example of an NFT-related patent filing, Nike has obtained U.S. Patent 10,505,726 titled “generating cryptographic digital assets for footwear,” which would allow a buyer of a shoe to ensure that their shoe is authentic, and also enjoy a digital collectible version of their shoe through their blockchain wallet.

The granted independent claims are directed to a method performed by a system representing a footwear company for receiving a purchase confirmation of an article of footwear, generating a digital asset (a “digital shoe” and an ID for the digital shoe, namely “digital shoe ID”) for the article and associating the digital asset with the footwear purchaser, recording ownership of the digital asset by creating a record in a blockchain that includes an ID of the footwear purchaser and is linked to the digital shoe ID, receiving a transfer request to transfer the digital asset to a new owner, and enabling transferring the digital asset to the new owner by creating a new record in the blockchain that includes the ID of the new owner and is again linked to the digital shoe ID.

In short, the claims recite a method for generating a digital asset for an article of footwear and recording ownership of the digital asset in a blockchain while providing transfer capability of the digital asset. In the context of the discussion in Part I of this series, the representation of ownership of the digital shoe that is stored in the blockchain, as recited in the claims would correspond to an “NFT”, and the digital shoe ID (which necessarily is associated with the digital shoe) recited in the claims would correspond to a linked “underlying asset”. These granted claims are relatively broad and potentially present a barrier for anyone looking to create or provide the infrastructure to create an NFT for a digital version of “an article of footwear or a digital design file for an article of footwear”.

However, the concept of recording ownership of digital assets in a blockchain and allowing the transfer of such digital assets using a blockchain has existed for years and has been on public display with projects such as Cryptokitties since early 2017. Additionally, the concept of tracking and managing transfers related to physical assets, such as IBM’s effort to manage car-sharing or rental using a blockchain was not new as of early 2018. Given that the priority date of the granted patent is December 7, 2018, what did the USPTO find inventive about Nike’s claims?

A deeper look into the prosecution history of Nike’s patent indicates that Nike initially sought claims that merely generate and store a digital token (i.e., the shoe ID) on a blockchain that is associated with an underlying digital asset (i.e., the “digital shoe”) and physical asset (i.e., the actual shoe), without an ability to transfer the digital asset separately from the physical asset. Upon the addition of transferability limitations along with clarification that the digital asset is transferrable separate from the physical shoe, the application was allowed. Shortly after the application was allowed, Nike filed three continuation applications, indicating that they will pursue additional coverage or possibly even broader protection.

In the Notice of Allowance, the Examiner directly points to the newly added transferability limitations as not being taught or suggested by the prior art. Although a reference to Cryptokitties was made in an Information Disclosure Statement (IDS) that was submitted by the Applicant, it is possible that the Examiner found some distinct difference between the transferability of NFTs linked to Cryptokitties and transferability of NFTs linked to digital shoe IDs, as claimed by Nike. One main difference appears to be that the Cryptokitties do not then “correspond” to actual kittens, while the digital shoe IDs “correspond” to actual shoes. However, the way the claims are written in the Nike patent, the actual shoe does not play any role other than prompting the creation of a digital shoe that appears to then have a life of its own.

Perhaps the USPTO was satisfied with the fact that the granted claims are narrowed to the storing and transferring of a digital asset associated with “an article of footwear or a digital design file for an article of footwear”, even if there should not have been any patentable distinction between shoes and another type of physical asset such as cars, for example. Specifically, IBM’s effort may have an almost identical set up as the subject matter recited in the claims of the Nike’s patent. In IBM’s effort, the linked “underlying asset” could be a digital car ID associated with an "occupancy right” (as opposed to a “digital shoe”) of an actual car as the car is being rented or otherwise shared. Therefore, the transfer of the occupancy right would be completely separate from the transfer of the actual car, which could be owned by any number of people while occupancy status changes. The claims in Nike’s patent appear to treat a “digital shoe” as a “valuable” digital asset and thus guard their access (with cryptographic code, access key, etc.) instead of directly putting them on public display. While the “occupancy right” might not be considered as a “valuable” digital asset, privacy issues might lead to a similar treatment of not revealing current details regarding an occupancy right.[1]

Despite the patentability question of Nike’s patent, the broad coverage of Nike’s patent and quick allowance begs the question of what and how other applications of NFTs can be patented. Transferable digital tokens as applied to digital or physical shoes may just be the tip of the iceberg with regards to patent protection in this space.

A NEW WAY TO MANAGE COPYRIGHT LICENSES AND ROYALTIES

As opposed to the direct transfer of a unique asset, to which the first-sale doctrine typically applies, when there is an NFT that is linked to the unique asset, the transfer of the NFT does not necessarily convey ownership of the unique asset. In the example discussed above, the transfer of the NFT appears to result in the transfer of the linked digital shoe ID and thus the digital shoe (although the transfer of the once-removed actual shoe outside the blockchain could be separate). In another example that is not uncommon in the arts world, though, the transfer of at least one NFT representing copyrights associated with a song composed by some legendary songwriter does not automatically transfer all the rights in the song to the new owner of the NFT. Generally, a creator of an NFT decides the terms of the NFT and how ownership of the NFT relates to the underlying asset. A copyright owner of an underlying work attached to an NFT may provide terms that grant any subsequent owner of the NFT a license to make certain uses of the work, such as limited right to make copies of the work, distribute those copies, display the work publicly, or make works that derive from the original.

When an NFT is created, some blockchain networks provide a way to manage the licenses and ownership rights of the underlying asset and some even include mechanisms to assign future royalties of the exchange of the NFT in association with pertinent licenses. Such blockchain networks can be used to record full or fractional copyright ownership of underlying assets and/or copyrights, and to automatically split royalty payments accordingly.

There were early efforts in the arts world on authenticity and provenance tracking as well as alternative fund raising and royalties using blockchains, such as the platform offered by the Blockchain Art Collective and the platform offered by Vertz, which was mentioned in our article on blockchains. These platforms may be lacking in easily adoptable standardization or otherwise failing to present features that especially appeal to celebrities or creative geniuses.

Now, the NFT technology offers an opportunity to buy “shares” in an artist’s intellectual property before it has even been released – also offering an alternative source of funding for the artists themselves. Once released, the owners of the copyrights can automatically receive their respective share of royalties delivered directly to their blockchain wallets from music streaming or other art distribution applications via the blockchain.

For example, blockchain tool platform Bluebox “is preparing creators for the music industry of tomorrow” by enabling them to reclaim missed monetization opportunities related to copyrights, such as capitalization options and sales of future royalties. Bluebox allows copyright license holders to directly manage their music rights through blockchains and automatically create new music licenses using smart contracts. With smart contracts and licenses, multiple rights holders can get paid in real time as music is distributed and delivered to consumers.

As a specific example, UK recording artist Big Zuu and US recording artist Taylor Bennett – each sold large stakes (50% and 75% respectively) in the recorded music rights of a yet-to-be-released track. These stakes were themselves divided up into 150 1% portions represented as respective NFTs, selling for $100 apiece. The recipients of these NFTs contractually own a fractional copyright in these sound recordings, and will continue to own it in perpetuity. In this case, since royalty payments are distributed in accordance with the percentage of copyright ownership in the recordings, each buyer should now share in 1% of all digital royalty streams generated by the tracks for good, although they will not have the right to approve or deny a usage of the recordings.

Thus, NFTs and blockchains make copyright assets liquid and easily tradable. It therefore provides the ability for timely, secure, and sometimes sophisticated management of the licensing of copyrighted items. In the music industry as an example in the world involving unique, valuable assets, such an ability has the potential to transform how major record labels, publishing rights organizations, and the music industry as we know it does business by providing ways to flexibly manage intellectual property rights. Many copyright-related questions remain, though, including how to improve contract provisions for proper protection of client rights and easy integration into smart contracts in the existing NFT framework. We can help find answers.