In Short

The Situation: The current non-fungible token ("NFT") market presents exciting new opportunities and important intellectual property ("IP") considerations. In this first of two Jones Day Commentaries exploring the interaction of IP with the current crop of NFTs, the focus is on copyright issues.

The Result: Owners, sellers, and prospective buyers of NFTs, as well as owners of the underlying material, need to be aware of potential copyright risks associated with this fledgling market.

Looking Ahead: The related practice of trading NFTs accentuates the need for existing IP issues in this area to be tested in courts and commercially.

NFTs are verifiable cryptographic tokens, which can act as a form of digital receipt. NFTs can also be used to evidence the authenticity, ownership, and provenance of real-world items, such as artwork and real property, or digital files including an image, GIF, or tweet. NFTs raise material copyright concerns if the NFT contains a digital copy of an asset that might amount to an unauthorized reproduction and thus constitute infringement. In such a situation, the existing copyright owner of that asset could send a take-down notice or bring an action against both the person(s) making the unauthorized reproduction, as well as the platform hosting or trading the infringing content.

NFTs that infringe on copyrighted works can also create practical difficulties for enforcement where, for example, the NFT draws inspiration from a real-life work without explicitly copying it. Given the escalating number of NFT marketplaces, it is an immense burden on rights holders to continuously monitor unauthorized use.

KEY COPYRIGHT CONSIDERATIONS

To purchase an NFT is to buy an authentication of ownership of an asset as a digital file, but it does not necessarily transfer ownership of the underlying asset itself. NFTs come in different forms (and the terms of ownership will vary), but the remainder of this piece focuses on the most common, current use case where a buyer of a NFT acquires a proprietary right to an underlying work and a digitally authenticated certificate that verifies ownership.

Most NFTs contain a URL link to a file, with the buyer obtaining merely a license of noncommercial usage rights, such as displaying the file for personal use or resale. The creator of the underlying file can determine how to generate profit through a so-called "smart contract." The terms of these smart contracts include those allowing buyers to co-own an NFT, the creator being able to sell multiple NFTs for one file, and a percentage of profits owed to the creator for any prospective sales. Typically, the creator will retain all intellectual and creative rights to the work, including copyright and production rights to make and sell copies or iterations of the work. An NFT simply proves that the buyer is the owner of that work, and the terms of ownership will vary among NFTs.

Caveat Emptor—Buyers Beware!

Earlier this year, a group of investors called Spice DAO, operating as a tokenized community organization, purchased at auction a rare, script bible from legendary filmmaker Alejandro Jodorowsky setting out how he planned to film the Frank Herbert sci-fi classic Dune. The Spice DAO community paid an eye-watering $3 million for the book, intending to monetize it by converting each page of the script book into an NFT for sale and producing an original animated series based on the script. The problem was they did not own the copyright to do any of this. They mistakenly believed that, in purchasing the script bible, they were acquiring the copyright to the script and the underlying story and characters, when in fact all they had acquired was the physical book itself. The lack of understanding in the marketplace regarding IP and NFTs is, perhaps, unsurprising when considered in light of this case, given that such a large community of people had so fundamentally misunderstood the nature of copyright and the exploitation of such.

Copyright Infringement

Copyright infringement has become a source of debate with NFTs, as current U.S., EU, and UK IP legislation does not specifically account for cryptographic digital work. At the heart of the debate is the fact that the current crop of NFTs are typically not "works" within the usual meaning of copyright law but rather a digital receipt of ownership or a chain of title of an underlying work. NFTs are created by a process called "minting," in which metadata is written into a blockchain, but which typically does not reproduce or modify any underlying work (e.g., a photograph).

IP infringement in relation to NFTs is likely to arise in one of two circumstances:

  1. Minting an NFT for an underlying protected work, but where the online seller does not own the intellectual property rights therein (see Miramax v. Quentin Tarantino, discussed below); and
  2. Minting an NFT where the underlying work is created by the online seller, but it contains an element of reproduction or outright copying of another's intellectual property.

Unauthorized copying (and associated acts) of any underlying work that is attached to an NFT may constitute infringement under U.S., EU, and UK copyright law. While the actual minting of an NFT is an act not contemplated by the existing legislation, where it involves the unauthorized reproduction of a copyright work, it will likely constitute an infringing act, albeit one involving a new medium.

Copyright infringement is therefore relevant only if the NFT contains a digital copy of an asset that might amount to an unauthorized reproduction. In such a situation, a claimant has means to issue a take-down notice or can bring an action against both the person(s) making the unauthorized reproduction, plus the platform that is hosting the unauthorized content or offering it for sale or exchange, typically an NFT marketplace. Going after the marketplace may have a more immediate result (i.e., the NFT being removed from trading); however, this may not deter the individual from minting the same NFT on an alternative platform, particularly given the increasing number and diversity of NFT-related sites.

An NFT owner will need to acquire an assignment or license of the subsisting rights from the original creator of the work to be able to reproduce, or otherwise deal with, the work. As there is typically no owner verification process on many NFT marketplaces, issues have arisen with purported NFT sellers (either knowingly or unknowingly) not owning the intellectual property rights necessary to deal with the underlying work.

CASES TESTING COPYRIGHT INFRINGEMENT VIA NFT TRADING

Miramax v. Quentin Tarantino

In December 2015, Quentin Tarantino sought to mint an NFT of unused content from the Miramax film Pulp Fiction. Miramax alleged breach of contract and that Tarantino had infringed its copyright and trademark rights. Miramax filed a lawsuit against Tarantino in November 2021. While the lawsuit is pending, Tarantino had gone on to sell his first NFT for $1.1 million. The case will follow the question as to whether U.S. copyright law protects the right to convert a copyrighted work into an NFT. Also at issue is whether Tarantino's right to "screenplay publication" under his assignment of work to Miramax in 1993 extends to or is encompassed in selling an NFT of such screenplay content.

Art Wars

Similarly, in November 2021, images of Star Wars helmets from the "Art Wars" exhibition in London were sold as a collection of 1,138 unique NFTs by Ben Moore, the founder of the exhibition. These helmets were painted by artists including Dinos Chapman, Anish Kapoor, and David Bailey, and after the collection was put on sale on November 22, 2021, almost $7 million had been transferred on NFT site OpenSea. The NFT page on OpenSea was removed in November 2021 following a copyright infringement notice, and it is reported that approximately 12 of the artists are preparing to file a lawsuit.

PRACTICAL IMPLICATIONS OF ENFORCEMENT

There is no simple solution for addressing NFTs that infringe IP rights. As noted above, pseudonymized NFT creators can determine whether they create one or multiple NFTs, whether to offer a co-ownership structure, the rights contained in the smart contract, and whether to create direct copies or iterations of the work. In addition, NFTs are extensible and can be combined with other NFTs to create a third unique NFT.

The underlying works of some NFTs may also draw inspiration from real-life works but not explicitly copy the work. This makes determining the outcome of an infringement claim uncertain, although such issues are not new in copyright law. It is also unclear what the position would be in respect of unauthorized NFTs that have already been sold to a bona fide purchaser, although it is expected that the law will remain consistent in this regard.

Given the escalating number of NFT marketplaces, it is an immense burden on copyright holders to continuously monitor unauthorized use. Moreover, the creation, sale, and trading of NFTs is often unregulated under local laws, and the transaction is recorded on a public decentralized database. These issues make the "tracking" exercise for copyright infringement even more extensive.

CONCLUSION

While some commentators question whether the current NFT boom can continue, it is likely that they will present unique intellectual property issues and opportunities in the short term. Over the longer term, we are likely to see more NFT use cases and emerging best practices for engaging with rights holders. In the meantime, it will be interesting to see how the courts apply existing and long-standing principles of copyright law to the new medium of NFTs.

Four Key Takeaways

  1. NFTs create new opportunities for creators in terms of multichannel revenue sources, control over the terms of the transaction via a smart contract, and increased prominence in a new industry. However, creators should equally be aware of the risks of infringement and, in particular, verify that they own the necessary rights in the underlying work attached to the NFT.
  2. The current U.S., EU, and UK law governing the protection and enforcement of copyright requires testing in this sphere.
  3. Copyright owners should actively monitor and enforce their rights in the NFT space.
  4. While it is uncertain whether the current NFT boom will last, it is likely that the NFT market will develop over time, impacting the verification and ownership of artistic creations in the future, which presents both opportunities and threats to IP owners.