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Piers Dryden | Care needed with NFT deals to avoid IP infringements

As with any licensed digital content, NFTs are beholden to copyright and intellectual property law. Piers Dryden, head of technology at independent law firm Brabners, urges rights-holders to conduct due diligence before engaging with the sector.

With blockchain-based projects gaining traction and breadth in the market and crypto assets increasingly capturing the imagination of the wider public, it is no surprise that professional sports clubs and players are exploring how to incorporate these new technologies into their marketing and commercial portfolios.

The sporting industry is now fully embracing the technology as a way to improve the fan experience for followers of teams and competitions – just this month, Manchester United signed a £20m ($26.8m) sponsorship deal with blockchain platform Tezos, while French football club PSG recently launched its own fan cryptocurrency, indicating that what many once-labelled (and some continue to label) a ‘fad’ is here to stay.

The use of Non-Fungible Tokens (NFTs) in particular has grown in popularity amongst fans, teams and players alike. The conversation around NFTs has been difficult to ignore in recent months, as the technical attributes of this type of cryptoasset open up new possibilities to exploit intellectual property via new channels, and with unique payment and security possibilities.

However, as with any new technology, NFTs bring with them myriad and difficult-to-navigate legal requirements that can trip up fans, clubs and players alike. So, what role can NFTs play in sports – and what do operators need to be aware of?

Uses for NFTs in sports

An NFT is a digital asset for which ownership and use rights can be demonstrated by assigning the content a specific, inimitable identifier that is recorded on the blockchain. This identifier renders the NFT unique and impossible to duplicate – bringing the concept of exclusivity to digital content.

This makes them ideal for replacing physical objects, such as match tickets. Teams and leagues around the world are already experimenting with NFTs as a way to increase the value of digital tickets, with the ultimate goal of rewarding attendance while making it more difficult for touts to resell tickets at inflated prices.

Similarly, clubs are launching their own cryptocurrencies or fan tokens, through ownership of which fans are rewarded with exclusive content and a closer association with the team.

However, the majority of sports related NFT activity so far has been limited to the content marketplace. In the USA in particular, the market for sporting clip NFTs through which fans can own licensed digital media of their favourite sporting moments has taken off, while the UK is seeing a proliferation of players partnering with providers to create limited edition runs of blockchain-minted photos for their fans.

Deloitte Global predicts that NFTs for sports media will generate almost £1.5bn in transactions in 2022, while by the end of 2022, up to five million sports fans globally will have purchased or been gifted an NFT sports collectible.

These collectibles may provide a new, exciting way for teams and players to raise money while interacting with fans. However, as with any licensed digital content, NFTs are beholden to copyright and intellectual property laws, making the space a legal minefield for those looking to seize the opportunity without the correct approach.

Legal pitfalls

A high-profile and recent example of these challenges came when ex-Chelsea FC and England footballer John Terry partnered with Ape Kids Club (AKC) to create a collection of limited-edition run of NFTs, with a host of the images bearing a likeness to other current and ex-players. Terry used his Twitter account to promote the NFTs in question, which were cartoons of baby apes.

However, Terry ultimately became the subject of a copyright infringement claim due to the NFTs featuring various examples of intellectual property such as Chelsea’s kit and badge, the England kit and a number of famous trophies – including the Premier League, the Champions League, FA Cup and Europa League trophies. This invited investigation from such stakeholders as Uefa, the English Football Association, the Premier League and Chelsea FC.

In defense, NFT creators might seek to argue that such use constitutes fair use, or in relation to trademark infringement is merely decorative and does not constitute use of marks ‘in the course of trade’. That might also argue that such use does not have an impact on the functions of the trademark. However, legal precedence for copyright infringement was set in 2003, when the courts found that unofficial Panini Stickers which included club crests and badges and the Premier league emblem (without a licence) at the very least infringed copyright.

In the case of John Terry’s NFT collection, Terry and AKC were pressured to remove the alleged infringing NFTs from the marketplace.

Terry’s example is a stark reminder that creators must consider whether they have the legal right to create the NFT obtained through the correct route with permission from the appropriate IP and rights owners. With this in mind, it’s likely that we’ll soon begin to see right owners in the sporting sector (such as leagues and teams) begin to develop new policies and licensing strategies to accommodate for this new emerging revenue stream.

The importance of proper due diligence

As with any fast-growth market, the NFT space is also vulnerable to instances of fraud. OpenSea, one of the largest online NFT marketplaces, recently tweeted that around 80 percent of the NFTs minted through its free creation tool may be spam, scams, or otherwise fraudulent. Similarly, there are a high concentration of newly conceived firms in the blockchain sector that appear to engage in dubious and potentially illegal practices.

For this reason, it’s vital that clubs looking to ride the NFT wave complete the suitable due diligence first. There have already been some high-profile cryptocurrency partnerships that have fallen through or been rescinded for this reason. Manchester City, for example, had to suspend its partnership with 3Key Technologies as the club’s ‘official regional partner in decentralised finance trading analysis’ within days of the initial announcement due to serious concerns about the legitimacy of the business, arising from its inability to provide basic details including contact information or a registered office address.

As well as this, each club must also consider whether these new partnerships are in line with the values and ethos of their club, especially the values shared with the fans. Supporters’ trusts at Leeds United, West Ham, and Arsenal among other clubs have spoken out against these new arrangements.

Although the continued success of any technology cannot be guaranteed, the incredibly versatile nature of NFTs means that they will likely continue to prove popular, especially in the sporting world. For this reason, it’s imperative that operators in the sector are aware of the market landscape before doing business.

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