Brands Entering NFT Space: Mind Your P&Q’s With Your T&C’s

Nike made waves yesterday by announcing its acquisition of popular NFT brand RTFKT. This comes in the wake of RTFKT’s controversy regarding certain Terms and Conditions which seemed out of character at the time, but make total sense when put into the context of a pending major acquisition.

With major brand acquisitions and partnerships, comes major due diligence. Brands want to be assured that the businesses they are buying or partnering with aren’t about to be sued and bring bad publicity/liability into the planned joint venture. However, there is a right way to enter the space which provides the legal assurances brands need, while recognizing the Web3 nuances and addressing those nuances instead of ignoring them.

Terms and Conditions Are Necessary

Before I start, I know many in the Web3 world are going to be anti-terms and conditions at all. In the wild west of buying and selling .jpgs using magical internet money, why are these necessary? What do these do other than limit the rights of buyers and add a bunch of legal mumbojumbo which hurts buyers and helps the rich get richer?

As I explained in a prior blog, the biggest legal vulnerability facing most projects are consumer protection lawsuits. While consumer protection laws serve a valuable purpose in many cases, they are also often used by Plaintiffs’ attorneys to litigate technical errors which are not actually harming anybody. When this happens, the company being sued will often settle to avoid the costs of trial. The Plaintiffs’ attorneys get paid first, then maybe the “victims” will get a few dollars each (if they know about the lawsuit and can claim those dollars) and the costs get passed onto future consumers. These consumers now have to pay $1.15 for a can of soup that used to cost $1.00 because some Plaintiffs’ attorneys found out the soup said “organic” but had one GMO pea in most cans.

For large businesses and brands, this is a known cost of doing business. For smaller or start-up companies, it can lead to financial ruin. Most NFT projects, even the biggest and most well known, are still small start-ups in the grand scheme of things. They will not survive a well litigated consumer protection lawsuit. When that happens, the owners of those .jpgs will be left holding only that .jpg bag (with no developers left to continue adding value) and their $3.00 settlement check.

Terms and conditions are a way to protect against these baseless lawsuits. They make sure the necessary legal details are laid out in writing, and allow the project to protect itself (and its community) from Plaintiffs’ attorneys who don’t actually care about the community and just see dollar signs. (Note, there are plenty of projects which likely should be sued for rug pulls and various other misdeeds and which Plaintiffs’ attorneys serve a valuable role in protecting consumers against; I am merely referring to the attorneys who are out to leach off the NFT community rather than protect/foster it).

T&C’s are also important in understanding exactly what you are buying. I have spent many hours working with clients who want me to write up language needed to actually enforce IP rights for projects which a developer said gave “full intellectual property rights” to buyers without the necessary specifics to, for instance, apply for a copyright in the United States. This work is time billed to buyers when the project sellers should be the one paying for those legal services which benefit the community.

Terms and conditions do not just protect the project developers, they also protect buyers and the community which largely depend on those developers to create value for the owners of their product(s).

Copy Pasta Terms And Conditions Ain’t It

This brings me to the RTFKT terms and conditions. As lawyers, a large part of our job is copy and pasting form language when applicable. There is no need to reinvent the wheel when the wheel has been litigated for 100+ years. But attorneys learn in law school and through the experience of practicing law when to use form language, and when some original thought is necessary.

The RTFKT terms and conditions are an example of an attorney who understands IP/consumer protection law but does not understand NFT marketplace. These terms included a provision that said:

As a lawyer, I totally understand the reason for this provision, and it actually is helpful for future buyers. This is standard language to ensure sellers pass on all rights to buyers and do not sell some lesser version of the product while retaining the valuable parts for themselves.

As somebody who buys and sells NFTs, I know this provision is literally impossible. On the existing major marketplaces (rarable, opensea, etc.) there is no place for a seller to provide context for a potential purchaser. You can set the price, and that is it.

A smart lawyer who understands NFTs would tell RTFKT to make sure a link to the terms and conditions are included in the product’s “about” section on opensea so all buyers would have access to it on the same page they buy. A lazy lawyer (or one who doesn’t understand NFTs) puts that impossible task on the seller, as is done here. It makes otherwise largely valid and necessary terms and conditions appear both out of touch and actively harmful for sellers.

While this may seem like FUD against RTFKT or Nike in particular, I can assure you it is not intended to be. They are (in large part) first movers in the space and likely were put under time constraints due to the timing of the Nike acquisition. I assume their lawyers likely did the best that they could with the time they had. You can’t expect an M&A attorney to learn everything there is to know about NFTs in week. And there are plenty of other examples in the space of well intentioned implementation of legal formalities coming off as tone-deaf or ignorant due to attorneys trying to force square Web2 standard terms and conditions into a round Web3 hole.

The whole point of this article is to say that when major brands come into this space, they are going to be (and need to be) more mindful of legal obligations. This is a good thing! Many current developers in the space ignore these legal obligations to their own and their community’s peril. However, those brands also need to be mindful of the space they are entering and make sure their terms and conditions not only meet legal requirements, but also are tailored to the Web3 environment they are entering. It is not enough to know the law; they need to know Web3 as well.

Conclusion

Some brands entering the space will seek to force Web2 marketing and legal principles into the Web3 space and will, in turn, alienate much of the community they are seeking to ingratiate. Other brands will take the time to actually learn the Web3 space and help guide the lawless wild west of the metaverse/Web3 into the mainstream society while also respecting its core values and principles. This article is a long-winded cautionary tale. Brands who want to be successful in the space should choose the latter and not the former (and if you need help with the latter, shoot me a DM or email for my hourly rate 😉).

If you have any questions, or would like me to cover anything in particular, reach out to me on either of my twitter pages. As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.

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