GM (Good Morning) It’s Time to Talk NFT TM (Trademarks)

Some news has been hitting my timeline recently about Yuga Labs and their seemingly aggressive trademark related legal actions against other NFT creators. This is as good of a time as any to give some background on trademark law generally, what Yuga is doing, and what it means for the space going forward.

Just as I have been harping for a while, law is coming to the space. Creators and collectors need to have a basic understanding of the laws so they can make informed decisions on where to allocate their time and hard-earned ETH. Note: everything I say is based on general US law, and should not be taken as legal advice. This is intended to give you enough information to know what questions to ask, but I cannot answer your questions for you. Hire me (or another attorney) for that type of analysis.

Photo by Matthias Cooper on Pexels.com

Background on Trademark Law

Trademarks are a way for consumers to quickly understand the source or origin of the goods or services they are purchasing. They can be words, phrases, symbols, or a combination of the three. You know when you buy something with the Coca-Cola logo, even if it isn’t Coke Classic, that you can expect a certain level of quality. In the United States, there are two forms of trademarks: common law trademarks and registered trademarks.

Common Law Trademarks: Whether you know it or not, if you are offering goods or services for sale under a trademarkable designation (more on that later) you have very likely acquired a common law trademark over that designation if you are the first or only person currently offering those goods or services under that designation in that particular area.  So if you are selling lawn care services under the name “Happy Cuts” in central New Jersey, you may have a common law trademark which could prevent others from selling similar lawn care services named “Happy Cuts” in central New Jersey, but you wouldn’t be able to prevent a “Happy Cuts” lawn care company from operating in New Mexico, and you may not be able to prevent a “Happy Cuts” barber shop from operating in central New Jersey. This is because common law trademarks are limited in scope to the geographic region that the goods/services are being sold in, and the industry the goods/services are being offered in.

Registered Trademarks: Registered trademarks are an expansion on common law trademarks. While they are still limited by industry, they grant nationwide rights over that name for that industry and carry additional statutory protections. While you can register a trademark on an “intent to use” status (also known as a 1(b) registration), there must be a bonified intent to use supported by evidence. Generally things like registering web domains, creating a business plan, commissioning marketing materials, and other similar evidence of actual intent to use in commerce would suffice. You can’t just stake out a name with no actual intention of starting the business at the time of the 1(b) filing.

Importantly, the entire value of any given trademark is based on that word or phrase only being attributable to one entity. Starbucks prepares a fine cup of coffee, but the Starbucks value is based on people knowing what they are getting when they see that name/logo on a coffee shop or product. Unlike copyrights, trademarks lose value and protectability if they are not protected whenever that trademark is infringed or potentially infringed upon.

Trademarks have varying levels of distinctiveness, from fanciful (made up words like Google) to descriptive (Sports Authority or Microsoft where the words describe the general goods or services offered). There are also generic marks, which are words so common that they can never be an identifier of the source or origin of anything. A mark which was at one time distinct, can become generic over time. An example of this is aspirin, which was once the registered trademark of Bayer but has become generic in the United States. Understanding trademark distinctiveness is an important concept when choosing a business name.

When a trademark is registered, any prior users of that mark in commerce can continue to do so, but they are limited to the goods/services and geographic location where those goods/services were offered before the sale. For example, if somebody else registers “Happy Cuts” for lawn services nationwide from the example above, a company previously using that trade name for lawn services in central New Jersey can still do so, but they cannot expand into southern New York or start offering T-shirts for sale if the registered “Happy Cuts” is registered to both sell lawn care services and clothing. There are lots of nuances on if the senior user can prevent the junior registrant from selling in that senior user’s geographic area, but that’s the general rule.

Yuga Trademark Protection Actions

As stated above, trademark rights can be weakened if those rights are slept on. Essentially, if you allow Steve to use the trademark, not only is the trademark not a strong initiator of creator or origin anymore (because it could be from you or Steve), it also has less of your controlled goodwill (because if Steve does something wrong, people could also associate that wrongdoing with you). This means is Bob comes along later using the same mark, it is harder to make the case that Bob, but not Steve, is diluting your goodwill or brand strength.

Yuga’s trademark registrations have been widely reported, but it appears they have stepped up their enforcement actions to aggressively protect their brands (or risk losing those brands’ value). That includes a recent takedown notice sent to a fellow NFT creator using othersidenft.com for his genesis collection. Thanks to a little digging by my colleague @exlawyernft, it appears the owner of othersidenft.com was using the website for sales of his NFTs on Rarible as early as September, 2021.

I could spend a ton of time digging into the facts of this case to see when actual sales took place, how much this was marketed, when Yuga first announced the Otherside plan, the details on Yuga’s Otherside trademark registration status and basis, etc. However, now that I am back in the BigFirm life I need to spend more time on paying clients and less time on NFT legal rabbit holes. You can find the general facts of the case here.

However, here is what I think will happen. Yuga has issued the takedown notice to the othersidenft.com domain provider. The owner of the website has issued a counter notice, which prevents the provider from being required to take the website down. Now Yuga’s attorneys will contact the owner directly and likely negotiate an agreement to pay the artist to abandon the website/name, or agree to a license which allows the website to remain but protects Yuga from future claims of sleeping on their marks.

If they can’t reach an agreement, Yuga will have the weigh the pros/cons of filing a formal lawsuit with preliminary injunction to try to take the website down during the trademark litigation, or save those legal costs for more threatening incursions into their intellectual property. As the first to use in commerce (seemingly), the othersidenft.com owner has strong common law trademark claims to stand on. Additionally, the online nature of NFTs make this a good case for nationwide common law rights to continue using that mark. On the other hand, Yuga has a very sophisticated legal team and large war chest so if they do pursue legal action this othersidenft.com owner will have a long and expensive fight ahead of him.

In the end, for the sake of the othersidenft.com owner I hope they can privately reach an agreement. But as a lawyer it would certainly be interesting to see this play out in court if they don’t.

What This Means For The Space Going Forward

While I have written about some copyright enforcement actions and lawsuits, as a whole the Web3 space has been laissez faire when it comes to intellectual property rights. As I wrote in my creative commons article, there is a certain Web3 mentality that comes with removing government intervention through court proceedings and letting value stand on the strength of the original ownership and/or developers alone.

This is all well and good when we are talking about copyrights, which can be slept on for years only to be later just as enforceable whenever the owner wishes to be litigious. The same is not true for trademarks, which must be protected against dilution or be lost forever. Unlikely copyright violations, trademark violations are genies which can’t be put back in the bottle. As these major brands enter the space and as what were once start-ups like Yuga take the necessary next steps in hiring sophisticated legal teams to support their growing businesses, we are going to see far more of what we are seeing from Yuga now.

Intellectual property is still property. Some people are OK with strangers using their backyard as a campsite. Some people are not. But when it is not just your property, as in the case with Yuga who have investors they have a fiduciary duty to protect, things get sticky. There is nothing inherently bad or anti-Web3 about protecting the rights of creators, but it does require government intervention, so it is certainly one of those areas where code-is-law alone isn’t sufficient to protect.

While this specific example with Yuga may seem like the big guy picking on the little guy, it is important to note that these intellectual property protections were put into law as much to protect the little guy from having their work stolen from bigger competitors as vice-versa. Every company, big and small, should at least have a plan in place for managing their intellectual property in the same way they manage every other aspect of the business. Otherwise, you risk having your hard work go to waste right when you are looking to profit off that work.

Conclusion

Nobody likes dealing with attorneys. We have the stigma of telling people what they can’t do more than what they can do, and that’s frustrating to most. But the earlier you hire an attorney to assist you through issues from contracts to intellectual property, the less headaches you will have later if/when your project actually blows up. An ounce of prevention is worth a pound of cure. If this artist had filed for a trademark when his project was first started, he may have saved himself a lot of the intellectual property headaches he is dealing with now.

If you have any questions or would like me to write about anything else, let me know 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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