This article is part of a three-part series on NFTs:
- Part 1: What are NFTs and Where Do They Derive their Value?
- Part 2: NFTs and IP Law
- Part 3: NFTs and the Digital Art Marketplace
In the first part of our series on NFTs,[1] we discussed what an NFT is and what “ownership” of an NFT provides. You’ll recall that a non-fungible token is a unique blockchain-based “token” that consists of a chain of digital references to a specific intangible asset (e.g., digital files encoding music, art, video, icons, etc.).
In this instalment, we consider what NFTs could mean for IP rights creators, owners, and users.
Part 2: NFTs and IP Law
As discussed in part 1, the purchaser of an NFT cannot automatically claim ownership over the underlying digital asset, or any rights to that asset. What is acquired is simply the ability to exclusively transfer the NFT’s ownership status. What, therefore, is the value of NFTs to creators, holders, or users of intellectual property (“IP”) rights in those digital assets? Surely the NFT’s owner is the only person who can display, download or access the digital work? Not surprisingly, the answer is not as simple as many would like.
Intellectual Property
According to the World Intellectual Property Office,[2] IP rights are broadly defined as rights given to authors, creators, inventors, etc. “…over the creations of their minds.” Depending on the nature of what is created, developed or invented, IP rights typically give the creator some form of exclusive right over the use, display and/or reproduction of their creation for a certain period of time. With respect to digital assets and NFTs, a key IP right would be copyright. In Canada, copyright provides the author of the work with the exclusive right to make available to the public or reproduce the literary, artistic, musical or dramatic work during the life of the author and for fifty (50) years after their death. [3] Copyright arises immediately upon the creation of the work. The author or creator of the work is typically the owner of copyright, unless there is a legal or contractual obligation for the author/creator to assign the work to another entity (e.g., by virtue of employment or an existing development agreement).
The difficulty that digital intangible assets present from a copyright perspective is the ease at which such assets can be displayed, used, and/or reproduced – and that each reproduction is an identical copy. In view of this, identifying an original from a copy of a digital work may be technologically difficult. As a result, creators may quickly lose control over their digital works and the downstream monetization of those works. Likewise, for purchasers of digital assets, it may be difficult, if not impossible, to know whether the purchased digital asset is a “one of a kind” original or one of several copies.
This is precisely where NFTs become relevant, both as a benefit and potential risk to IP rights creators and holders. Given the smart contract, which contains the hyperlink to the underlying work, lives on the blockchain – which is a public register accessible to all – the digital work itself may be visible and accessible to all, without technological restrictions on its display, use, and/or reproduction. As such, could the minting (and resale) of an NFT create or curtail: (a) counterfeit issues for IP owners and creators; and (b) burdens on IP owners and creators to monitor and control the IP rights associated with the copyrighted work? By creating or acquiring the NFT, how might creators or purchasers control the use, display, and reproduction of the underlying digital asset?
Why Creators Would be Interested in NFTs
For creators of digital assets (e.g. digital art, music, video, etc.) there is interest in the NFT space because NFTs give creators a way to control the sale, display, and/or reproduction of digital assets. Given that an NFT resides in a smart contract with programmable self-executing commands, the creator can, for example, program a “resale right” into all subsequent sales of the NFT. In other words, the creator may receive a specified percentage every time the NFT is sold or changes hands, allowing the creator to take advantage of the increase in value of the digital asset. This means that every time an NFT changes hands, a certain percentage of the sale price will be automatically redirected back to the artist, no matter how many times the NFT has been previously bought and sold. This feature may be built-in to NFTs allowing creators to monetize their work without intermediaries, such as privately-run galleries or music distribution platforms.
Artists and creators should always consider implementing appropriate technical protective measures (e.g., digital rights management) in association with their work to prevent copying. How could NFTs assist with digital rights management? While an NFT is a unique identifier, there exists the very real possibility that the underlying work, which the NFT identifies, may itself not legitimately obtained. To the extent the underlying digital asset is not pirated (i.e. authentic), the NFT will perpetually ensure the authenticity of that digital asset. Whereas, if the originally-minted artwork is not, the NFT merely proves the provenance of a fake.
However, as you will recall, the underlying digital asset needs to be uploaded to a hosting platform before the NFT can be “minted.” And, hosting platforms generally provide IP policies, which address the unauthorized uploading and minting of NFTs, usually in the form of a “take down” policy. In the event a creator discovers their work has been uploaded and minted into an NFT by a third party without their authorization, they may avail themselves of those enforcement mechanisms. Indeed, such take down policies would likely be key to stopping would-be infringers from “claiming” ownership of an existing artwork and minting it into an NFT, given the ease with which digital files can be reproduced.
In a recent example, the NFT creator Larva Labs, who created a series of works under the CryptoPunks project, submitted a Digital Millennium Copyright Act (“DMCA”) takedown request that the NFT platform Foundation takedown a copy of a CryptoPunks posted by the artist Ryder Ripps; Ripps then turned around and minted the DMCA takedown request into an NFT.[4]
While NFTs do not eliminate the need for creators to take steps to protect and enforce their IP rights, their use does appear to provide another tool to enforce those rights. Artists, musicians, and other creators using NFTS should therefore pay close attention to the terms of service (“TOS”) of their chosen NFT-minting platform or NFT marketplace.[5]
Buyer Beware
What if you are the purchaser of a NFT directed to a digital asset? Like most other purchases, the buyer should conduct their due diligence. Of key importance is understanding what the NFT provides and does not provide.
As noted previously, NFTs do not provide ownership to the underlying intangible asset, but rather ownership of the links to the digital asset. A key understanding therefore is that copyright – the right to display, use, and/or reproduce the digital asset – does not automatically get transferred or otherwise granted when ownership to the NFT is transferred. Similarly, the owner of the NFT does not automatically get a license to display, use, or reproduce the digital work after purchasing the NFT.
As noted above, the copyright to the underlying work resides with the creator, unless there is an assignment of copyright. Without an assignment, the purchaser of an NFT may only be granted a copyright license to display the underlying work. In such cases, the IP rights will remain with the creator of the work in the same way that when you purchase a painting you may get the right to display that physical copy of the painting in your home, but not the right to sell reproductions of the painting or charge money for exhibitions of it. Unless the license grant provides for an exclusive right, the copyright owner retains a right to display, use, or reproduce the underlying work. In that case, the copyright owner retains the ability to make additional copies of the underlying work, including the right to mint additional NFTs. Purchasers of NFTs should, therefore, be aware of and understand whether there are any restrictions on the ability to display, use, and/or reproduce the underlying digital work.
The purchaser’s rights of display, use, or reproduction of the digital work are typically dictated by the underlying contract for sale of that digital work. Since NFTs are typically sold through online marketplaces, these marketplaces are grappling with how to deal with the IP rights of the underlying assets that are tied to the NFTs bought and sold on their platforms. The TOS of those online marketplaces typically define the nature and scope of the IP rights that get transferred upon purchase of the NFT, but not always.
While the nature and scope of the terms of sale can vary significantly, a common form of rights grant is a non-exclusive, non-transferrable license or sub-license to display or use the specific version of the intangible asset underlying the NFT for non-commercial purposes.[6] Indeed, most marketplaces have adopted this type of licensing approach, where the creator grants a non-exclusive license to the marketplace (essentially, to host and display the work), who then grants a sub-license to the purchaser of the NFT to view, access, and display the work. For example, the purchaser of the NFT may get some basic usage rights, like being able to post the image online or set it as their profile picture. Purchasers of NFTs should always conduct their “due diligence” to ensure they are getting what they bargained for.
Conclusion
For creators of digital assets that have been minted into NFTs, as well as purchasers of those NFTs, contractual terms (typically provided in the TOS) that govern the minting and/or sale of the NFT will be paramount. It is important for all players in the NFT space to understand the nature and scope of the IP rights associated with the underlying work and any corresponding NFT. In reviewing these contractual terms, the parties should consider how IP provisions address the following:
- Rights of use, display, and reproduction of the underlying work(s) and any restrictions on the foregoing;
- Representations and warranties covering (i) ownership or license rights in and to the underlying work(s); (ii) the right to “mint” the underlying work(s) into an NFT; (iii) authenticity and/or validity of the underlying work(s); (iv) freedom to use, display, or reproduce the underlying work(s) without infringement of third party rights;
- Volatility of the digital marketplace and what happens if the underlying work is no longer accessible;
- How, where, and when IP disputes will be resolved;
- Indemnification provisions (e.g. if there is a breach of any representation or warranty); and
- Disclaimers of liabilities for the creator, purchaser, seller, and/or marketplace.
There is potential value to IP creators and users in NFTs. But IP creators and IP users should understand the nature and scope of what NFTs provide before embarking on the creation of an NFT portfolio.
In our final instalment, we will look at NFTs from the perspective of the digital art world and what specific issues arise in that context.
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[1] See NFTs, Intellectual Property and Art: An Overview in Three Parts (fasken.com)
[2] See https://www.wipo.int/about-ip/en/
[3] See Section 3 of the Copyright Act (Canada)
[4] See https://www.reuters.com/legal/transactional/what-are-copyright-implications-nfts-2021-10-29/ or https://ca.style.yahoo.com/cryptopunks-punked-181112751.html
[5] See, for example, OpenSea’s TOS which provide that “The sale of stolen assets, converted assets, fraudulently obtained assets, assets taken without authorization, and other illegally obtained assets on OpenSea is prohibited. Listing illegally obtained assets may result in your listings being cancelled, your assets being hidden, or your account being suspended.”
[6] Some marketplaces provide purchasers with a non-exclusive, nontransferable license to display the item underlying the NFT for personal as well as commercial use for up to $100,000 annually. For example, Dapper Labs, which operates the NBA Top Shots marketplace, has proposed an “NFT License 2.0”; see https://medium.com/dapperlabs/nft-license-2-0-why-a-nft-can-do-what-mickey-mouse-never-could-27673d5f29aa.
