The mania over people paying to own one-of-a kind, cartoonish characters or short video clips stored in non-fungible tokens, or NFTs, is over — but the legal questions around ownership is heating up.

The NFT market peaked in early 2022 at $17 billion in trading sales volume, but by September, sales volume for the industry reportedly sunk to less than half a billion.

Accelerating, however, are legal battles over who can claim ownership of these digital works of art or prove theft of intellectual property.

Computer- and human-created NFTs are not fully protected under trademark laws today, yet people are making copies and selling them to the highest bidder.

In February, a federal jury in New York decided a digital artist infringed on luxury brand Hermès' trademark with his creation of NFTs resembling the popular Birkin bag.

To Twin Cities intellectual property and trademark attorney Joey Balthazor, the lawsuit by luxury brand Hermès — which resulted in the artist having to pay the French company $133,000 in damages — is a landmark verdict.

It's the first case that's truly challenged trademark or intellectual property law for NFTs and crypto properties, Balthazor said.

The market for digital goods, created to resemble real-world brands that people buy for their online gaming profiles, is a booming business. But most brand owners have yet to fully gain control of it.

The Hermès settlement, though, is a warning to NFT creators. It also gives Balthazor and other Twin Cities attorneys that specialize in patent, IP, trademark and copyright an example of how to proceed and assist clients caught in the murky intersection of law and NFTs.

What's legal, what's not

NFT sellers are simply sharing a piece of data at a price. Knowing when copyright infringement has taken place, and how to avoid it, has been difficult.

"And the court system doesn't know how to deal with a piece of data on the blockchain, or how to trace its intellectual property," said Daniel Tysver, a Minneapolis trademark and IP attorney.

Blockchain is the cryptic ledger of transaction technology in which crypto data, like NFTs, and other tokens are kept.

For NFT creators, knowing what they can register for trademark or patent protection is not clear-cut, either. That's a significant piece of the NFT-law equation, considering the U.S. Patent and Trademark Office has received more than 10,000 trademark applications for NFT-related goods and services over the last few years, said Kathi Vidal, undersecretary of commerce for intellectual property and director of the U.S. Patent and Trademark Office, during a recent online panel.

"And we expect that number to grow," she said.

The U.S. Patent and Trademark Office and U.S. Copyright Office are working on a study with input from industry experts to determine how the nation should proceed with NFT laws. The study, a response to a request from the U.S. Senate subcommittee on intellectual property, will help officials determine what policies are to be supported, and what position the U.S. takes on the matter, Vidal said.

Right now, an NFT is similar to a certificate of authenticity, and does not necessarily have any value or status as a good, unless the nature of the token being authenticated is specified, like downloadable images of action figures or sneakers. Blockchain is not considered a good or a trade of registerable service, either, though it can be a feature of the good, or a means to performing an activity, said Rebecca Eisinger, attorney for the U.S. Office of Trademark Quality Review and Training, and Mary Munson-Ott, attorney for the trademark classification policy and practice unit, in a recent webinar.

Also, cryptocurrency is a method of payment, and not considered a good or service, they said.

Expertise in high demand

To obtain an official identification for an NFT, filing for a trademark requires precise wording about what's being authenticated, Eisinger and Munson-Ott said.

Assistance in filing those trademark applications is where local attorneys see business growth.

At Tysver's firm, Forsgren Fisher McCalmont DeMarea and Tysver, about 10% of queries were for blockchain-related IP and patents in 2020. In the last six months of 2022, 60% of calls were for blockchain-related queries.

In 2021, Peder Jacobson, patent attorney at Christensen, Fonder and Dardi and Herbert, also received many queries about blockchain-related patents. Patent and trademark prosecutors help clients draft applications, submitting on their behalf and responding to application rejections from the federal office.

"There's a lot of capital [in this space], because everyone's got their own tokens and the tokens are worth a lot more, so they have a lot more money to invest in legal services, which are generally not fun things to throw money at," Jacobson said. "That's when we saw the height of demand for legal services in terms of my practice, which is patenting."

At the height of crypto between late 2020 and 2021, Seungwon Chung, who with Balthazor works at Taft Stettinius & Hollister, experienced an increase in clients wanting to properly register digital currency for tax purposes and in divorce settlements.

Blockchain patents, however, could slip into low importance moving forward, Jacobson said. In this fast-growing industry, creators want something that would block competition from having an advantage.

"We've got like 20,000 cryptocurrencies in existence," he said. "You'd have to invent something that's going to force all of those cryptos to interface with your patent."

Though the value of NFTs has waned, the popular digital data asset is still a major source of work for firms, local attorneys said.

"Copyright licensing has limits," Tysver said. "If you don't have the full understanding of it, it can lead to court."