Many believe that non-fungible tokens (NFTs) are poised to revolutionize the esports industry. Current applications of NFTs in esports include awarding NFTs in place of physical tournament trophies, which is a much more efficient solution given the prevalence of online competitions today; and game publishers and esports organizations such as 100 Thieves and Simplicity Esports are integrating NFTs into consumer offerings in the form of digital player cards and collectible trading cards. While these applications represent just the start of what may become a booming use of NFTs in esports, currently there is little information available on related legal and regulatory issues. This article examines some important legal considerations related to the use of NFTs in this exciting environment.
Scope of Rights
An NFT typically represents a type of license attached to a specific digital asset – an image, sound bite or video clip, etc. In most cases, the copyright to the underlying art or other asset is retained by the owner of the physical asset. It is important to understand that buying an NFT does not automatically give the purchaser the rights to the digital media file itself. Only the token changes hands, so companies seeking to memorialize esports highlights as NFTs should obtain the rights to the events from the rights holders unless the fair-use doctrine or other exception applies.
In the case of esports NFTs, intellectual property (IP) licensing can become complicated, as several entities could claim a stake in a transaction. This includes but is not limited to players, teams, leagues, game publishers, and tournament promoters. Creators of esports-based NFTs should protect themselves by obtaining the proper license for any intellectual or creative property they do not own. NFTs that incorporate (or simply appropriate) third-party IP without permission set themselves up for a lawsuit. Contracts for esports NFT licensing rights should cover three broad areas:
- Scope and Limitations – Both the licensee and the licensor should be clear about what rights are granted in a sale and even whether those rights can legally be transferred. Sellers will want to limit what the buyer can do with the NFT while the buyer will want to obtain as much leeway as possible for the licensing fee. The permissions being transferred should be expressly stated in the contract. Generally, the license will reserve all other rights for the IP owner – not the NFT owner. For example, to maintain scarcity and value, a creator may grant another party the right to create a limited number of NFTs associated with a copyrighted work. Further, a licensor may choose to expressly prohibit, or impose restrictions on the licensee to create NFTs based on modifications of the underlying work. This is particularly important given the growing trend of layered, programmable, and generative art.
- Content Restrictions – The murky and sometimes clandestine world of NFT creation has led some minters, either through ignorance or malfeasance, to incorporate third-party IP without permission. IP owners have taken note and begun protecting their creative output through vigilance and enforcement efforts. Game publishers and esports companies must adhere to content restrictions related to the use of third-party IP. It is also important to have the necessary prior permission in order to avoid legal liability.
- Revenue Split – Game publishers and esports participants should clearly delineate how any revenues generated as a result of an NFT arrangement will be allocated. Revenue split or profit-sharing provisions in the license agreement are critical because many IP owners grant rights to create NFTs based on their IP with the intention of getting paid, not only on the initial sale of the NFTs but on subsequent sales as well via smart contracts.
Name, Image, and Likeness (NIL)
As highlighted by NCAA athletes’ recent win regarding their right to profit from their names, images, and likenesses, esports companies must understand their responsibilities with regard to NIL. As of this year, collegiate athletes in many states now can earn money and/or merchandise for appearing in advertisements, making endorsements, or otherwise promoting products and services. Game publishers and esports companies should be mindful of these such developments to be aware of the appropriate licensing requirements, prepare comprehensive contracts, and distribute remuneration as and where necessary.
As game publishers and esports companies increasingly create their own tokenized assets, they should consider their own IP protection strategy. Brand owners may wish to extend their trademark registrations to cover the use and classification of NFTs. They may also choose to associate certain designs or trade dress (product packaging, labeling, layout, color, etc.) with their brand. Design patents may also be particularly valuable since profits from the sale and resale of NFTs can be significant. Unlike copyright protection or trademark protection, a design patent entitles the owner to the entirety of profits an infringer collects – not just the portion of profits attributable to the unauthorized use of the design. Appropriate legal mechanisms should be put in place to assure IP protection in tokenized assets and other digital collectibles.
Securities and Taxes
Teams selling esports fan tokens in the US may be walking a fine line between merchandising and securities dealing. As such, they must ensure that they comply with all these laws and securities-related regulations in particular. NFTs bought and sold on secondary markets must be structured such that the SEC does not view them as securities. If regulators deem an esports NFT to be an investment (rather than a collectible or an artistic bauble), they may seek to regulate it as a security.
Game publishers and esports companies are advised to implement robust terms and conditions, privacy policies, end-user agreements, copyright protection, and disclaimers to ensure their rights and shield themselves from legal action. This will also offer protection in the case of an allegation of direct or indirect infringement. An attorney specializing in esports and NFTs can help in drafting these legal documents.
It seems inevitable that NFTs will become increasingly prevalent in the booming esports market. In fact, there are already several examples of esports-based NFTs that surpassed $100 million in sales within a couple of months of launch. With so much money at stake, legal considerations related to the use of NFTs in esports such as the above are likely to become more pronounced. Due to the relatively nascent nature of NFTs, the regulatory landscape is still evolving. It is important to consult an attorney specializing in esports and NFTs before launching your own NFT. Nuanced legal advice at the inception of the NFT project can save you time, money, and resources down the road.
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