This was originally published by Esports Insider
on June 4, 2021
Within the blockchain space, one of the fastest-growing areas is
NFTs. Within the games space, esports is growing rapidly. So
naturally the combination of NFTs and esports should have
tremendous potential. This article will explore some opportunities
at the intersection of these trends and some of the potential legal
issues that might arise.
NFTs are non-fungible tokens. Each token is unique and
represents rights to some asset – either digital or physical. The
token is created and recorded using blockchain technology. The
asset that the token represents typically is not stored on a
blockchain. The token typically references the underlying asset and
its location via metadata specified in the token.
Some types of assets that have been the subject of NFTs include
video highlights, trading cards and collectibles, and other forms
of media such as digital art, pictures, music and much more. One of
the most popular NFT marketplaces right now is NBA Top Shot. These
are based on short video highlights from NBA games. The popularity
of these NFTs propelled Dapper Labs, the platform’s creator, to
a reported $7.5bn valuation. Could NFTs based on
video highlights of esports competitions become as popular?
The opportunities for esports-based NFTs abound. As with other
sports, NFTs can be based on highlights from esports competition,
player images, and other digital collectibles including perhaps a
key weapon used to win a competition, other esports-related
memorabilia, or esports-related artwork. NFTs can also be used for
ticketing to live events and much more.
Fan tokens are another type of token that have become popular.
Fan tokens are designed to create engagement between fans and
teams. The rights associated with fan tokens can vary including
certain governance rights, unique access to content, rewards and
more. For example, the OG Esports Fan Token includes governance
rights that give fans a tokenised share of influence on team
decisions through voting in surveys. Team Alliance, Team Heretics
and Natus Vincere have also launched fan tokens.
Legal issues in esports NFTs: Licensing
One of the most fundamental legal issues with NFTs is the scope
of rights the NFT represents. Typically, an NFT represents a
licence to the instance of digital media associated with the NFT,
but the underlying copyright is retained by the copyright owner.
Thus, while platforms that sell NFTs refer to ownership of NFTs, it
is important to understand that while the token part of the NFT may
be owned by the purchaser of the NFT, typically the rights in the
digital media file are not.
Dapper produces its NFTs of NBA highlights under licence from
the NBA. With esports, licence rights might be more complex. In
esports there are several entities that may have certain rights
that could be relevant. This may include the game publisher, teams,
leagues, players, the tournament organiser and potentially others.
Anyone creating an esports-based NFT needs to ensure that they have
all of the necessary rights from the right entity or entities.
For example, if an NFT includes esports highlights that depict
playing the game, it may be necessary to obtain rights from the
game publisher, unless the fair-use doctrine or other exception
Many NFTs have incorporated third-party IP without permission.
Sometimes, NFTs have included third-party IP as part of the
content. In other cases, third-party IP alone has been the content.
IP owners, whose content is being used in NFTs without permission,
are taking note and ramping up their enforcement efforts.
When licensing rights to NFTs, it is important to be clear what
is and what is not being licensed. When licensing IP for use in an
NFT, the licence should be limited to that purpose and other
restrictions should be considered. Typically, the licence will
reserve all other rights to the IP owner. For example, a creator
may grant rights to create a limited number of NFTs associated with
a copyrighted work, to maintain the scarcity (and associated value)
of the NFT based on such work. As another example, a licensor may
choose to expressly prohibit, or impose restrictions on the right
of the licensee to make modifications associated with the licensed
work for purposes of the NFT. This is particularly important given
the growing prevalence of layered art, programmable art and
generative art. Each technique can cause your IP to be used with
other IP or to be modified in ways you may not desire.
“Licensors can ensure their cut of NFT resale revenue with
well-drafted licence agreements”
IP owners who grant rights to create NFTs based on their IP may
wish to clearly address revenue-share issues for both the sale and
resale of any NFTs. Many NFTs are structured so the NFT
‘creator’ gets paid on the initial sale, but also (via
smart contracts) on any resale. Licensors can ensure their cut of
NFT resale revenue with well-drafted licence agreements.
Given the increasing number of NFTs that are not properly
licensed, it is important for IP owners to consider rethinking
their IP protection strategy. For example, teams, event organisers,
leagues, sponsors, and game companies should consider extending
their trademark registrations to cover trademark uses and
classifications that include NFTs. They may also choose to
associate certain designs or trade dress with their brand.
Design patents should also be considered, where appropriate.
Design patents are particularly valuable since profits from the
sale and resale of NFTs can be significant. And unlike trademark,
trade dress and copyright protection, the owner of a design patent
can be entitled to all of an infringer’s profits, not just the
portion of profits attributable to the use of the design. Design
patents cover the ‘visual ornamental characteristics’ of an
article and can include such visual aspects of screen displays.
Teams selling esports fan tokens in the United States need to
ensure they understand U.S. securities law. A number of fan tokens
have increased in value and are bought and sold on secondary
markets. If a fan token is structured in such a way that it looks
like an investment, it may fall under the regulation of the U.S.
Securities and Exchange Commission (SEC). The primary test used by
the SEC is whether the purchaser makes: an investment of money; in
a common enterprise; with an expectation of profit; based on the
efforts of others. In some cases, the common enterprise could be
the team and the profit from the tokens could be based on the
efforts of the team.
These are just some of the legal issues that should be
considered when dealing with esports-based NFTs. There can be a
host of other issues depending on the business model and other
technical factors. These legal issues can include
anti-money-laundering, gambling, or tax. For more information on
this please see Protecting IP and Limiting Liability When
Licensing IP for Digital Art and NFTs.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.