Non-Fungible Tokens, or NFTs, are all the rage in the technology community, especially at the intersection of entertainment and sports.
We wanted to learn more about this important topic, so we sought out Doneld Shelkey, a partner in the Technology Practice at Morgan Lewis, for his insight into the growth of this field over the past year.
Shelkey represents clients in global outsourcing, commercial contracts, and licensing matters, is well versed in copyright and trademark law issues as well as some of the other legal issues that are surrounding the rise of NFTs in the sports industry. What follows is his insightful interview.
Question: How did you get involved in NFTs?
Answer: Morgan Lewis has a robust technology transfer practice that lent itself easily to the issues involved with NFT related transactions. One of the first mainstream uses of NFTs was in the sports memorabilia and the collectible arena. Once businesses and investors saw the money that consumers were willing to pay for NFTs, it didn’t take long for us to start receiving calls.
More substantively, we have been seeing NFT transactions that are all over the map. Commercially popular applications, like the sports collectibles example, were some of the most straight forward and have issues that are typical in other media contexts, such as rights clearance, IP related issue and rights of privacy and publicity. But we have also seen more business-to-business NFT questions relating to smart contract licensing and development and handling regulatory issues associated with SAFTS and other SEC issues.
Q: Why are they a good fit for the sports industry?
A: At its core, an NFT solves what is called the “double spend” problem with digital assets. Prior to NFTs, if you wanted to sell digital sports collectibles, you either had to create a proprietary ecosystem that maintained the “authenticity” of a digital object (and had popular support of the ecosystem to make them valuable). With NFTs, you simply can secure the rights to create a digital collectible and produce one using an already existing third-party infrastructure that can maintain the authenticity of the item. Essentially, the technology ensures you are buying authentic goods…which is extremely valuable for collectors of all types, including sports memorabilia collectors.
Q: What are some of the latest trends you are seeing as far as their use in the sports industry?
A: As you can tell from my previous answers, right now, the trend is all about digital collectibles, so rights clearance is all the rage. In many cases, you have to look back through previous agreements that were not drafted at all with NFTs in mind…they didn’t even exist…and try to determine where the various parties have the rights to sell or buy a particular style of NFTs. Although there has been a lot of talk about a NFT “bubble” in the sports space, my personal view is that we aren’t yet at capacity. With new technologies coming around the “metaverse,” improvements to 3D printing, and other technologies that, though are unrelated, will almost certainly serve to stabilize the value and potentially increase the demand for collectible NFTs. Said differently, having a collectible NFT video of a sport event playing in your “metaverse house” will be thing in the near future (as odd as that may sound to some purists).
Q: Why should organizations, teams, athletes and others need lawyers to facilitate their creation or use of NFTs?
A: While access to NFT technology is relatively trivial given the various third-party services providers out there now, the ability to effectively and legally source and sell content is a complicated matter. Turning something into a NFT and commercializing it is not an intuitive process from a legal perspective. For example, content used to create NFTs are often covered by copyrights or are subject to agreements that, as mentioned above, were most likely drafted prior to the NFT age, so having your lawyer review your plan and ensure you have the various permissions you need to make your NFT drop is a good idea. Otherwise, you could end up paying your profits out to various right’s holders rather than your pocket.
Additionally, not all NFT service providers are the same. So, reviewing (and creating) the terms and conditions surrounding the NFTs and related services are imperative. Are you granting commercial rights to the NFTs? Are they allowed to publicly display the NFT? At its core, the NFT world is a licensing world, so having a licensing attorney review the agreements moving around rights is a really good idea.