Contract And IP Implications Of Design Professionals Monetizing Non-Fungible Tokens Comprising Digital Construction Designs
Colin C. Holley, Partner, Watt, Tieder, Hoffar, & Fitzgerald, LLP
Posted: December 30, 2022 | Legal
by Colin C. Holley, Partner, Watt, Tieder, Hoffar, & Fitzgerald, LLP
There is an emerging market that appears poised to increasingly provide opportunities to monetize architectural and other construction designs through the sale of non-fungible tokens (NFTs). Last year, artist Krista Kim reportedly made the first sale of a digital home design via an NFT marketplace, for over $500,000. With some NFTs selling for millions of dollars, monetizing digital designs is undoubtedly an enticing prospect for architects, engineers, and other design professionals. It is thus critical to understand the application of intellectual property rights to NFTs and to address those rights in contracts involving design professionals.
What is an NFT?
To understand the market for NFTs it is necessary to first understand blockchain technology. A blockchain is a decentralized system of recording information via a digital ledger of transactions duplicated and distributed across many computers. The manner in which each block of the ledger chain is created—using a cryptographic mathematical algorithm tied into the previous block, a timestamp, and transaction data—prevents it from being changed retroactively without a change to all subsequent blocks and consensus of the decentralized network.
An NFT is a ‘token’ secured to a blockchain. It can represent ownership of any item that is non-fungible, i.e., any item that has unique qualities that add value and make the item non-interchangeable. NFTs can take unlimited forms, including, for example, tokens representing unique artwork, music, fashion items, in-game items, essays, collectibles, memorabilia, furniture, and real estate.
The highly secure nature of NFTs allows for an efficient market for purchase and sale with little concern regarding authentication of ownership, counterfeiting, or fraud. There is a growing demand for NFTs from investors, collectors, and traders, and people interested in the new technology and in owning one-of-a-kind items. NFTs are also increasingly used as a part of both profit and non-profit enterprises to help raise funding and launch new campaigns, especially when younger audiences are being targeted.
NFTs Representing Building And Construction-Related Designs
The nature of NFTs is well suited to the monetization of building and construction-related designs. In addition to Krista Kim’s sale of a digital home design for over $500,000, another example is property developer Stately Homes’ listing of yet-to-be-built luxury real estate to be sold with an NFT of the blueprint and virtual version of the home. In the area of architecture design, the company Aureal is creating and marketing NFT designs that can be used to build in either the virtual metaverse or in the physical world.
Construction design professionals around the world are undoubtedly brainstorming an endless variety of lucrative ways to monetize all manner of artwork, architectural and engineering renderings, graphic designs, videos, and other creative items relating to development and construction. As these uses of NFTs become increasingly common, it is important to consider associated intellectual property and contract issues.
Intellectual Property Rights And Protection Applicable to NFTs
Depending on its content, laws governing copyrights, design patents, and trademarks may apply to an NFT.
In the United States, copyrights protect ownership of original works of art. Protection in a work exists automatically from the moment of creation, whether or not the work is registered with the United States Copyright Office. The owner of copyright generally controls all rights to use the work in any way.
Patents are rights protecting uniquely original and usable inventions and designs for a prescribed period of years. U.S. patent rights arise from successful registration through the United States Patent and Trademark Office. Registration gives the owner the ability to prevent others from using or selling the invention or design without permission.
Trademark rights exist only in connection with the commercial use of a word, phrase, symbol, or design, such as product brand names and logos, to identify goods or services as originating from a single source. Under U.S. law, “common law” trademark rights can exist without the need for registration when there has been sufficient use of a mark in commerce. Registration with the United States Patent and Trademark Office creates additional protections that do not exist under common law, such as “constructive” notice to others of the registrant’s ownership of the mark.
Assuming the creator of an NFT owns the intellectual property rights associated with its content, those rights may be transferred, in whole or in part, to a buyer of the NFT. A design might, for example, be licensed to the NFT buyer to use only for personal, non-commercial purposes, or specific limited commercial uses.
The creator of an NFT cannot, however, transfer to a buyer any intellectual property right the NFT creator never had in the represented content. For example, an architect who has already assigned the rights in a particular design to a developer cannot convey any rights in the design by minting and selling a token representing the design.
Because NFTs are a new type of asset, having been in use for less than a decade, building industry owners, developers, contractors, and design professionals, and their legal counsel should review their contracts to ensure there is certainty regarding intellectual property rights associated with any NFTs representing related designs. For example:
- Where contracts address ownership and assignments of design work product, the terms “work” and “intellectual property” should be defined to expressly include any NFTs, digital tokens, and any other assets based on blockchain technology, incorporating any aspect of the design or engineering work associated with the project.
- Provisions in a consultant or independent contractor agreement should require any design or engineering consultant to disclose to the company any and all NFTs, digital tokens, and any other assets based on blockchain technology, in existence, or created during the project, incorporating any aspect of the design or engineering work associated with the project.
- Where a contract allows a consultant or independent contractor to identify as “excluded property” specific works, ideas, processes, or designs that the consultant or independent contractor previously created and wishes to exclude from the operation of the contract, the contract should require such identification to include any NFTs, digital tokens, and any other assets based on blockchain technology.
- Contracts between owners, developers, contractors, and design professionals, should expressly address whether any party to the contract is allowed to create NFTs, digital tokens, and any other assets based on blockchain technology, incorporating any aspect of the design or engineering work associated with the project, and, if allowed, how any rights associated with monetizing such assets are to be allocated among the parties.
Watt Tieder is one of the largest construction boutique law firms in the United States, with a diverse and experienced team of attorneys representing many of the world’s leading corporations, developers and contractors on both domestic and international projects. We represent more than half of the Top 30 Engineering News Record contractors and most of the nation’s top sureties. With offices in six cities in the United States, the firm is a dynamic, mid-size boutique that provides knowledgeable and practical legal representation to the construction, surety, government contracts and bankruptcy industries world-wide.
Reprinted with permission from ConsensusDocs.
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