SMART CONTRACTS AND THE INTELLECTUAL PROPERTY

Introduction

Unlike traditional property, Intellectual Property (IP) is mostly non-corporeal in nature. IP is the creation of the mind and manifests in the form of literary or artistic work[1]. A musical composition, painting, drama, logo, packaging, creative camera shot, etc, are a few examples that may receive protection for being an IP.

Just like traditional property, however, IP can be a source of monetary benefits. The owner of the IP has the right to commercially exploit the IP, which enables them to earn through royalties, licensing or assignment.

The Indian IP laws facilitate such commercial use. For instance, a copyright holder of a music piece can grant a license to another party under section (u/s) 30 of the act[2] to play, perform or distribute the music. Similarly, a trademark owner, u/s 48, can permit a third party to use the name, logo, branding in the course of trade[3]. Such transactions are typically executed through a written contract.

This article aims to explain what a smart contract is and how it differs from a traditional contract. Further, the aim is to discuss how smart contracts and the IP law converge to give new possibilities in the techno-digital landscape.

What is a Contract?

A traditional contract is a legally enforceable set of reciprocal promises for a lawful object and with a lawful consideration[4]. Now this comes across as quite a condensed and legally rich definition of a contract, so let’s break it down. When you accept an offer made by another person, a promise is formed between you and them. This promise, when backed by consideration (read money) and enforced legally, becomes a contract.

Illustration: X offers: I offer to sell my car.

Y accepts: I accept and would like to buy your car.

Consideration: Y pays Rs. 1,00,000 to X.

Law recognises this transaction, hence it becomes legally enforceable

A CONTRACT IS FORMED!

Such a level of sophistication is the result of refinement in:

i) Jurisprudence

ii) English language

The concept of property, ownership and possession developed over centuries. The mode of writing contracts also evolved from being pen-and-paper-based to digitised, in the form of e-contracts. But what if the English language is replaced by machine language? Instead of clauses, what if codes run the contract? How would a mathematically certain contract look? The answer to all these questions is- “Smart Contract”.

What is a Smart Contract?

To completely understand this concept, it is essential to study smart contracts with blockchain technology. In simpler terms, blockchain is a public ledger that enables multiple people or computer networks to share and maintain a list of records[5]. Blockchain is immutable in nature, created using computer codes and each new entry is added like a block on an already existing chain.

Understand it in this manner- the certain nature of blockchain comes from the fact that every record is maintained on all the computers. It is similar to having all of your friends maintain a record of every transaction happening in the group. The ability to cross-verify the transactions to absolute certainty makes blockchains unique.

The immutable nature of blockchains is like a read-only CD where once the data is written, it cannot be changed or deleted, and one can keep adding more tracks or blocks. Public blockchains like Bitcoin or Ethereum are owned by no one person. It’s run by a distributed network of computers called nodes. Blockchains are decentralised, cryptographic and run on consensus. Once a smart contract is added as one of the blocks, it runs and executes without any hitch or interference.

A smart contract is a computer program stored on a blockchain. It is a self-executing function (read agreement) that is digitally signed and runs automatically when certain conditions are met. Think of it as a vending machine. When appropriate money is put in, the machine dispenses the required item. It runs on electricity, logic and maths and not trust.

The conditions are like the clauses of an agreement that the parties agree to beforehand. The code is then stored as a block on a blockchain and shared with all the participants of the network, making the transaction transparent and secure. The self-executing element eliminates the need for a third party for executing purposes, making it a less complicated process. Here is a simple, binary code-to-English, translated example of what a smart contract may look like:

This smart contract sells a 30-day license to listen to a song. Such a model is beneficial in removing the middlemen like Spotify. Artists, for instance, suffer from the autocracy of labels where unfair compensation, delayed payment and lack of ownership of their IP are still prevalent problems. Smart contracts, here, may give the artists a greater sense of ownership and transparency. A similar case can be argued for patent and trademark owners.

A smart contract can offer streamlined channels for uploading original content, ensuring distribution and allocation of royalties[6] without the threat of piracy. Today, blockchain marketplaces have made it possible to sell and buy original copyrighted material. This has not only increased the convenience but has also increased the value of IP created, as every copyrighted material is original and can be distinguished by a unique mathematical ID.

Challenges

One of the foremost challenges in India is the absence of a legislative framework. The legal vacuum becomes even difficult to navigate in a cross-border IP transaction and execution where international standardisation remains uncertain. However, jurisdictions like the US, Europe and China have begun exploring the possibilities of blockchain-based smart contracts. The present usage of this technology has provided us with insights as to what some of the possible challenges are that need to be resolved before the general public can harness the fruits of this innovation.

Further, the immutability of the blockchain network, which is its unique selling point, becomes a bane as soon as it interacts with the right to privacy. The unerasable nature of the blockchain comes into conflict with the ‘right to be forgotten’ enshrined under the General Data Protection Regulation[7]. Moreover, smart contracts, in their current form, can only be used for simple transactions. It becomes inflexible if used for complex agreements.

These are some of the issues that make the use of smart contracts and blockchains inefficient in the mainstream setting. However, in the author’s opinion, it is only a matter of time before the nearly-perfected ecosystem of technology may significantly transform the enforcement of rights and automate legal compliance. The World Intellectual Property Organisation (WIPO) has already begun the research integrating blockchain and smart contracts into IPR[8].

Conclusively, the answer to the abovementioned questions would be that a mathematically certain contract may be revolutionary, self-executing, transparent and secure. It may very well be the future norm for managing and protecting intellectual creations across global digital economies.

References

[1] Definition by the World Intellectual Property Organisation- WIPO

[2] Section 30 of the Copyright Act, 1957

[3] Section 48 of the Trade Marks Act, 1999

[4] Section 2(h) of the Indian Contract Act, 1872

[5] https://nualslawjournal.com/2024/10/16/ai-smart-contracts-and-blockchain-the-new-frontier-of-intellectual-property-management/

[6] Ibid

[7] Article 17 of GDPR. https://gdpr-info.eu/art-17-gdpr/

[8] https://www.wipo.int/export/sites/www/cws/en/pdf/blockchain-for-ip-ecosystem-whitepaper.pdf