Written by Nicholas Fitzpatrick (Partner at DLA Piper)

As the sports world has sought to recover from the financial consequences of COVID-19, two themes have emerged. First, the paramount need to secure sources of revenue and second, an urge to accelerate the adoption of technologies which offer new ways of engaging with fans in a way which is, at least partially, insulated from the vagaries of global pandemics. And so, news that the National Basketball Association (NBA) was a successful early adopter of Non Fungible Tokens (NFT) collectibles and is (in partnership with Dapper Labs) generating significant numbers from its early Top Shots drops, has been welcomed like the promise of ‘Manna from Heaven’ across the sports industry.

Since then, few in the sports industry have resisted the temptation of contemplating their own NFT programme, although relatively few major deals have yet been announced in the U.K. The valuations achieved by some of the technology companies leading the charge in this area find their equal only in the dot com bubble of 2000. There are still many lessons to be learned, market norms to be established, and mistakes to be made. However, there are some immediate lessons in terms of legal and commercial issues, and the purpose of this and later articles will be to convey some of those, with a focus on IPR and data.

There is nothing novel about the IPR issues associated with NFTs. However there are complexities which are pronounced in the context of major sport. Of these, perhaps most difficulties have been found in establishing the correct analysis applicable to the use of images and data of athletes/players in the context of a matrix of agreements often conceived of well before NFTs were contemplated. Under English law, an athlete/player seeking to control the use of his or her image must typically rely on breach of contract, confidence, passing off etc.

With any leap in technology lawyers always strain to analyse the imperfect language of historic agreements in the context of the new development and there is a well-established course of caselaw in the UK as to how grants might be properly construed in this context. The fact that a technology is new does not preclude a pre-existing grant of rights for encapsulating that usage, and the terms of most participation agreements tend to convey a reasonably full grant of rights (long necessary to create certainty as to the ambit of their rights when selling images of their events). Nevertheless where an NFT “drop” includes images of, say, retired players/athletes, nuanced issues will arise. In each case, careful due diligence of archives, and of the relevant contracts signed by relevant employees, is necessary.

The task will not end on launch: it may well be that the size and shape of “drops” may, at least to some degree, be dictated by the contractual restrictions agreed with players/athletes (for example, in relation to the manner in which their images may be used in conjunction with other players/athletes, IPR et cetera). The result is unlikely to be entirely comfortable for either sports bodies or their technology partners and this issue will ensure the need by both sides for careful attention in order to ensure third-party rights are adhered to. That inevitably means intrusive and involved approval rights which sit uneasily with tech companies generally.

Additional complexities are created by virtue of the fact that NFTs represent an ongoing tradable asset in perpetuity. This is a particular concern to those organising committees or federations which benefit from a grant of rights from some superior international governing body to exploit an event, since those rights will inevitably cede back at some stage - a fact inconducive to the lifespan of an NFT. It follows there may well need to be a process of collaboration between sports owners as to how the rights of particular major international events are monetised in this regard. It is also important to note that ownership of an NFT does not necessarily - indeed it probably does not - equal copyright ownership or a proprietary right over the original actual asset. The reality is that an NFT is proof of owning a unique digital version of an asset, rather than the asset itself. In the UK for example, the author is generally its first copyright owner. As such, the NFT owner does not have a right to print or make copies of the work, for example, without the copyright owner's permission. An exception to this rule would be the existence of an express term in the NFT's encoding, for transfer of copyright ownership to the NFT owner alongside a sale. None of this is likely in the context of sports-related NFTs.

NFT creators and platforms should therefore consider how to mitigate the risk they are infringing on third party rights, and how to best protect the intellectual property they create and have licensed. They should also explicitly define the rights that will be held by any NFT owner (and that these may be rightfully assigned or licensed through the second step). In the context of the EU’s data protection regime (the General Data Protection Regulations) and the UK’s implementation of such regulations (via the Data Protection Act 2018), further complications arise. Recent press reports in the UK have suggested that actions may be taken by bodies purporting to act on behalf of athletes against companies (computer game manufacturers/betting companies etc) using players’ personal data (i.e. their image/likeness, name etc) for their products, and potential claims by players that they have not (i) given consent to the use of their personal data; and (ii) received the chance to change data they feel misrepresents them; or (iii) been given the opportunity to be either reimbursed for the use of the data or have their data removed from the data set entirely. In terms of consent, for consent to be the lawful basis of processing under the GDPR and Data Protection Act 2018, players must have been given the clear opportunity to consider and give consent to the named controller’s processing. Inevitably, sports-related NFTs will use such data to some degree. As yet, we are not aware of any claims having been brought, nor even contemplated in the specific context of NFTs, but this is clearly also an issue for the industry which requires analysis given the impact on licensing mechanisms.

Financial regulation

At their core, blockchains are an information medium. The laws and regulations they implicate depend on their application. Because the NFT craze is still relatively new, many regulators, including those that have asserted jurisdiction over other blockchain-based assets, have yet to weigh-in on whether they will assert jurisdiction over activities in the NFT space. In parallel, many NFT industry participants have not engaged with these regulators or sought their approval of NFT products. It thus remains unclear how NFTs will be regulated. In the UK, two key areas - beyond the limited scope of this article - relate to anti-money laundering and the regulation of security tokens.

Consumer protection

There are no specific regimes for consumer protection in relation to NFTs and therefore legislation governing the provision of digital content will apply. Consumer protections applicable to English law fall primarily within the Consumer Rights Act 2015. In the UK, Crypto-assets are viewed as property and as a result, a consumer receives the same consumer protection rights as it would in purchasing any digital property when purchasing an NFT (but not the underlying asset). Consumers will receive protections such as the need for the NFT to be of satisfactory quality (e.g. that it sufficiently linked to the digital asset i.e. with no broken links/corruptions or removed from the host server), fit for purpose and as described. Sellers of NFTs should be particularly clear in describing what they are selling.

Gambling regulation

Some NFT providers have sought to market the product to consumers within the context of fantasy sport and other games. This has led some schemes to reach the attention of the U.K. Gambling Commission, and this demonstrates some of the additional risks attaching to the marketing of NFTs. The Gambling Commission has already noted an inherent risk for those organising fantasy leagues that their activities could constitute a "regulated activity". Press stories have confirmed that the regulator has become interested in fantasy leagues which trade NFTs. In practice, participants buy NFT collectibles and can use them in free-to-play fantasy leagues, earning prizes. So, although the game itself is free to play, users buy collectibles, which are not free. This use of NFTs elevates such games to potentially qualify as ‘betting’. Careful analysis is required.

 This article first appeared in Digital Bytes (15th of December), a weekly newsletter by Jonny Fry of Team Blockchain.