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1. © Sheppard Mullin Richter & Hampton LLP 2021
Blockchain Games and NFTs -
Keeping it Legal
James Gatto
Blockchain Team Leader
Games Team Leader
Sheppard Mullin
linkedin.com/in/jamesgatto
Jgatto@sheppardmullin.com

2. Background
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Blockchain & Fintech Team Leader
Games Team Leader
Open Source Team leader
• 35 years of experience focused on all aspects of intellectual property, open source,
internet and technology law especially ones driven by new business models and/or
disruptive technology – Started working in blockchain 2012
• Heavy focus on interactive entertainment (games, AR, VR, fantasy sports, esports)
blockchain, blockchain games, cryptocurrency/NFTs, metaverses, digital art and
online gambling
• Advises clients on NFT licensing and regulatory issues, IP strategies, game
development and publishing agreements, licensing and technology transaction
agreements, regulatory issues (securities, gambling, AML); and technology litigation
James Gatto
J.D., Georgetown University
Law Center, 1988
B.E., Electrical Engineering
(Physics minor), Manhattan
College, 1984
Former U.S. Patent Examiner
bio
Recent Honors
Cryptocurrency, Blockchain and Fintech Trailblazer, The National Law Journal
Go-To Thought Leadership Award for Blockchain Technology Law, National Law Review
Top Rated Lawyer, Martindale-Hubbell AV Preeminent®
Best Lawyers (2021) Patent Law
Super Lawyers

3. NFTs are Booming!
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4. Why Legal Issues Matter with NFTs
License Uncertainty
 Crypto Punks License uncertainty dilemma
IP Ownership
 Miramax sued Quentin Tarantino over Pulp Fiction NFTs
 Roc-A-Fella sued Damon Dash to stop NFT sale relating to Jay-Z’s debut
album, Reasonable Doubt - Roc-A-Fella says Dash has 1/3 stake in the
company, but it owns the album
Trademark Suits
 Nike Sued StockX for selling Vault NFTs (proof of ownership) of limited-
edition Nikes that include an image of the sneaker in question
 Hermès sues creator of NFT collection resembling Birkin bags- right to
make and sell art that depicts the bags?
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5. Why Legal Issues Matter with NFTs
Copyright
 NFT site HitPiece accused of selling NFTs of songs by musicians like Britney
Spears and Taylor Swift without permission
 TamarindArt sued for the right to make an NFT of a 60-foot-long mural it
purchased from the artist in 2002 for $400K - artist’s estate alleges NFTs would
be copyright infringement
Scams
 Over 80 percent of NFTs minted for free on OpenSea are fake, plagiarized, or
spam. Many NFT Discord channels are flooded with criminals using NFTs to
scam individuals.
Name and Likeness
 Lil Yachty sued NFT Opulous for utilizing his name and likeness to make an NFT
without his consent
 ItsBlockchain – NFT package of 46 infosec pioneers shut down – “We were not
aware of the likeness laws in NFTs as the market is not regulated”
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6. Why Legal Issues Matter with NFTs
Title Slander, Deceptive and Unlawful Trade Practices, and
Commercial Disparagement. Artist Kevin McCoy and Sotheby’s sued
over the 2014 artwork Quantum, first-ever NFT minted in May 2014;
sold for $1.47 million during Sotheby’s ‘Natively Digital’ auction; Free
Holdings, sued alleging that the plaintiff Quantum’s rightful owner.
Unjust Enrichment - Kim Kardashian and Floyd Mayweather, among
others, were sued for allegedly promoting a Crypto “scam”
Securities - Dapper Labs, Inc. and its CEO were sued alleging
violation of securities laws based on NBA Top Shot sale of NFTs
promoting profits
Insider trading - Open Sea exec resigned for trading NFTs on non-
public information
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7. Why Legal Issues Matter with NFTs
Money Laundering - treasury department report warns that NFTs are
being used to conduct “self-laundering”, where criminals purchase an
NFT with illicit funds, transact with themselves to create records of
sales on the blockchain, then sell to another party using clean funds.
OFAC - Sanctioned a Latvia-based exchange, Chatex, for facilitating
financial transactions for ransomware actors; designated Chatex and
57 cryptocurrency addresses (associated with digital wallets) as
Specially Designated Nationals (SDNs); first time NFTs have been
publicly impacted as “blocked property” as one of the designated
cryptocurrency addresses owns non-fungible tokens (NFTs); U.S.
persons prohibited transacting with the individuals and entities
associated with the designated cryptocurrency addresses or dealing in
those NFTs
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8. What are NFTs?
Non-fungible Tokens = evidence of ownership or other
rights in an asset (physical or digital) or entitlement
Asset Evidence of Ownership
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9. NFTs – IP ISSUES
NFT = TOKEN + ASSET
 Typically own the token, but only have a license to the single
instance of the digital asset referenced in the token metadata
 Copyright owner typically retains rights in the underlying work
 If selling NFTs, need to conduct rights clearance for the digital media
file (as with licensing of other digital media) to ensure you own what
you are licensing
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10. The A, B, C’s of IP and NFTs
A. Develop and implement a comprehensive IP protection
strategy
B. Ensure you have a well thought license strategy and ensure
your have a legally binding license
C. Monitor and enforcement against infringements
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11. A. IP Protection Issues
 Utility Patents
 Design Patents
 TM/trade dress
 Copyright
 Right of Publicity
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Take a fresh look at comprehensive IP protection strategy including all forms of IP

12. Trademark Protection For NFTs
Types
 Word Marks
 Logos, Design Marks / Trade Dress
 Slogans
 Motion Marks
Classes
 9: Downloadable Software
 42: Non-downloadable Software
 28: Digital collectibles and games
 41: Entertainment Services
Intent to Use
 Constructive Priority Date
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13. Design Patent and Copyright Protection
Design Patents
Violation of a design patent permits recovery of all of the infringers’
profits (not just those attributable to the use of the design/trade dress)
 35 U.S. Code § 289 allows patent owner to pursue "total profits“ instead of
reasonable royalty = Total sales less certain costs and expenses.
Copyright Protection
 Many of the traditional principles apply to the digital asset
 Consider copyright filings for key assets
 Can get attorney fees
 Statutory damages
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14. B. Ensure Valid License
 Must form valid contract – typically need affirmative
acceptance from user at POS
 Some platform TOS do not include a license – if they do often
cannot be customized
 Consider your business model and legal risks – prepare
custom license
 Do not treat as boilerplate/copy from others
 Ensure description of NFT on marketplace is consistent
with license –
- Don’t say “Total ownership of digital assets” if user only gets a
license
 After initial sale, how do you ensure subsequent
purchaser is bound by license?
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15. Brand Licensing IP for NFTs
Brands/IP Owners should consider nuances of NFTs when licensing:
 Limit scope of license to specifically agreed upon authorized uses
 Limit # of instances to maintain scarcity
 Specify license fee based on sale and resale
 Limit modifications/combinations – approve NFT and prohibit
subsequent modifications or combinations w/o approval
 Limit where distributed – specify agreed upon distribution channels
 Limit how distributed – e.g., prevent unauthorized pooling or
fractionalization
NFTs and Intellectual Property: What IP Owners and NFT Creators Need to Know
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16. C. Detecting and Enforcing Infringement
 Many of the traditional principles apply to the digital asset
 Monitor and act early
 If NFT infringes copyright – DMCA take down notice to the platform
 Domain name Ripoffs - UDRP
 Once sold, NFT is associated with a user wallet, but identity may be
hard to ascertain

17. Terms of Service
Marketplace and Platform Operators
Powerful tool to legally protect you…if done right
 Must form valid contract - sign on property doesn’t bind a passerby
 Modifications must be agreed to - once we have an agreement you need
to agree to change the deal
 Must be customized to your business model and legal risks - Do not treat
as boilerplate/copy from others
 You must act consistent with what’s in the TOS to get the benefit
 Courts will enforce TOS if properly formed - it has saved most game
companies from gambling suits - prohibit secondary markets (this specific
point may not be relevant to NFTs but is example)
 Leverage requirement for arbitration and avoid class action
 Ensure AML and Sanctions Compliance

18. Terms of Service
Users of Marketplaces
 Review TOS for platform through which you sell
- Ensure you can apply the license you want to apply with original sale
- Ensure platform does not overstate what user “owns” or is “buying” – typically
user owns token but gets license to digital asset

19. 4 Big Regulatory Issues
Securities AML/Sanctions Tax Gambling
• SEC enforcement and
guidance - has found
most crypto
currencies/tokens to be
securities
• Hasn’t squarely
addressed NFTs
• Fractionization/Pooling
• Presales
• Royalty bearing NFTs
• FinCEN - first agency to
issue guidance on CVC
(2013); more strictly
enforcing AML rules;
•Marketplaces need to
comply
•OFAC – sanctions
compliance – need to
blacklist blocked property
and wallets
•Greater scrutiny on digital
art
• IRS – issued guidance
on taxation of CVC
• Treats and taxes crypto
currency as property
• Operation Hidden
Treasure
• Growing scrutiny of
chance-based
mechanics
• More gambling-related
lawsuits against
games/apps
• Many game companies
relied on no “thing of
value” for assets used
only in game
• Where NFTs can be sold
that argument may not
work

20. Unikrn Esports Token
Unikrn runs online “esports” entertainment and gambling platform had
gambling license from Isle of Man for spectators to bet on esports
using crypto
Securities
 lawsuit against Unikrn alleged that they violated U.S. securities law
when selling digital tokens (UnikoinGold)
 US law applies if US residents involved
 Unikrn sought to compel arbitration, but lost (poorly drafted TOS)
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21. Developer Liability
Does DAO avoid personal liability?
 Probably not in many cases!
 smart contract developers can be
liable if what they build is
reasonably foreseeable to be illegal
 SEC enforcement against
developer who built decentralized
exchange
 Unincorporated partnership means
all may be liable
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22. US Jurisdiction
If you interact with US customers … you will be subject to US Law!
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23. Insider Trading Policies
 If NFTs are securities, insider trading likely covered under SEC rules
 Even if not, best to avoid the perception of insider dealing based on
confidential info
Recommendation
Adopt an NFT trading policy against use of material, non-public info
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24. Money Laundering
 Published a study on the
facilitation of money laundering
and the financing of terrorism
through the trade in works of
high-value art
 “The emerging digital art
market, such as the use of non-
fungible tokens (NFTs), may
present new risks, depending
on the structure and market
incentives”
Treasury Releases Study on Illicit Finance in the High-Value Art Market

25. Proposed SEC Rule
 On Jan. 26, the US SEC proposed amendments to Rule 3b-16 under
the Exchange Act that doesn’t mention digital assets or decentralized
finance but could adversely affect platforms that facilitate crypto
transactions
 The proposed amendments dramatically expand the definition of
what an exchange is while eliminating the exemption for systems that
merely bring together buyers and sellers of securities while not
providing facilities for order execution
 Could have a significant impact on DEX and DEFI
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26. Summary
 Opportunities abound for NFTs
 Lots of legal and regulatory risk and uncertainty
 NFTs legal issues very specialized
 Get advice from a lawyer that specializes in these areas
 Get advice early – not after or right before you launch
Often can make design choices to at least mitigate risk
Spend a couple of hours getting a legal assessment!
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27. Contact Information & Resources
James Gatto
Blockchain & Fintech Team Leader
Jgatto@sheppardmullin.com
Sheppard Mullin Blockchain Blog:
https://www.lawoftheledger.com/
Sheppard Mullin Art Law Blog:
https://www.artlawgallery.com/
 Legal Considerations of Esports NFTs (2021)
 Protecting IP and Limiting Liability When
Licensing IP for Digital Art and NFTs (Mar.
2021)
 NFTs and Intellectual Property: What IP
Owners and NFT Creators Need to Know
(Mar. 2021)
 Tokenized Art Legal Issues (Feb. 2021)
 Blockchain Games and Collectibles – Patents
and Other Legal Issues (Mar. 2019)
 Legal Issues With Blockchain-Based Crypto
Games and Collectibles (May 2018)​
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