Moving patent transactions into the future with nfts

From digital artwork to music and even tweets, non-fungible tokens (NFTs) are becoming increasingly prevalent for digitally establishing, provenance, ownership, and transfers of assets. While NFTs have thus far been associated primarily with digital collectables (and no shortage of shockingly large-value transactions), an emerging application for NFTs is for establishing ownership and transfer of intellectual property (IP) rights, including patent rights. But are NFTs a fad, or is it really time to retire that dusty old patent assignment document?

WHAT ARE NFTS?

Generally speaking, an NFT is a blockchain-based token that is associated with an underlying asset. A token itself is a digital object that is built on a blockchain. As their name connotes, “non-fungible” tokens cannot be exchanged like-for-like. A fungible token, like a cryptocurrency token (e.g., Bitcoin), can be exchanged like-for-like.

NFTs can be linked to various types of underlying assets in various ways, including directly by encoding the asset in digital form within the NFT, and indirectly by embedding a code within the NFT that serves as a unique identifier of the original asset, which can be subsequently used to authenticate the NFT’s association with the underlying asset.

While blockchain technologies are often considered the Wild West of digital asset systems, NFTs are typically governed by standards that define, for example, the minimum elements required for establishing and exchanging NFTs between owners. As an example, Ethereum, the first, and presently the most widely used blockchain platform for NFTs, uses the ERC- 721 standard, which essentially defines how NFTs may be established and safely transferred on the Ethereum platform.

Different blockchains may use different NFT standards as well as other supporting technologies, such as “wallets” for holding assets (like NFTs) and marketplaces for trading assets. Thus, an NFT created for the Ethereum blockchain may be stored in an Ethereum-compatible wallet, such as Trust Wallet or Coinbase Wallet, and may be traded on an Ethereum-compatible NFT marketplace, such as OpenSea or Mintable.

An interesting capability of blockchains generally, and NFTs specifically, is the ability to encode NFTs with self-executing (so-called “smart”) contracts, which may then be used to facilitate transactions, such as the transfer of NFTs, their underlying assets, or both.

REPRESENTING PATENTS WITH NFTS

While patents are not the sort of digital collectable that NFTs have come to be known for, they are nevertheless underlying assets that can be represented by an NFT.

For example, the startup IPwe has partnered with IBM to create a platform for representing IP assets (such as patents) as NFTs, i.e., for tokenizing IP assets. According to IPwe, a patent NFT is a “digital twin of a real-world asset” (e.g., a patent) that has the advantages of aggregating information about the asset in one place, verifying information associated with the asset (e.g., the current owner), and providing a history of value associated with the asset (e.g., sale and license transactions recorded on a blockchain).

Because NFTs are blockchain-based technologies, representing patents with NFTs exposes patent ownership and patent transactions to a wide, and exciting, new array of digital capabilities.

FACILITATING THE TRANSFER OF INTELLECTUAL PROPERTY RIGHTS WITH NFTS

Traditional ownership of a patent is established by means of a patent assignment document that may (and should) be recorded at the USPTO’s assignment database. While this is a perfectly functional system, it lacks the expanded capabilities of blockchain-based assets, such as NFTs.

For example, a traditional patent assignment is a “dumb” contract, whereas an NFT may leverage a “smart” contract encoded digitally within the NFT to perform automatic transfers of rights upon a change of NFT ownership. Thus, by leveraging blockchain-based technologies, NFTs create new possibilities for commercialization and monetization of patents— something that has been historically difficult with no well-established marketplace for patents. However, there are important concepts to grasp before tokenizing all of your patents.

For example, the sale of an NFT transfers ownership of that NFT, but not necessarily ownership of the underlying asset. That is, ownership of an NFT for a digital collectible (e.g., a work of art) may not confer ownership of the underlying digital collectible. Consequently, the NFT you bought from the band Kings of Leon gives you the right to personally enjoy a musical work but does not give you the right to license that musical work to a radio station or to an event for public performance of the musical work.

However, it is possible to transfer both an NFT and the underlying asset associated with the NFT when the seller has both (1) ownership and (2) possession of the underlying asset.

For example, a patent represented as an NFT may include a self-executing “smart” contract that automatically grants the buyer of the NFT all, or some subset of, the rights in the patent. Thus, as compared to a conventional patent transaction, an NFT transaction requires no lawyers, no signed documents, and no interaction with the USPTO assignment recordation system after a sale is completed. And the sale of an NFT associated with a patent is recorded for the public by design on the blockchain associated with the NFT.

NFTs can likewise be associated with individual, licensable intellectual property rights. Because intellectual property rights, like patents, trademarks, and copyrights, generally include a “bundle” of rights, NFTs can be used to create an auditable, public record of the distribution of the individual rights (within the bundle) to different parties. What’s more, NFTs can use the aforementioned smart contracts to implement automatic royalty payments upon, for example, subsequent transfers of the NFT, introducing further revenue streams for royalties of IP rights. Thus, the capabilities of blockchain-based technologies, like smart contracts, can imbue NFT-based patent transactions with many new capabilities that historically required many individual legal documents.

Naturally, this is just a very brief overview of a very new, and very different, mechanism for transacting with IP assets, such as patents. While NFTs and blockchains enable new capabilities and efficiencies, you should still consult your intellectual property attorney when making any such transaction. As the sayings go, caveat emptor and caveat venditor. Let the buyer and the seller beware!

Nick Transier is a registered patent attorney and partner in the San Diego office of Patterson + Sheridan LLP and Kaylee Hoffner is an associate in the firm’s Houston office.