In December 2019, Nike was granted U.S. Patent No. 10,505,726 for cryptographic digital assets covering footwear, thereby securing its place in non-fungible token (“NFT”) history. An NFT is a digital asset that utilizes blockchain technology to represent a real-world object, like a shoe. In contrast to most other digital creations, an NFT’s unique identifying code hosted on the blockchain makes it one-of-a-kind.

The Nike patent connects a real-world physical shoe to a virtual collectible digital shoe to authenticate and track exchanges and purchases of each. When a consumer buys a pair of real-world physical shoes, a “CryptoKick” is generated. The CryptoKick includes a digital representation of the shoe that is linked with the consumer and assigned a cryptographic token. The consumer may utilize the CryptoKick to securely trade or sell the physical pair of shoes, trade or sell the digital shoe, or store the digital shoe in a cryptocurrency wallet or locker. In addition, the consumer may “breed” the digital shoe with another digital shoe to create “shoe offspring,” which may then be custom manufactured as a new pair of physical shoes in the real world.

The Nike patent (granted a mere 196 days after filing as part of the USPTO Track One program) vividly illustrates the new world we find ourselves in, where physical and virtual worlds collide. This new world, and NFTs in particular, has created new opportunities for monetizing intellectual property. With it, however, comes new challenges and considerations with respect to intellectual property protection.

Intellectual Property Licenses

Traditionally, intellectual property has been monetized by granting licenses to third parties. As NFTs become more ubiquitous, they should also be factored into the scope of such license agreements. On one hand, intellectual property owners may wish to license their intellectual property to developers in blockchain technology to reap the benefits of this emerging market. On the other hand, it may be wise for licensors to impose restrictions on or expressly preclude a licensee from creating NFTs based on the work being licensed.

DC Comics learned this lesson the hard way when Jose Delgo, a former DC and Marvel comics artist, made $1.85 million dollars by selling NFTs of his drawings online. Many of the NFTs that Delgo sold featured Wonder Woman® and other licensed characters.

Here, an ounce of prevention is worth a pound of cure. Existing remedies for trademark, copyright, and design patent infringement may be asserted against NFT creators whose NFTs infringe the intellectual property rights of a third party. The immutability of blockchain transactions and the pseudo-anonymous nature of NFT ownership, however, make it nearly impossible to identify the infringer once the NFT has been sold. As a result, the process of enforcing intellectual property rights and obtaining recourse against the infringer may be futile.

Patent Marketing and Licensing

Of particular interest to patent owners may be the prospect of tokenizing patents as NFTs for the purpose of monetization and licensing. Patents tokenized as NFTs would include a “smart contract” stored on the blockchain. Beneficially, once a condition is met, a smart contract is executed immediately without requiring third-party involvement. In addition, blockchain transactions are encrypted and tracked on the blockchain, thus providing both security and transparency to the transaction. Purchasing an NFT patent on the blockchain would automatically give the buyer of the NFT all of the rights to the patent as set forth in the smart contract, including the right to sue for infringement.

Blockchain-enabled patent transactions have tremendous potential for facilitating efficient patent monetization and licensing, as well as for mitigating risk associated with patent transactions. Though still an emerging technology, platforms for blockchain-enabled patent transactions (such as that contemplated by the partnership between IBM and IPWe®) purport to provide transparency and certainty to both buyers and sellers, automate execution of license agreements, and automatically collect fees and/or royalties on behalf of the licensor. Indeed, one of the unique aspects of NFTs is the ability for the licensor to collect a fee not just when the NFT is originally sold, but each time it is resold as well. This capability requires that the smart contract include a properly-worded license.

Because smart contracts are digital and automated, blockchain-enabled patent transactions may increase speed and accuracy of patent transactions, in addition to reducing and/or eliminating expenses and delays associated with due diligence practices, license negotiation, and error reconciliation. Blockchain-enabled patent transactions may also simplify the process of collecting and maintaining prior art data and data related to patent families. In addition, the permanence of blockchain data may facilitate tracking and recording revenues received from patent assets.

Patent licensing attorneys need not worry about job security quite yet though. Blockchain-based patent marketplace platforms have not been tested, and deals associated with patent ownership and licenses may continue to exist outside of the blockchain even if blockchain-based patent transactions become commonplace. Since NFTs do not automatically transfer an ownership or license unless a smart contract is associated with the purchase, it will remain the buyer’s responsibility to ensure exactly what they are buying when they purchase a patent NFT.

Patent NFTs may also give the erroneous impression that they can be relied upon to guarantee the authenticity of a patent. In the United States, however, a U.S. patent assignment, grant, or conveyance must be recorded in the U.S. Patent & Trademark Office within three months from the date of conveyance or prior to a subsequent conveyance. Otherwise, the conveyance is void against any subsequent purchaser or mortgagee, 35 U.S.C. § 261. Conveyances of patent NFTs may thus be void if not also recorded with the U.S. Patent & Trademark Office.

Buyers (and their attorneys) will need to continue to authenticate the title to the patent or obtain a warranty of title from the seller before purchasing a patent NFT. Otherwise, transferring the NFT may continue to perpetuate errors in the patent NFT rather than ensuring an accurate chain of title to the patent.

Related
The New York Times – Nike Sold an NFT Sneaker for $134,000