With Non-fungible tokens (NFTs) comprising a multi-million-dollar market, there is seemingly no limit to their potential – the summer 2022 slump notwithstanding. Though some NFTs sell for millions of dollars and make their creators rich overnight, most NFTs sell for much more modest prices. Bloomberg estimates the average NFT can be had for just under $2,000. While NFTs don’t necessarily offer a “get rich quick” scheme anymore, they can provide significant revenues for brand owners, artists, and minters. Companies can use NFTs to promote their products, events, or brands. NFTs no longer are the exclusive domain of digital art collectors and video gamers; they have since branched out into other collectible spaces, notably for entertainment, music, and esports. This rapid expansion has created growing pains for some participants. As G2 Esports recently discovered, forging partnerships with the wrong collaborators or if they fail to ddress each party’s rights and responsibilities, problems are bound to arise.
When Deals Go Sideways: G2 Esports v. Bondly
In March 2022, G2 Esports filed a lawsuit against Bondly in Los Angeles Superior Court claiming intellectual property rights violations and seeking damages. G2 alleges that Bondly breached its contract to develop and promote a series of NFTs based on G2 Esports’ intellectual property relating to the company and esports teams it sponsors.
The plaintiff is a European e-sports entertainment company that brings together industry-leading brands and players to compete in League of Legends, Valorant, Counter-Strike: Global Offensive, Hearthstone, Rocket League, Rainbow Six Siege, and iRacing esports leagues. The defendant, Bondly (since rebranded as Forj), is a blockchain technology company that creates NFTs based on music, entertainment, gaming, and collectibles and administers a suite of products and services that support the blockchain ecosystem.
In the lawsuit, G2 asserts that Bondly misled the company leadership about its NFT-creating abilities and missed key deadlines for deliverables and payments. The parties entered into an exclusive two-year contract in June 2021 under which Bondly agreed to develop NFTs for G2 Esports and to function as its agent and promoter. In exchange, Bondly would pay G2 a series of fees for its intellectual property rights, which it planned to recoup through sales of the NFTs.
The agreement granted Bondly access to G2 Esport’s intellectual property, including images, video, and audio files. Shortly after G2 sent the first rights-fee invoice to Bondly, it says it discovered that Bondly would not be able to deliver the NFTs as promised. The parties could not agree on who was responsible for certain deliverables and tasks as outlined in the contract. Bondly later attempted to end the contract, citing G2’s unwillingness to compromise. Claiming breach of contract because of the non-payment and non-delivery of the NFTs, G2 filed suit seeking $5.25 million – two years’ worth of $2 million in annual rights fees and the agreed-upon advance guarantee of $1.25 million. The case highlights potential problems surrounding NFT partnerships when licensing, distribution, and other rights and responsibilities are not clearly delineated in the contract.
Web 3.0 partnerships
The G2 Esports/Bondly case highlights the key considerations in Web 3.0 world partnerships. Web 3.0 would not be possible without collaboration between diverse players bringing complementary skills and resources to the ecosystem. Any partnership agreement to create NFTs will clearly need to spell out rights, responsibilities, and any other pertinent factors in order to make these partnerships run smoothly. When entering a contract for an NFT, it is recommended to cover several considerations:
- Intellectual property rights – NFTs should be considered intellectual property, subject to copyright protection and design patent rights. NFT creators often stipulate in their sales contract that they retain the copyright to their underlying assets. Copyrights on NFTs exist as soon as they are created, and copyright ownership does not necessarily transfer when the NFT is sold.
- Trademark extension – Brand owners should extend their trademark rights to cover additional uses, including technologies and media not yet in existence. These provisions will reserve owners’ rights to exploit NFT and other digital uses of their products’ images. Several well-known brands, including Nike and Hermes have learned this lesson the hard way and were forced to assert their brand autonomy in court.
- Royalty rates – Because copyrights attach to NFTs, creators can specify royalty payments in the smart contracts governing their use. For each sale, the creator can receive a portion of that sale going forward. NFT owners will receive their share of the sale price.
- Licenses – NFT purchasers should engage an attorney experienced in licensing, IP, and digital technology to review licenses that call for the reproduction of copyrighted content. Most NFT licenses only grant the buyer limited capacity to use, copy, and display the NFT. They usually cannot commercialize the NFT by creating derivative content or using the NFT to market a product or company. If that is the intent, buyers should negotiate those rights and be prepared to pay extra for the privilege. These expanded rights are becoming more common with the success enjoyed by Bored Ape Yacht Club and Cryptokitties.
- Design patents – Brand owners should become conversant with how current and future design patents can protect their interests against counterfeits or infringement, so they will know how to protect their assets, enforce their rights, and recover damages. While NFTs cannot be duplicated due to their unique “fingerprint” on the blockchain that verifies their authenticity, they can be replicated.
- Securities designation – The Securities and Exchange Commission does not currently consider NFTs securities, but there is a growing movement within regulatory communities to revisit this policy. Owners should be aware if the SEC decides an NFT is marketed based on potential profits accruing to buyers based on the efforts of others they could satisfy the “Howey test” and be categorized as investment contracts. Additionally, the fractionalization of NFTs has raised eyebrows and could lead them to be regarded as unregistered securities and regulated and taxed accordingly.
- Private personal data – Several high-profile breaches have brought data security into the public eye, and governments in the US, Europe, and Asia have taken steps to mandate higher-level These laws could potentially cover NFTs. Any NFT agreement should include a personal private data policy to ensure that no NFT contains sensitive data or, if it does, how its security will be maintained.
The legal rules and regulations surrounding NFTs and the blockchain are still evolving, so partnerships in Web 3.0 will have to adapt as the law eventually catches up to the new technology. To avoid litigation, any NFT agreement should consider the rights of each party in the partnership, who’s in charge of marketing, which platform to sell the NFTs, and the blockchain to use as well as intellectual property and passive income streams. Companies that want to avoid poor collaboration choices as befell G2 Esports should understand the potential pitfalls and plan accordingly. A consultation with an attorney specializing in the blockchain/NFT space and well-versed in contract law could prove valuable.
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