As content-based NFT projects seek to provide NFT owners with value beyond being scarce collectibles, they should consider whether to grant owners rights to commercialize the content underlying the NFTs.

As the ecosystem for non-fungible tokens (NFTs) continues to mature, the discourse around content-based NFTs[1] has increasingly focused on the utility that accrues to NFT holders. NFT holders increasingly want to understand what specific bundle of rights and privileges they are acquiring when holding a content-based NFT. Among the most important of these rights are the intellectual property (IP) rights that NFT holders are granted in the artwork linked with a particular NFT. By default, purchasing an NFT only conveys ownership of the NFT as a unique token on a particular blockchain protocol, and absent further contractual language, does not transfer ownership of the underlying IP rights in any media associated with that NFT.

Purchasers of a content-based NFT have no default rights to commercialize that media, such as by selling merchandise, creating spin-offs, or otherwise making commercial use of the media. Instead they are granted only an implied, non-exclusive license to display the media for personal purposes (for example, as a social media profile picture). Any additional rights would require explicit permission from the NFT project that holds the underlying content IP, and is typically granted through an NFT license or other agreement that holders agree to when minting or purchasing an NFT.

NFT projects are increasingly exploring opportunities to grant such commercial rights to NFT holders in a way that aligns with the strategy of the NFT project to develop the IP in such NFTs. Savvy users are seeking more clarity on exactly what rights they acquire as part of their NFT purchases.[2]

For example, the bundle of rights that an NFT project may grant can vary based on whether the rights:

1. are granted on an exclusive basis (meaning only the NFT holder can exercise the licensed rights in the related artwork) or non-exclusive basis;
2. are terminable upon certain forbidden uses of the underlying media by the NFT holder; or
3. include the right for the NFT holder to modify, adapt, and create derivatives of the underlying artwork.

This post explores how content-based NFT projects are approaching the types of IP rights granted to NFT holders. It also explains why NFT licenses should not be one-size-fits-all, but should be tailored to reflect the specific philosophy of each specific NFT project and its underlying IP.

Allocating Rights Between NFT Projects and Holders

When it comes to IP rights in the specific media attached to content-based NFTs, most NFT projects coalesce around three models:

1. remaining silent or adhering to default, thus granting holders no additional rights beyond an implied personal license to display the media for their personal purposes;
2. granting holders broad unfettered personal and commercial rights in the media (or going even further to dedicate the copyright in such media to the public domain under CC0 or a similar framework); or
3. trying to carve out a middle ground under which NFT holders are granted only specific sets of personal and/or commercial rights, often with key limitations around scope of monetization or fields of use.

No Rights/Silence

Some project terms and conditions only address topics such as user account logistics and liability disclaimers, and remain silent on holder rights in any IP associated with the NFTs. Other projects expressly reserve all such IP rights. The question of what IP rights an NFT owner acquires in the related artwork when the sale terms are silent on such rights is still untested under US law. In such situations, such NFT owners would likely be deemed to only receive an implied license to digitally display the NFT artwork for personal use. Absent a legal defense like fair use, even printing out the NFT artwork as a picture could be treated as copyright infringement.

Broad Personal and Commercial Rights

On the other end of the spectrum, some projects grant broad personal and commercial rights to NFT holders. For example, under Section 1.1 of the Non-Exclusive Commercial Rights “Can’t Be Evil” NFT License the NFT holder is granted a “perpetual, irrevocable… worldwide license under [the NFT project’s] copyrights to use, distribute, reproduce, display, perform, modify, and create derivative works of the specific [NFT media] linked to [the NFT] for personal and commercial uses, with the right to sublicense such rights through multiple tiers of sublicensees.” This broad license allows holders to sell merchandise, create spin-off content, display the artwork in a physical or digital museum, and conduct a wide range of other commercial activities. However, granting a broad license requires a project to surrender control over how others use its IP and, depending on the specific language of the license, may or may not allow the project to retain the flexibility to use the content for itself.

Another version of this model involves relinquishing IP rights in the media underlying the NFT altogether, and placing it in the public domain. For example, the NFT project Nouns does so under CC0, which effectively places all Nouns artwork in the public domain and prevents Nouns from influencing how anybody uses the content. However, unlike ownership-centric licenses, which are only available to current holders of an NFT, CC0 and similar tools allow anybody, even those who have never owned the NFT, to use, copy, and modify the underlying artwork.

When a piece of content is in the public domain, any person can use it to create derivative work, without a license from the creator of the artwork. Under copyright law (17 U.S.C. § 103), the creator of a derivative work that is created from public domain content receives exclusive rights to the truly derivative elements of the derivative work, including the right to exclude others from using this derivative “layer.” To receive such copyright protection, a derivative work must sufficiently transform the original work and be fixed in a tangible medium of expression. The sufficiency of such transformation is a fact-specific inquiry, and varies based on the type of work. Notably, the copyright of a derivative work only covers the additions to the original work, and not the original work itself. Thus, in the case of the Nouns artwork, while anyone can create derivative works from the public domain artwork, anyone can also receive a copyright to their derivative work (assuming it is sufficiently transformative of the original work and fixed in a tangible medium), and derivative works that are similar or even identical may exist.

The possibility that similar or identical derivative works may be created from an original work also exists under a commercial rights license. However, the possibility is likely lower since the licensed original work is presumably less accessible than media in the public domain. For example, an NFT holder may create a derivative work of the underlying media that is very similar to the derivative work that a subsequent NFT holder creates after the original NFT holder sells the NFT.

To mitigate risks associated with IP disputes over derivative works, the commercial rights Can’t Be Evil licenses include a provision requiring the NFT holder to:

1. acknowledge that other third parties with the same IP rights to the underlying media may also create their own derivative works of the media;
2. acknowledge that these other derivative works may be similar or identical to the NFT holder’s; and
3. agree not to bring any suit, claim, demand, or challenge against the NFT project or any third parties in connection with their use, distribution, reproduction, display, perform, modification, and creation of derivative works of the media.

In-Between — Some Limited Personal and Commercial Rights

Many projects find a middle ground between granting unlimited rights and no rights at all, and selectively grant holders certain commercial rights subject to key limitations. NFT projects may create specific commercial licenses that fit their needs by customizing the permitted scope of the NFT holder’s use. For example, limitations may include:

1. a cap on the gross revenues that an NFT holder may receive from commercialization of the underlying media;
2. field of use restrictions, such as allowing commercial use on physical merchandise only but not with other media projects; or
3. limitations only allowing use of certain components of the underlying artwork.

NFT projects may even provide entirely separate licenses for different collections held by the same project, or set forth an application process for NFT holders to request additional rights that are not granted in the license. Such arrangements allow holders to capture value from some commercialization opportunities, while still helping projects retain control over how other parties use their collections’ artwork.

Considerations for NFT Project Creators

Given each project’s unique combination of underlying IP, community vision, and business goals, designing an NFT artwork license should not be a one-size-fits-all approach. Instead of uniformly favoring the NFT project or the holder, an effective commercial license might sacrifice project control in some areas to increase holder value, while still preserving project discretion elsewhere. The right balance will vary by project — an established IP holder exploring NFTs as an additional revenue opportunity might want to prohibit derivative works that could unexpectedly impact its valuable core assets, while projects developing brand new IP may want to actively encourage such uses in the hopes of driving engagement and building traction.

Factors that might influence a project’s decision include:

1. whether the project envisions its NFTs as being more like collectible art, an enabler of content commercialization, or a mixture of both;
2. how highly the creators value artistic control versus encouraging remixes and spin-offs;
3. how established the underlying IP is, and whether any of it is controlled by third parties who may have different goals;
4. the administrative costs of monitoring and enforcing certain limitations such as a revenue limit; and
5. how a particular licensing scheme would align with the project’s broader ethos.

Not All Commercial Licenses Need to Be Equal

For projects looking to develop a commercial license that best supports their goals and vision, here are some specific options to consider.

How Can Holders Use the Content?

Modifications and derivative works — Most projects that grant holders commercial rights will likely provide the right to display and copy the content underlying the NFTs, although they will likely diverge in their stance on modifications and derivative works. For example, NFT project Doodles only allows holders to copy and reproduce a Doodle image in its fullness, while Boss Beauties also allows holders to modify or create derivative works of Boss Beauty art. Doodles provides more artistic control and helps projects preserve their vision, while Boss Beauties encourages more creativity and engagement. If a project allows holders to modify or create derivative works based on its IP, it should be sure to also provide for an additional license or covenant to prevent the holder from accusing the project of infringement of the holder’s modification or derivative work.

Field of use restrictions — A project seeking to preserve its competitive interests can restrict holders from certain fields if the project has its own commercial plans while still allowing holders to pursue lucrative opportunities elsewhere. For example, instead of prohibiting merchandise altogether, an apparel-focused project might prevent holders from selling clothes and shoes while still allowing them to sell posters.

Hate speech restrictions — A project can restrict certain commercial use that tarnishes the project’s image or otherwise constitutes hate speech. For example, one of the commercial rights Can’t Be Evil licenses includes a requirement that the underlying media not be used in any way that is unlawful, defamatory, harassing, abusive, fraudulent, racist, hateful, vulgar, cruel, illegal, or obscene, or that promotes any such activity, as determined in the project’s sole discretion. Including such a restriction can help NFT projects encourage use of the underlying media among NFT holders while maintaining control over its brand consistency, cohesiveness, and quality.

Revenue caps — Revenue caps require holders who generate revenue above a certain amount to negotiate a separate license that would likely involve some sort of revenue sharing or other payment. Therefore, they allow smaller holders to freely commercialize the IP underlying their NFTs while allowing the project to capture upside from unforeseen breakout opportunities.

Third-party IP — Projects exploring collaborations or other partnerships must also determine how their licenses treat third-party IP featured in their NFTs. Options include creating a separate license for NFTs that include third-party IP, negotiating with the partner before the NFT project’s launch to fit the partner’s IP into the project’s existing license scheme, or starting with an extremely limited license that is unlikely to trigger a partner’s concerns.

Who Else Can Use the Content?

Exclusivity — Projects may choose to grant exclusive or non-exclusive commercial rights under a license. Under an exclusive, commercial rights license, the NFT creator itself cannot exercise the rights granted to the NFT holder, or allow any third party to exercise such rights. This means that the NFT project would not be able to sell any other NFTs or products using the underlying media, or grant any person the right to use the media either. While holders would probably value their NFTs more if the commercial rights they received through their NFTs were exclusive, projects may wish to grant nonexclusive licenses to preserve their own ability to utilize their IP. Doing so is especially important for projects seeking to pursue opportunities beyond initial mint, such as selling products or creating a backstory based on the entire collection.

Holders versus public — Projects should decide whether they want the rights they grant to flow to only current NFT holders or the general public through a tool such as CC0, keeping in mind that granting rights to the public would make individual NFTs significantly less valuable to their holders, but could also drive widespread engagement that lifts the entire collection.

Key Takeaways

Commercial rights that enable merchandising, branding, and spin-offs can help content-based NFT projects attain significant value beyond their worth as digitally scarce collectibles. NFT holders increasingly assess NFTs on more than just their collectability, so projects should be thoughtful in determining how best to allocate the valuable commercial rights inherent in the NFTs they create. As the ecosystem continues to expand and develop, projects that create well-tailored commercial licenses that align with their visions will be better positioned to succeed.

Endnotes

[1] “Content-based NFTs” refer to non-fungible tokens whose metadata links the token with specific artwork, content, artwork, images, or other media.

[2] Latham & Watkins has assisted in developing a series of template licenses called the “Can’t Be Evil” licenses, which are designed specifically for NFTs, and provide a licensing framework that helps (i) set forth the IP rights that NFT projects bestow upon NFT owners when they purchase an NFT, (ii) clarify what NFT owners can do with such IP rights, and the scope of their permitted use, and (iii) maximize the creative and economic potential of NFT projects by promoting transparency and clarity on the IP framework behind the NFTs. The Can’t Be Evil licenses can be accessed here: https://github.com/a16z/a16z-contracts. They include different types of commercial NFT licenses, which provide a different bundle of rights to the NFT holder, and can be used by NFT projects to protect or release their IP rights in media that is linked with their NFT projects to varying degrees.