FRENS: A Generalizable Legal Framework for Fractionalized IP-NFTs
The current drug development system reflects an incentive structure that is anti-competitive and neglects the potential to repurpose existing therapies. Novel mechanisms for funding the repurposing of existing therapies will leverage existing solutions to target emerging threats faster and at a fraction of the cost. In this article, we introduce FRENS — a novel fractionalized IP-NFT sublicensing system to help make drug development more like software development.
Addressing the Problem
Currently, drug development is anti-competitive and stagnant because of the restrictive legal and financial frameworks that dominate it. The overarching goal of FRENS is to make drug development more like software development where open source licensing helps drive further software development. Facilitating an open innovation environment empowers and ultimately benefits more people.
Say hello to my little FRENS
FRENS stands for Fair, Reasonable, Ethical, Nondiscriminatory Sublicense. It is a play-on-word of the meatspace legal concept of F/RAND terms in IP rights and the Web3 term fren (a misspelling of friend.) The ‘S’ in FRENS reflects the fact that many FRENS tokens will be created from each parent IP-NFT.
Owning a FRENS token means the owner holds a license to the parent IP. The benefits conferred to FRENS holders can be broken down into three primary areas of focus (FRENS with benefits):
- Fair & Reasonable
The IP-NFT is fractionalized and shared among community members in order to drive innovation. Let’s take a deeper look into how FRENS benefits are created from IP-NFTs
IP-NFTs and FRENS Benefits
The three parts of the FRENS license help to explain not only the motivation but also the implementation of this fractionalized licensing system. At the heart of the FRENS license is the pursuit of a fair system that is innovative and poses a reasonable alternative to existing systems. Let’s consider each aspect of the FRENS license for more clarity.
Fair & Reasonable
The FRENS token is a license that provides its owner the right to market the IP. ‘Fair’ refers to the terms of the license and ‘reasonable’ refers to the price of the license. The terms can’t be anti-competitive which, in this case, means the parent IP owner can’t prevent the license holder from marketing the IP.
This is reflected at the time of the auction when the FRENS token price must be reasonable compared to the price of the parent IP-NFT. For example, an IP-NFT has an established market value of $100,000 and there are 100 FRENS tokens issued. At the time of the auction, the FRENS tokens would have a price of $100,000 / 100 = $1000 each — representing a reasonable relationship with the parent IP-NFT
Because DeSci is for the people, these ‘end-user rights’ to market the IP are constrained to natural persons (human beings) and not legal persons (corporations). More technically, The end-user ‘use’ and marketing rights (under e.g., 35 USC 271) can be constrained to human beings and not legal persons, along with the pricing of FRENS tokens that comports with traditional F/RAND terms
Owning a FRENS token gives the owner governance rights to determine how others receive payments from those that make money off owning the parent IP. For example, one FRENS token holder may elect to vote that indigenous groups receive payments while another might elect for researchers of a rare disease would receive payments. This can be thought of as a pay-it-forward condition.
If a bad actor is deemed as operating in violation of the FRENS terms their license is revoked. If an unethical actor such as a patent troll tries capitalizing on the IP by using it as a weapon to stifle innovation, then the IP automatically flips to open source to prevent unethical exploitation. In more technical terms, FRENS confers governance rights to vote on ethical encumbrances that should attach to the parent IP NFT upon any transfer of ownership or commercial license. This includes springing commercial licenses that open-source the IP to prevent a non-practicing entity (NPE), i.e., patent troll, from capitalizing on it. This provision also introduces third-party beneficiary standing to enforce the ethical encumbrances.
FRENS are DeSci assets for the people. As such, FRENS tokens are available to any human being regardless of status. In addition, FRENS are available to corporate interests as well provided they elect to operate under the ethical restrictions of the FRENS terms. This creates a level playing ground for both corporate and individual FRENS.
In more technical terms, this includes any corporation that is willing to accept the ethical encumbrances, where non-discriminatory is used in the traditional sense. Alternatively, FRENS can be culturally non-discriminatory, restricted to only humans, so that FRENS holders can be any human, anywhere, but no corporations. Whether to allow corporations depends on what the IP-NFT and FRENS token holders decide.
Example Use Case
The FRENS terms are designed to level the playing field so that real people can benefit from novel IP. The three areas of focus discussed so far outline the core principles of the FRENS license but can still leave one wondering how this might apply to a real-world application. Simply put; why should you be excited about FRENS? Let’s consider a FRENS implementation of VitaDAO’s Morten Scheibye Knudsen IP-NFT (MSK IP-NFT) also known as “The Longevity Molecule.”
Step 1: Fractionalization
VitaDAO owns MSK IP-NFT from the lab of Morten Scheibye-Knudsen at the University of Copenhagen. The MSK IP-NFT is then locked in a vault that emits 100 MSK-FRENS which equates to 100 sublicenses to that IP. Note this sublicensing does not confer ownership to the MSK IP-NFT but only provides a license to the holder to control it in ways that fit with the FRENS conditions.
Step 2: The Auction
These 100 MSK-FRENS tokens are then auctioned off with a starting price equal to their fractional representation of the MSK IP-NFT. For example, VitaDAO paid $250,000 for the MSK IP-NFT therefore the starting price per MSK IP-NFT is $2,500 (250,000 / 100).
Step 3: Acceptance of License Terms
The MSK-FRENS buyers must voluntarily agree to use their token within the terms of the FRENS license — terms that govern any FRENS-based token. We can use the outline of the FRENS concepts from earlier, and see how they relate to this specific example:
- Fair: Terms include VitaDAO won’t prevent someone from using the IP to market products on their website
- Reasonable: Each token costs $2500, which makes the aggregate value of the licenses the same as the parent IP, a reasonable price.
- Ethical: Some groups, to be determined by FRENS token holders, get paid when VitaDAO profits off of one of the MSK assets. If someone who buys the MSK IP-NFT from VitaDAO proves themselves to be an unethical actor, such as a patent troll who doesn’t make use of the IP, then the IP would convert to an open-source license to be made/sold by anyone. Here, the token holders could also take legal action against the unethical actor for violating the FRENS terms.
- Non-Discriminatory: MSK-FRENS buyers can be any human being, regardless of status. However, corporations cannot be MSK-FRENS, which protects FRENS as DeSci assets, for the people.
Step 4: Marketing the IP
An example use case for an MSK-FRENS token would be a retail dietary supplement brand. By holding a FRENS token, this business could make and sell a dietary supplement based on the IP afforded by the MSK-FRENS sublicense. This would be applied by the brand being able to substantiate label claims of their product. When the MSK study results in patentable innovations, patents are issued, and the patented pharmaceutical products are approved by regulators, FRENS holders could advertise and sell those products and reap the rewards!
The FRENS model presented here is a brave new framework to address the immense potential in novel new drug development pipelines. This framework draws upon proven IP mechanisms from more traditional approaches while leveraging the efficiency of Web3 technologies such as the IP-NFT framework, token issuance, the trustless transfer of licenses, and stakeholder governance to deal with bad actors in the system.
Developed by: Chris Byrnes with assists from Savva Kerdemelidis and Jesse Hudson
Interpreted by: Tim Peterson (non-legal scholar)