Non-fungible tokens (NFTs) are unique identifiers which represent ownership of a particular item in the digital or physical world. They are typically stored on public blockchains so that anyone can view and verify the owner of an NFT. Additionally, public blockchains are not controlled by a central authority. Instead, when an NFT is transferred from one party to another, the transaction is validated by each node of the blockchain network before the transfer is appended to the blockchain. Therefore, a blockchain is not considered to require a trusted third party to verify transactions, and is immutable (tamper-proof), and secure.
Accordingly, NFTs have similar benefits, and a central authority cannot alter the ownership of an NFT. For this reason, NFTs are great as certificates of authenticity for various items where NFTs can be used to prevent counterfeiting and false ownership claims.
These items include physical assets such as real estate, vehicles, artwork, shoes, and memorabilia; digital assets such as digital art, video game assets, and virtual real estate; other virtual reality assets such as virtual vehicles; and more. Additionally, NFTs can represent ownership of intellectual property, such as patents, copyright, and trademarks.
NFTs are secured through cryptography, such that only the owner of a private cryptographic key corresponding to an NFT can transfer ownership of the NFT. This prevents others from making false ownership claims and makes it nearly impossible to steal an NFT without taking possession of the private key. NFTs can also be fractionalised, such that the owner can transfer partial ownership of an NFT. For example, an owner can sell a share of their home, vehicle, or artwork instead of having to sell it in its entirety. This allows for increased liquidity in markets with large barriers to entry like buying and selling real estate or expensive artwork.
Recently, there has been a movement to monetise patents through NFTs. IBM and IPwe partnered up to mint NFTs for patents on the HyperLedger, IBM’s blockchain. True Return Systems is also auctioning US patent number 10,025,797 as an NFT on OpenSea.
Value for money
Currently, there are several issues with patent monetisation that may be resolved, at least in part, through use of NFTs. More specifically, patents are illiquid and many licensing and settlement agreements occur behind closed doors, making it difficult to identify the terms of these agreements. Additionally, patents typically have more value as part of a large portfolio than individually, which can be very costly to build. It also makes it difficult to ascertain the value of particular patents within a portfolio when the entire portfolio is transferred in one transaction.
Moreover, the marketplace for patents is typically limited to direct competitors. Patents are unlikely to have the kinds of speculators, as in other markets, who are unrelated to the industry. Lastly, due to the cost of litigation, patents are rarely asserted. This makes it even more difficult to value patents as less than 2% of them ever enter into litigation where a monetary reward may be received.
At present, patents may be valued based on similar patents that have entered into litigation and the resulting damages awarded. Patents may also be valued based on the number of claims in a patent, the number of citations made in a patent, the number of citations the patent receives from subsequent patent applications, the size of a patent family or patent portfolio, some metrics to measure the breadth and/or novelty of a patent, the industry for the patent, and a few other characteristics. However, patent valuation experts can at best make a subjective determination using these factors and there is no guarantee that the valuation they come up with will be accurate or that the patent owner will be able to find a buyer for an amount close to the valuation.
By using NFTs to monetise patents, patent owners may sell fractional shares of a patent to multiple buyers. This can create a new form of litigation funding where financiers or speculators buy partial ownership of the patent from the patent owner, and it uses the proceeds to pay for the costs of litigation. Then the financiers or speculators who purchased fractional ownership can share in the proceeds of the litigation.
Also, selling fractional shares may create a liquid marketplace in an otherwise illiquid market. While a speculator may not be interested in purchasing an entire patent for the reasons mentioned above, they may want to purchase partial interests in several patents or patent portfolios in the hope that one is sold for a large multiple over their investment or one enters into litigation and produces large returns. Like with other cryptocurrencies or NFTs, speculators may see themselves as first movers in the patent NFT marketplace, giving them an advantage before the patent marketplace can be used to assess fair value to patent NFTs.
Finally, NFTs reduce transaction costs and simplify the transaction process for transferring patent ownership. NFTs do not require intermediaries to assist in transactions. Instead, an NFT may include smart contract functionality to automate the transaction process. For example, once ownership is transferred from one party to another, the party purchasing the NFT may assert ownership of the NFT and the underlying asset – the patent. The NFT may also include a patent assignment document that transfers ownership to the party purchasing the NFT and may be recorded in the USPTO.
Patent pitfalls
While NFTs appear to have many benefits for monetising patents, there are also some drawbacks. Most importantly, using an NFT as proof of ownership of an asset has not been tested in the courts. Theoretically, one can transfer ownership of a patent NFT to another and the party purchasing the NFT should be able to assert ownership of patent rights without having to record an assignment document at the USPTO. However, since this has not been tested, it is unclear whether courts will recognise ownership of an NFT as proof of ownership of the underlying patent. Right now, patent NFTs include built-in assignment language so that it is clear there is a transfer of not only the NFT but also the patent rights associated with the patent. However, critics may argue that if the assignment document is being produced and recorded anyway, there is no reason to change the current system where patent ownership is publicly recorded at the USPTO through assignment documents.
Furthermore, NFTs can be stored on several different blockchains, such as Ethereum, Flow, Wax, Hedera Hashgraph, and others. A patent owner can mint an NFT representing the same patent on several different blockchains and transfer the same ownership rights to several different parties unbeknown to them. Potential purchasers may need to check every blockchain to make sure they do not include additional NFTs representing the same patent.
Still further, even if patent ownership is represented by an NFT, an ownership transfer can be made ‘off-chain’, where the patent owner does not record the transfer on the blockchain. For example, the patent owner may license the patent without recording this on the blockchain. Then when a purchaser buys the patent, they may be unaware of the licensee. Until the vast majority of patent ownership is represented by NFTs, it actually may create more work for lawyers to look through assignment documents, licensing agreements, and blockchain transactions to determine the owner of a patent, licensees to the patent, and any encumbrances on the patent.
Also, some companies may not want to publicly identify patent licensees or the terms of patent licences, such as the royalty rates used in certain licences. These companies may prefer the traditional patent ownership recordation system over an NFT where patent ownership transfers are made public.
Counselling clients
Based on this new trend of using NFTs to represent ownership of assets, IP counsel should consider recommending this as a tool to clients who would like to monetise their patents. As patent NFTs are still in their infancy, IP counsel should be wary about recommending NFTs as a first option to sell or license patents. However, if a client is having trouble raising funding for litigation or selling a patent in its entirety, IP counsel may want to recommend an NFT as another alternative to raise money for litigation financing or to sell at least a portion of the patent.
Cameron Pick is a partner at Marshall, Gerstein & Borun in Chicago.
