Fatal Mistakes Made By The ‘Bored Ape Yacht Club’ & ‘Crypto Punks’ NFT Projects

My name is NFT lawyer Enrico Schaefer. I am an attorney specializing in blockchain technology. Today, we’re going to talk about non-fungible tokens (NFTs). We will look at two popular NFT offerings, the Bored Ape Yacht Club and Crypto Punks. Both NFT drops have been unexpectedly and amazingly successful. But the companies behind these NFT projects failed to account for several critical legal issues when they launched. These NFT drops offer valuable learning lessons which every NFT project, brand, and company must consider before launching their NFTs project.

Don’t Be Dumb Ape or Crypto Idiot. Think Before Your NFT Launch.

In this video, we will also examine the legal strategies each project got right on trademark registration and copyright licensing. These two projects offer a roadmap for any company, brand, or agency looking to launch an NFT project. After watching the video, we provide a checklist of legal issues for any NFT drop. Remember, if you don’t get it right before NFTs are minted, there may not be any way to fix your mistakes.

What Is A Trademark & How Does It Impact NFT Drops? 

A trademark can be any word or phrase symbol design combination of things that identifies your goods and services in the marketplace. A trademark identifies the source of goods and services so that consumers know if they can trust the seller. Trademarks help sellers and buyers guard against counterfeit and fraud which has become rampant in the NFT marketplace. If you are the Bored Ape Yacht Club, you’re operating under the brand “Bored Ape Yacht Club,” which is your trademark. Just like “Nike” can protect its brand name, so can every NFT project if you set your foundation correctly.

Your trademark identifies your company as the source of goods and services related to your NFTs and digital assets (the pictures linked to your NFT smart contracts). Your company can leverage your trademark rights to protect your brand against infringers who might mimic your offerings to cause confusion in the marketplace, defraud consumers and offer counterfeit (confusingly similar) NFTs. Think about fake Louis Vuitton handbags. Just like Luis Vuitton can shut down counterfeiters of similar bags, so can your NFT project if you set the correct foundation protecting your intellectual property rights

What Is A Copyright and How Does It Apply to NFTs? 

Copyright is different than a trademark. Copyright identifies the author or artist who owns the “Work” (i.e. art, photograph, video, NFT asset). The “Crypto Punk” brand name is a trademark. The image of the Crypto Punk linked to the NFT placed on to the blockchain is copyright protected. The gallery name is a trademark. The art inside the gallery is protected by COpyright law. Copyrights protect original works of authorship, such as the digital asset being offered with the NFT. The digital asset that goes along with the NFT sale is potentially copyrightable. If you don’t copyright protect your digital assets, you’re going to have some serious legal problems down the line. Your NFT drop will license your copyright-protected digital asset (i.e., the Bored Ape image) to the NFT purchaser.   

What Rights Are Licensed To Purchasers Buying NFTS?

When you buy the Bored Ape NFT, you receive a license to the image. The license will tell you what rights you receive and what (limitations on) rights are restricted. Due diligence is critical. You need to know who owns the actual copyright (the artists who put digital pen to paper). The Bored Ape Yacht Club’s license agreement is poorly drafted and internally inconsistent. It is unclear whether Crypto Punks included any license agreement with their NFT drop. Both projects made serious legal mistakes when they launched; those mistakes are not easily fixed and may be impossible to remedy. Imagine buying a house without a purchase agreement or title. NFTs are no different. They require both chain of tile and a contract setting forth the seller and buyers’ essential contract terms.

Learn more about NFT licensing.

What Legal Mistakes Did Bored Ape Yacht Club and Crypto Punks Make When They Launched their NFT Projects?

In the video, we look at both the trademark and copyright model employed by the BOred Ape yacht CLub and Crypto Punks. We also review the licensing language and terms of use for each NFT project.  

• You might be shocked to learn that both projects have gaping holes in their licensing language, leaving the NFT buyers at risk and creating potential liability to the projects.  
• Even more concerning is that there is no way to easily modify the initial licensing language between the seller and the buyers.
• Buoyed Ape Yacht Club did an excellent job registering trademarks for their NFT project but is plagued by trademark infringers launching variations of their project on Open Sea and other platforms.
• Crypto Punks has paid less attention to protecting their trademark “Crypto Punks” and, of course, is also suffering a loss of goodwill and brand value due to imitators, infringers, and counterfeiters.
• Trademark rights are critical to protecting your NFT project name, logo, and slogans. Like any other brand name, the first to use the name in commerce has priority rights. The senior rights holder can stop any identical brand name use and any name, words, or logo that is confusingly similar. Trademark rights protect more than the literal name. 
• Copyrights protection for the artwork itself is also critical. Any NFT project offering Apes are derivative of the artwork for the Bored Ape yacht CLub are potentially infringing the BAYC’s copyrights. However, BAYC’s license purports to sell the images to NFT buyers, which will inconsistently limit the rights of NFT purchasers. If the copyright to the Bored Ape is transferred to the NFT buyer, the NFT buyer can enforce the copyright. BASIC project’s listing agreement is internally inconsistent on the issue of ownership.
• The Crypto Punks failed to include any license agreement with their NFT drop. There does not appear to be any written license agreement associated with the initial NFT minting of Crypto Punks. Courts will either rule that the ownership of the punks was part of the minting or that an implied license accompanies the digital art, which is the Crypto Punk image. If the license is implied, the licensor can terminate the license at any time or specific rights that might have been implied. 
• The Bored Ape and Crypto Punks projects made legal errors when launching their NFT projects. The failure to get good legal advice was likely because they did not expect things to go so well. But there is no putting the ape back in the cage or the punk back in the hood. So both the project owners and the buyers will live with unknown legal rights, which will someday have to be litigated in the courts. 

Legal Checklist for NFT Projects

Here is the money list of NFT legal tips you have been waiting for! If you are considering launching an NFT project or selling NFTs, your attorney needs to consider and advise you on these legal issues before your NFT launch. The earlier you understand the importance of these critical legal issues, your project will have less legal risk, and the more value you will be able to provide to NFT purchasers. The ROI on good legal advice by a competent NFT lawyer is huge.

• Have your trademark attorney do a trademark availability search for your project name. If there is something similar that already exists, you could get shut down, lose your domain name, and have to shut down your NFT store.
• Register your project name as a trademark as soon as you determine the name is available.
• Have your lawyer draft and obtain a ‘work for hire agreement’ with all artists involved in creating the digital image for your NFT project. Make sure your company actually owns the copyright to the images associated with your NFT.
• If your employees are helping create the artwork, have them se=ign an IP ownership contract for the artwork concept and all aspects of your NFT project.
• Obtain non-disclosure and non-compete agreements from all contractors, employees, partners, and investors before sharing confidential information.
• Have your legal team draft a copyright licensing agreement for your NFT project as part of your roadmap. You need to understand your licensing model before you launch, and typically as part of your initial business plan.
• Make sure your project offering won’t be considered a security by the SEC. There are a number of factors that will impact the issue of whether your NFT is considered a security. A good blockchain securities lawyer is essential.
• Determine how you will permanently communicate copyright rights to your NFT buyers, through the platform, one your website, or on the interplanetary file system.

My name is blockchain attorney Enrico Schaefer. We’ll see you next time. Don’t forget to subscribe, follow our channel, and we will be here to help all along the way.