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Digital Intangibles: How NFTs Transform the World of Art and Sports Memorabilia

Posted on Modified on by Lynn Dudinsky

The utilization of blockchain within the digital art environment is a new and rapidly growing application of the technology to enable ownership and authentication of intangible works of art. Historically, physical pieces of art could be bought, sold and authenticated based on the documentation that accompanies the work (known as provenance). The authentication process relies on documents such as artist signatures, ownership records, signed certificates of authenticity, exhibition stickers and other forms that link the piece of art to the artist. While it was possible for another artist to make a replica of a particular painting and try to sell it as an original, the lack of provenance would make it apparent to a buyer that the piece of art was not an original and the price would reflect the art as being a replica. Setting aside replicas, with physical pieces of art, there is typically only one version of the original work and because it is a tangible object, the owner can physically hold the piece of art and once it has been authenticated the owner is assured of the uniqueness and value above any replica. With ownership authenticated, the piece of art may still be displayed publicly in museums and found online in various forms without devaluing the original piece of art.

For digital art, the physical component is absent and the work is typically found online and available for anyone to view and copy. While this ecosystem has extended the reach of digital artists to anyone with internet, it has also complicated the management of rights and ownership as well as the value. Since a piece of digital art can be easily copied, the perceived value has remained low. Blockchain technology has provided a solution to this problem due to the immutable nature of the data stored on a blockchain. The data stored on a blockchain has the ability to provide the provenance for digital art that has historically eluded the industry and depressed the value of original digital art. This data and the process of storing it on a blockchain to create the provenance necessary to authenticate the original piece of digital art happens through the process of tokenizing the art to make a Non-Fungible Token (“NFT”).

An NFT is unique digital object that represents the digital asset or a particular right in the underlying asset. When a particular piece of digital art is tokenized with an NFT, the data (artist information, signature, purchaser history, etc.) is stored on the blockchain. Because the blockchain is both immutable and open source, anyone can view the digital provenance of a particular NFT. While this also means that anyone can view the piece of digital art, as is the case with most high-value tangible art, true ownership of the art is stored on the blockchain which, in theory, should create a strong market for authenticated ownership that parallels that of tangible pieces of art.

Recent headlines have hinted at this theoretical market for digital art in the form of NFTs becoming a reality. Christie’s Auction House recently sold an NFT for $69,346,250. This sale represented the first major auction house to offer a purely digital work with a unique NFT as well as the first to accept payment in the form of cryptocurrency. The piece of art was created by Mike Winkelmann (also known as “Beeple”) and was a collage of digital works of art he created and posted daily for 13-and-a-half years. Other examples include Twitter co-founder Jack Dorsey selling his first tweet as an NFT for over $2.9 million. NFT marketplaces are in the process of raising significant VC funding, particularly in the area of sports.  According to the Wall Street Journal, the market for NFTs grew to at least $338 million in 2020, from around $41 million in 2018.  In March 2021, Dapper Labs Inc., maker of NBA Top Shot, has raised $305 million from investors including NBA legends and other athletes and celebrities.  NBA Top Shot is a site where basketball fans can own a digital copy of a video highlight such as a dunk or game-winning shot.

It is too early to determine if this new market for NFTs will be a short-lived bubble or if we are seeing the early stages of a growing NFT market where collectors will eventually no longer see a distinction between tangible and intangible works. One early indication that the value of owning tangible and intangible art may be converging can be seen in the story of one tech investor who was outbid for the Beeple NFT; this art collector returned to Christie’s to see if any other NFTs were available. While Christie’s had no NFTs to offer, the auction house informed him of an upcoming lot of tangible art, and he ultimately purchased a collection that included artworks by Pablo Picasso and Andy Warhol. Given the rapid rise in prices paid and media exposure of NFT, it is likely a trend that will continue. However, due to the unique nature of art and purchasers of art, the NFT market may simply result in a small number of digital artists receiving high prices for their work with others struggling to find a buyer for their work, just as we see in the world of tangible pieces of art.

Centripetal Networks v. Cisco Systems

Posted on Modified on by Lynn Dudinsky

The 22-day bench trial in the District Court for the Eastern District of Virginia concluded last week with a verdict in favor of Centripetal Networks for $1.9 billion in past damages and a running royalty of 10% for three years followed by a 5% royalty for an additional three years. The Centripetal Networks, Inc. v. Cisco Systems, Inc. case involved the assertion of five patents that deal with complex computer networking security functions. Centripetal accused various Cisco network devices of infringing the asserted patents, including Cisco’s Switches, Routers, Digital Network Architecture, Cognitive Threat Analytics as well as other products. Of the five asserted patents, the Court found that each element of the asserted claims in four valid and infringed by one or more of Cisco’s products and that Centripetal had failed to meet its burden of proof on infringement of the asserted claims of the fifth patent.

An interesting aspect of this case was the use of a live video platform used by both parties to present their evidence and the selection, over objections by Cisco, of a platform other than Cisco’s. The reason for the need of a video platform was based on the technologies involved being “at the forefront in protecting intellectual property and confidential personal information” as well as their use in the national defense context. The court believe that it was in the public interest to move forward with the trial rather than waiting until an unknown time when courtrooms would be open for traditional civil trials. The use of this platform ended up being a success and at the end of the last day of trial, both parties “joined in congratulating the Court’s staff for their handling of the trial evidence by means of the video platform.”

Following the Court’s determination on validity and infringement, the issue of damages was discussed. As it related to past damages, Centripetal declined to present evidence of a causal relationship between suspected lost profits and Cisco’s sales of infringing technology and therefore the lost profit method of calculating past damages was not at issue in this case. Rather, the Court adopted the approach based on the reasonable royalty Centripetal would have received through arms-length bargaining. The determination of reasonable royalties can be based on the following methods: (1) the analytical method which focuses on the infringer’s projections of profit for the infringing product and (2) the hypothetical negotiation or the willing licensor-willing licensee approach. The Court stated that insufficient evidence was submitted for the first approach therefore the willing licensor-willing licensee approach as selected.

In accordance with the selected approach, the Court based its economic analysis on the factors laid out in Georgia-Pacific Corp. v. U.S. Plywood Corp. Factors one and two of Georgia-Pacific focus on the presence of existing license agreements for the patents-in-suit and the rates paid by licensees to license other patents comparable to the infringed patents. In this case, the Court had recently heard a case involving Centripetal and Keysight Technologies where an agreement was made related to a Confidential Binding Term Sheet. In this agreement, Centripetal licensed patents that the Court determined to be comparable for a $25 million upfront payment in addition to a 10% royalty on directly competing products and a 5% royalty on non-competing products. The Court determined that the 10% royalty on directly competing products provided “a comparable baseline license from which the Court can determine a reasonable royalty in this case.” Due to the fact that this agreement was the only comparable agreement, the Court was able to overcome the preference to exclude agreements that were obtained in the coercive environment of litigation as opposed to being the result of open negotiation.

The Court discussed the various other Georgia-Pacific factors and, while we will not elaborate on the specific discussion of each factor in this blog, it is important to note that the Court determined that the “weight of the factors as a whole strongly favors Centripetal.” This determination allows the Court to find that the Keysight royalty rate of 10% is a reasonable royalty rate to compensate Centripetal for Cisco’s past infringement. Another discussion (reserved for another blog) relates to the apportionment argument presented by both parties that led to the determination that the apportioned royalty base was $7,558,085,447.

Following the determination of the reasonable royalty rate and the apportioned royalty base, the Court was able to calculate the total past damages award of $755,808,545, before adjusting for enhanced damages. On the topic of enhanced damages, the Court noted that Centripetal and Cisco signed an NDA in 2016 as a result of meetings where Centripetal’s product offerings and the effectiveness of their solutions were demonstrated to Cisco. After additional meetings and further disclosures, Cisco released its “network of the future” products in June 2017, which incorporated Centripetal’s patented technology. The Court outlined enough evidence to support its belief that “this is an egregious case of willful misconduct beyond typical infringement” and determined that enhancing the damages by a factor or 2.5 was appropriate. Applying this factor increased the damages to $1,889,521,362. One of the reasons stated by the Court to use a factor of 2.5 instead of 3 was because Cisco prevailed as to one of the asserted patents, potentially saving the company over $375 million in additional damages.

The Court then turned its attention to future damages where it denied Centripetal’s request for injunctive relief and instead imposed an ongoing royalty obligation. Again, the Court used Georgia-Pacific to find that the Keysight license as a comparable license and selected a 10% royalty for the first three years and extended the three year term of Keysight to 6 years for Cisco with a 5% royalty set for the final three years. The Court also set minimum and maximum annual royalties of $167 million and $300 million, respectively, for the first three years and $83 million and $150 million for the final three years.

The final tally of damages related to this case resulted in Actual Damages of $755 million enhanced to $1.9 billion and Pre-judgement Interest of $13.7 million for a lump-sum award of $1,903239,287 “due on the judgment date.” Additionally, the future damages based on royalties over the next six years will range from $754 million to $1.3 billion. These combined damages awards rank among some of the highest patent damages awarded to date.  Cisco has already announced its plan to appeal this decision to the U.S. Federal Circuit Court of Appeals, and we will update this blog as new information emerges.

USPTO v. Booking.com: Acquired Distinctiveness of a Generic Domain

Posted on Modified on by Lynn Dudinsky

The Supreme Court (“Court”) in USPTO v. Booking.com resolved a dispute about whether a generic name can become eligible for federal trademark registration though the addition of an internet-domain-name suffix such as “.com.” The USPTO rejected applications by travel-reservation website Booking.com seeking federal registration of marks including the term “Booking.com.” The USPTO concluded that “Booking.com” is a generic name for online hotel-reservation services and as a generic name, the USPTO was forced to reject the applications. Booking.com took their argument to the District Court seeking judicial review and the District Court held that “Booking.com” – as opposed to the term booking standing alone – is not generic. The Court of Appeals agreed with the District Court and rejected the USPTO’s position that combining a generic term with “.com” results in a generic composite.

In order to understand this case, it is important to understand the meaning of generic in the field of federal trademark registration. A generic name is the name of a class of products or services and is therefore ineligible for trademark registration. As it relates to this case, all parties agreed that the word “booking” is a generic word for the class of hotel-reservation products or services. Moreover, the word “.com” is a generic internet-domain-name suffix. The USPTO argued for the adoption by the Court of a rule that the combination of a generic word (i.e., “booking”) with “.com” maintains the generic nature of this combination.

Another important idea to understand when reviewing this case is the purpose of trademarks and how this impacts the decision of the Court. The purpose of trademarks is to distinguish one producer’s goods or services from another’s. Distinctiveness is defined as the quality of being distinguishable and the USPTO recognizes and expresses distinctiveness on an increasing scale: generic, descriptive, suggestive, arbitrary and fanciful. The higher on this distinctiveness scale, the more readily it qualifies for trademark registration. The Court noted that generic terms, such as booking, are ordinarily ineligible for trademark protection. Moving up the distinctiveness scale, the USPTO argued that even if “Booking.com” was considered descriptive, it could not be registered because it lacked secondary meaning. Secondary meaning, also known as acquired distinctiveness, refers to the concept of a descriptive term achieving significance in the minds of the public as identifying the applicant’s goods or services.

In the lower courts, Booking.com leveraged the concept of acquired distinctiveness by providing evidence that the consuming public understood Booking.com to refer to the specific product or services offered by Booking.com at that domain name. This evidence allowed the District Court to hold that “Booking.com” was descriptive and had acquired secondary meaning and thus met the requirement for trademark registration. The Court of Appeals affirmed the holding of the District Court.

The Supreme Court granted certiorari and, in its opinion, delivered by Justice Ginsburg, the Court highlighted the importance of a mark’s capacity to distinguish goods in commerce as the underlying principle of trademark registration. The Court agreed with the Court of Appeals and discussed the USPTO’s failed logic behind its argument that “Booking.com” signifies to consumers the class of online hotel-reservation services. Under the USPTO’s approach, this would mean that consumers would understand Travelocity or Expedia to be a “Booking.com” or that when a consumer is looking for a trusted source of online hotel-reservation services they might ask a frequent traveler to refer them to their favorite “Booking.com” provider. The evidence provided by Booking.com in the lower courts provided enough support to demonstrate that this is not the perception of the word “booking.com” and that consumers understood “booking.com” to refer to the services provided by Booking.com. Based on this analysis the Court affirmed the decision by the lower courts reflecting the eligibility for “booking.com” to receive trademark registration.

Romag v. Fossil: Resolving a Circuit Split on Willfulness and Profit Awards for Trademark Infringement

Posted on Modified on by Lynn Dudinsky

In the midst of the COVID pandemic, the Supreme Court resolved an issue that was split evenly between the circuit courts. The issue before the Court was whether the Lanham Act, which is the federal statute governing trademarks, required a plaintiff to prove that the defendant had willfully infringed their trademark before the plaintiff could recover the infringer’s profits. In a surprisingly unanimous decision, the Supreme Court in Romag v. Fossil held that a plaintiff in a trademark infringement suit is not required to show that a defendant willfully infringed the plaintiff’s trademark as a precondition to a profits award.

This dispute began when Fossil signed an agreement with Romag that allowed Fossil to use Romag’s magnetic snap fasteners in Fossil’s handbags and other products. During the initial years of the relationship, both parties were content with the arrangement but after some time, Romag discovered that the factories Fossil hired in China to make its products were using counterfeit Romag fasteners. Romag alleged that Fossil did little to prevent the factories from continuing this practice and when both parties were not able to resolve the issue internally, Romag initiated litigation. A trademark case followed with Romag accusing Fossil of infringing its trademark and falsely representing that the fasteners came from Romag. At trial, a jury agreed with Romag and found that Fossil acted in callous disregard of Romag’s rights but rejected Romag’s claim that Fossil had acted willfully and therefore denied Romag’s recovery of Fossil’s profits. This decision by the jury was based on the definition of the district court which relied upon precedent from the Second Circuit. The Second Circuit happened to be one of the six circuits that required proof of willful infringement as a precondition to a profits award. This case was then accepted by the Supreme Court to resolve the split.

The Supreme Court was careful to rely on the plain language of the Lanham Act in describing the unanimous holding. This is important because the plain language of the Lanham Act does require willfulness as a precondition to a profits award for a trademark dilution cause of action. However, Romag’s cause of action was not for dilution (conduct that lessens the association consumers have with a trademark), it was for the false and misleading use of their trademarks and the plain language of that section does not require proof of willfulness. Fossil, and half of the circuit courts, had read into this cause of action the willfulness requirement of a dilution cause of action. The Supreme Court rejected this inclusion of willfulness language where the Act had been silent, holding that courts must be more careful when reading into statutes words that are not there when Congress has included that language elsewhere in the same statutory provision. In making its decision, the Supreme Court refused to insert this language, and noted other examples within the Lanham Act where the statutes speak to mental states and how the mental state impacts the damages award (i.e., increasing damages for intentional acts and with specific knowledge, increasing the statutory cap on damages for certain willful violations and limiting the types of awards for innocent infringers). With these references in mind, the Supreme Court made it clear that, while the mental state of a trademark defendant is a “highly important consideration in determining whether an aware of profits is appropriate,” the use of willfulness as an “inflexible precondition to recovery” cannot be read into the statute as written. Based on this determination, the Supreme Court vacated the judgment of the court of appeals and remanded the case for further proceedings consistent with its opinion and left the door open for policymakers to insert this language into the Lanham Act should it determine that this requirement for willfulness would further the goals of the statute.

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