NFTs’ legal implications for the art, music and fashion industries

Do you remember Magritte’s famous painting displaying a pipe with the wording “Ceci n’est pas une pipe”, or Duchamp’s irreverent readymades? Well, keep them in mind, as it is from that moment on that artists started questioning the relationship between art and the objects that embody it. And yet, the detachment between the work of art and the object that incorporates it has now reached another (revolutionary) level: artworks which do not exist in reality, or rather, artworks which exist only in a digital form: the so called “Non Fungible Token” (NFT).

You have probably already heard about NFTs, as they received a lot of attention over the last months, impacting not only the art market but a number of different industries. But what are they exactly?

In simple words, NFTs are units of data linked to the blockchain, which can transform analog or digital works into unique, verifiable assets that are easy to trade on the blockchain. Unlike a bitcoin, which is fungible just like paper currency (i.e. you can trade one bitcoin for another and you will have exactly the same thing), NFTs are not interchangeable. Instead, they are inextricably associated to only one specific and unique object, in a way which allows to track them on the blockchains to provide the owner with a proof of ownership.

Essentially, any item – including digital ones, like an image, a video, a song, even the part of a code – can be purchased as an NFT, with complex and not entirely foreseeable consequences for the industries involved in the revolution, which we will briefly analyse as follows.

1. The art industry

Digital artworks sold through NFTs have recently become the most hyped trend in the art market, which reached one of its peaks last March, with the auction of Beeple’s “Everydays: the first 5000 days” by Christie’s. Indeed, the purely digital artwork, a collage consisting of 5,000 single images, was sold for $69.3 million.

Although NFTs have the potential to be a disruptive technology, it is not clear yet whether they will revolutionize the art world or be just a temporary fad. In any case, when approaching this technology, both investors and artists should not forget some legal considerations.

First of all, one has to bear in mind that NFTs provide reliable information only with respect to what is on the blockchain, but do not “certify” that the underlying asset is an original, nor that the issuer of the token holds the relevant IP rights.

Indeed, this issue already arose in a very recent case, where the sale of Jean-Michel Basquiat’s ‘Free Comb with Pagoda’ drawing, along with an associated NFT through the online platform OpenSea, was first announced and later cancelled, due to the opposition of the artist’s Estate. The sale announcement not only guaranteed the authenticity of the physical work (and thus of the token), but also stated that whoever bought the NFT would also have the right to destroy the physical work associated therewith. Yet, the artist’s foundation announced that the owner of the physical work, who had also created the NFT, was not entitled to the exploitation rights and therefore had no right to tokenize and auction the work. Indeed, the exploitation rights of works of art are not transferred to the buyer automatically upon purchase.

Under Italian law, for example, art. 109 of the Italian Copyright law (“ICL”) clearly states that the exploitation rights, which include the reproduction of the work, i.e. the multiplication of all or part of the work into copies, belong exclusively to the author and are not transferred with the sale of the work, unless otherwise agreed in writing.

This rule applies also to NFT, with the effect that (i) the only subjects authorized to tokenize a certain physical work are the holders of the relevant exploitation rights, i.e. the artist, his estate, or the owner of the work (as long as the relevant rights have been expressly assigned to him/her); and (ii) when buying an NFT it is important to be aware that the ownership of such a token does not translate into ownership of the exploitation rights of the original underlying work.

Another feature of NFT technology is that it allows to set forth conditions for the resale of artworks on the secondary market. Indeed, NFTs can be sold by means of smart contracts, where artists can install predetermined resale royalty that is automatically applied to any subsequent sale on the secondary market. In this way, even American artists – who are normally not entitled to the so called droit de suit, as it is not regulated by US copyright law – can enjoy it. In Europe, this is nothing new, given that the droit de suite was introduced by Directive 2001/84/EC, whereby artists are normally entailed to receive a percentage of the resale price obtained on the secondary market through professionals, like auction houses, galleries, etc.. Yet, although smart contracts are transnational, many of them are platform-specific, meaning that resale rights are counted only if the resale occurs on the same platform where the original NFT was sold.

2. The music industry

The phenomenon has started to go big also in the music industry, where artists see NFTs as a chance to directly connect with fans and take control of their music. Indeed, artists have already embraced this trend by creating NFTs associated with digital art, physical goods and live experiences. For example, Kings of Leon’s latest album has been released also as a collection of NFTs and Mike Shinoda, the co-founder of the band Linkin Park, dropped an NFT associated with a clip of an unreleased song accompanied by an animation.

At a closer look, collecting societies had already captured the potential of blockchain in the arts and music. Indeed, SIAE (Italy’s largest copyright collecting agency), few years ago entered into a partnership with Algorand, a leading blockchain platform. Said partnership recently brough to the creation of more than 4 million NFTs, representing the rights of the more than 95,000 authors members of SIAE.

Although in theory NFTs have the potential to significantly impact the role of collecting societies and of labels, by giving artists the chance to directly control the exploitation of their music works, artists’ ability to successfully mint and sell NFTs is not child’s play. First of all, it is key to carefully evaluate which rights the artists is actually entitled to, given that normally the rights of economic exploitation of a music work are assigned to labels. In this respect, it is interesting to note that virtually all label agreements refer to the exploitation of the relevant recordings also on all future-developed technologies and platforms, meaning all the technologies not yet developed at the time the artist entered into the agreement. If the wording of the agreement is that broad (as usually is), it will easily include also the creation of NFTs associated with a recording.

In this respect, it is interesting to note that after a long debate on the applicability of art. 119, para. 3 ICL – which limits the chance to transfer “future rights which may be granted by subsequent laws and which provide copyright protection of wider scope or longer duration” – to music publishing contracts, the Italian Supreme Court has answered in the negative. More precisely, the Court concluded that whilst book publishing agreements are governed by specific provisions (among which art. 119 ICL), agreements regarding cinematographic or musical works are to be considered as atypical contracts, not regulated by the provisions set forth for the “traditional” publishing contract (Italian Supreme Court n. 12086/2013 and 26626/2008). Consequently, the transfer of rights of exploitation of music works and sound recordings thorough future technologies might be validly included in music publishing and music recording agreements.

A second issue worth mentioning is that the creation and sale of an NFTs shall take into consideration all the rights on the works, which are usually more than one, considering that musical works generally involve joint authors, like authors of the musical composition and of the lyrics. For example, an artist who wishes to create and sell an NFT having as object a new music video clip will need to check whether he/she has obtained all the licenses to do so, such as those from the musicians and songwriters. This analysis should carefully take into consideration the agreement entered into with the co-authors and with the relevant label, if any. However, if no agreement has been reached by the co-authors, the exploitation of the economic rights is still not free, but it shall follow the rules set forth by articles 33 ff. ICL, regulating musical works.

Established artists may also face a third key issue: as said, NFTs can be associated with an indefinite number of digital objects, such as merchandise goods bearing the artist’s name or image, backstage experiences or exclusive events, just to mention some. Thus, it will be increasingly relevant to carefully address all these issues in the agreements between artists and labels.

3. The fashion industry

After the Simpsons’ runway debut during Paris Fashion Week for Balenciaga’s fashion show and the already successful relationship between fashion brands and the gaming community, NFTs open up the fashion world to new digital channels. In fact, the possibility for users to not only buy digital items in the fashion space but to also have unique pieces adds a level of exclusivity that has always be key within the fashion culture.

It is thus no surprise that Italian luxury brand Dolce & Gabbana sold at auction a nine-piece collection of digital NFTs, alongside some actual couture for a total of 1,885.719 Ether (Ethereum cryptocurrency), or the equivalent of nearly $5.7 million. Earlier this year, also Gucci created an NFT called “Aria,” a three-channel video loop, inspired by its fall 2021 collection, which was auctioned by Christie’s for $20,000 and last August Burberry dropped a limited-edition NFT collection for Mythical Games’ online game Blankos Block Party, which realized a total of about $375,000.

In this scenario, NFTs might be a powerful tool against piracy by helping brand owners in their anti-counterfeiting activities. In fact, besides the traceability of the garment over its life-cycle provided by the blockchain technology per se, NFTs takes the fight against counterfeits a step further by offering the possibility to embed an NFT in physical products to be scanned in order to confirm they are authentic.

On this ground, a leading sport brand in the U.S. has already patented a system for minting, exchanging, and intermingling cryptographic digital assets in the form of digital shoes, which can each be linked to a real-world physical shoe. Upon purchase of a sneaker associated with this technology, the purchaser also receives an NFT tied to it that he can transfer with the shoe, thereby verifying the authenticity of the product. In addition, customers who own said product can create custom shoe designs by digitally combining the owner’s digital shoe design with another person’s digital shoe in order to create a new design that is a hybrid of the two. When they do not come from the fashion brand itself, however NFTs cannot fully guarantee the authenticity of a product because, although they can authenticate the fashion item and its ownership, if an original ledger entry is false or in error from the start, the NFTs will confirm and perpetuate that falsehood.

As a possible solution to overcome this risk, platforms selling NFTs might consider to verify creators, in the same way that Twitter or Instagram verify their users.

Another problem that fashion brands might face with third-party created NFTs displaying their trademark is given by the actual scope of their trademark rights. The issue arose for example in relation to the “Baby Birkin” NFT, which was an animation of a baby growing in an Hermès Birkin bag, recently sold in a Basic.Space auction for the equivalent of $23,500, without Hermès having any affiliation with nor being awarded any royalty for the sale of such NFT. In fact, Hermès registered the “Birkin” trademark for leather goods and leather handbags but not for digital artworks, so the creator of the NFT could argue that the NFT is not covered by Hermès’ trademark rights. In this scenario, famous brands like Hermès might probably rely on the stronger protection granted to trademarks that enjoy reputation, whereas emerging designers and smaller fashion houses might face serious difficulties in enforcing their rights.

Interestingly in this case Hermès decided not to take action. In fact, given the popularity of NFTs among generations Z and Alpha, some brand might look at the phenomenon as an opportunity to create relevance and buzz within new potential customers. Should thus NFTs be considered as underground marketing or counterfeits? Only time will tell!