By Lawfox | Algemeen | 24 February 2022 | 13 min. reading time
2022 will be the year of NFTs. Often NFTs are dismissed as (far too expensive) digital art, but there is often more to it than that. The ownership of NFTs often includes other rights, such as voting rights, royalties, bragging rights, and reserved access to an (online) club or events. One of the largest NFT projects at the moment is the Bored Ape Yacht Club (BAYC): an NFT collection consisting of some 10,000 monkey avatars. Each monkey has its own expression, clothing, attributes and background. Costs at this moment? From around € 177,000 to in the millions (although you can buy them with crypto currency, in this case ether). Cost at the start of the project? Around € 170. Meanwhile, Adidas is already working with BAYC, and there was a monkey on the cover of Rolling Stone magazine. Another example are CryptoPunks: some 10,000 avatars in the old skool 8-bit style. Costing you about €200,000. Two examples that make it clear that a lot of money is involved in NFTs – even if it is only ‘just’ about some simple images ‘with some extras’. Whether NFTs are here to stay, or whether they represent a new Tulip mania? Time will tell. Anyway, NFTs are here now and have their place in the digital world. That also means legal conflicts, such as with scams (“back pulls”) and copyright. In this blog, I look at NFTs in the light of copyright law.
What is an NFT?
As explained in my previous blogs, an NFT is a ‘digital thing’ that is not interchangeable. In the analogue world, think for example of a work of art that bears the signature of the artist that is not interchangeable because of its uniqueness. Nobody would trade a real Van Gogh for a lithograph. This is in contrast to, say, a euro. Whether you exchange a note of five for five separate euro coins or vice versa, the value is basically the same for everyone (unless it concerns a rare coin or a special coinage of course). Digitally, the same applies. Crypto tokens, such as bitcoins, for example, are also exchangeable (1 BTC = 1 BTC). With NFTs, uniqueness is artificially added to the token so that there is only one (or a number, if so programmed) authentic item of it (or rather, an item whose authenticity is recorded on the blockchain).
However, not all NFTs are the same. They exist in different shapes and sizes. It is therefore important to pay attention to what the NFT actually entails.
For example, the NFT can only contain a link to content which is hosted on a server. The NFT then does not contain the image itself, but only a link. This not only creates integrity risks (what if the hosted content is removed from the server, what do you then have as an NFT?), but also risks of copyright infringement if the seller does not have the rightful rights.
An NFT can also refer to content that is not published online. For example, the hash of the NFT can refer to a file that has been sent separately to the NFT buyer. If the buyer then has access to the file, this may constitute copyright infringement if an unauthorised copy is distributed. If the buyer does not have access to the file, the situation may be different.
Finally, an NFT can also contain the content itself. However, this will mean that the NFT file will be larger, which will not often happen (at least not on Ethereum).
NFT does not affect copyright
According to the main rule of copyright, the creator of the work is the copyright owner. The copyright holder retains the exclusive right to determine who, under what conditions, may copy (reproduce) and publish (disclose) the work. Therefore, if a copyright owner mints a work, such as a digital image, as an NFT, this does not mean that the buyer of that NFT has obtained the copyrights because he was the first to record that work on the blockchain. Most likely, the buyer of that NFT will ‘only’ have obtained a licence from the copyright holder to keep the work as NFT (and possibly sell it on). Incidentally, the creator also retains his personality rights, such as the right to name and protect the integrity of the work, and the creator’s reputation – and the purchaser may be required to continue to adhere to these.
Purchase of an NFT is not a transfer of copyright
This also means that the owner of an NFT does not buy the copyright to the NFT. This remains, in principle, reserved to the maker. The law requires a written deed for such a transfer. In any case, the purchase of an NFT does not qualify as such a deed. Therefore, the copyrights remain with the author. The buyer of an NFT has thus ‘only’ become the owner of the tokens in his digital wallet. Whether a smart contract, which includes the transfer of copyrights, counts as a required deed is still unclear.
What does an NFT entitle you to?
So what you are buying is actually only a licence. What actions that licence gives you permission to perform must be explained. That interpretation follows from what has been agreed between the parties. That can be determined by the conditions of the platform on which the NFT will be sold. Think for example of OpenSea or Rarible. It may follow from the terms and conditions of the platform that buying an NFT does not automatically give you the right to reproduce, resell or use the work for commercial purposes. But also the digital contract (smart contract) that regulates the sale of the NFT, and the meta text accompanying the collection, will determine what is being bought at the conclusion of the sale.
Can you mint another person’s work as an NFT?
To ‘minify’ an NFT is to create an NFT, writing the data, on the blockchain. NFTs on the secondary market are often already ‘minted’: In generative NFT projects, the buyer mints the NFT. The NFT is then only created when you buy it.
However, the question is which data is actually written to the blockchain. Does it contain the actual work? Or just a link to it?
If the NFT contains the work, the question arises whether this is an infringement of someone else’s copyright if their work is minted without their permission. As can be seen from the above, NFTs do not affect copyright. Thus, the actual creator of the work retains his copyright on the work being mined. Such a minting should have been done with his permission, if a reproduction or publication of the work took place in the process. The right to name, for example, also continues to exist. If these actions are carried out with the NFT without the consent of the copyright holder, this may constitute copyright infringement and infringement of personality rights.
If the NFT contains only a link, case law indicates that a hyperlink does not automatically mean reproduction. However, the hyperlink may refer to a work, which may constitute a copyright relevant “publication”. If this is done without the consent of the rightholder, it may constitute an infringement. This will depend on whether the hyperlink refers to legal content or illegal content. For legal content, the European Court of Justice has ruled that offering clickable links to works that are freely accessible on another website does not constitute an “act of communication to the public”. Therefore, there is no infringement. However, if that hyperlink refers to a web page that is only lawfully accessible behind a payment wall, the link may constitute an “act of communication to the public” in the NFT, and thus constitute an infringement. If the link is to illegal content (i.e. an unauthorised copy of the work), the decisive factor is whether the user of the link wants to make a profit. This is presumably fulfilled quite easily if the NFT is exploited on an NFT marketplace, because the minter will go there to make money. However, it will depend on the circumstances of the case whether linking to a work constitutes infringement or not.
Of course, the question is what the copyright owner’s work is and whether the NFT is infringing it. For example, there is also a legal conflict going on between director Quentin Tarantino and film production company Miramax: Tarantino has always kept the handwritten scenario of the legendary film Pulp Fiction private. Together with the company SCRT Labs, he will soon release “Secret NFTs”, consisting of the original script of some iconic scenes, accompanied by the personal audio commentary of Tarantino himself. These NFTs will be issued on the “Secret Network”, a blockchain with standard privacy for smart contracts. The Secret NFT makes the linked content accessible only to its holder. In the case of Tarantino, this means that only the owner of the Secret NFT can view the images and audio of the NFT, and can decide whether to keep this content to himself or share it. Even before this project has been released, it appears that film production company Miramax has filed a lawsuit with the Central District Court of
California. Miramax is said to own the rights to the film, Tarantino only the screenplay. The lawsuit alleged that Tarantino kept his NFT plans secret from Miramax and that this disrupted Miramax’s own plans for Pulp Fiction NFTs. Miramax believes that this would “devalue the NFT rights to Pulp Fiction”. Tarantino has now filed a legal defence. This would show that Tarantino takes the position that he has reserved the right to publish his original scenario, and that he can therefore ‘simply’ exercise that right with the NFT sale. Miramax would dispute that an NFT sale would involve the publication of the script. Apparently, the first hearing is scheduled for 24 February 2022. Meanwhile, the NFT project appears to be continuing as usual. Naturally, we are keeping a close eye on the developments in this court case.
Can you exploit an NFT with existing (fictional) characters?
Exploiting NFTs with copyrighted parts may also constitute copyright infringement. The use of well-known (fictional) characters or characters, such as video game, animation or comic book characters, can thus constitute an infringement. A good example is DC Comics, which banned all their illustrators from publishing their work as an NFT without a licence, after an illustrator made USD 1.85 million by selling an NFT depicting a character he had drawn for DC Comics. The copyrights to that character had been transferred to DC Comics, and therefore the artist was no longer allowed to use the drawing. Experience shows that large media companies regularly take tough action against the use of their protected content. The use of well-known characters can also be prohibited, based on portrait rights.
Is it allowed to exploit a parody as NFT?
Under Dutch law, parody is an exception to copyright. However, you have to meet certain conditions in order to invoke that exception. Which conditions these are, can be read in earlier blogs, see for example here and here. It remains to be seen whether Dutch law will apply. Which law is applicable, is determined by international private law. We have blogged about this before as well, see for example here and here. If American law applies, the parody may fall under the established doctrine of ‘fair use’. In simple terms, this means that the use of copyrighted material without the permission of the copyright holder is permitted for certain limited, “fair” purposes. In general, this means that a copyrighted work may be used for comment, criticism, news reporting, teaching, research and/or parody without the owner’s permission. A parody of an NFT may be considered “fair use”. Whether there is a valid parody exception is ultimately up to the court. The fact that an NFT is a parody does not automatically mean that it does not infringe copyright.
How to act against infringing NFTs?
If there is an infringing NFT, the copyright holder can (in principle) take action against the infringement. The copyright holder can claim cessation of the infringement (“cease & desist”), but also, for example, damages consisting of compensation for the missed licence revenues or a profit transfer. The question of how best to go about this will depend, in particular, on the content of the NFT and how the content is referred to.
As far as this is known, you can of course sue the holder of the NFT. The holder cannot “remove” the NFT from the blockchain, but he can send it to the wallet of the copyright owner or “burn” the NFT by sending it to a “burn wallet”: The NFT is then sent to a non-existent wallet, and is thus destroyed. To find out who the holder is, different parties can be addressed. Such as the operator (seller) of the NFT, the sales platform, or the game / metaverse in which the NFT is used. Parties can be required to provide known name and address details.
If all this is not possible, then the location where the content is actually hosted can (also) be examined. If the hash of the NFT only refers to hosted content on a centralised server, it is (also) possible to write to the hosting provider concerned. A Notice and Take Down request can be submitted for this purpose. However, the hosting provider itself is not liable for compensation of damage, in so far as it complies with this request without delay. The consequence of complying with such a request is that the NFT will only contain a ‘broken link’. The NFT is therefore empty and will no longer have any value. If the hash of the NFT refers to hosted content on a decentralised server (peer-2-peer), the situation is different. The content will then be stored fragmented on different devices. Anyone using the server network may then have stored or exchanged part of the image. It will then be a lot harder to find out which parties have done this. In that case, other measures may be possible.
If the NFT is stored on the blockchain itself, there is a different problem. Blockchain technology is generally designed to ensure that information is stored reliably and inviolably, and therefore permanently. The removal of an infringing image is therefore not simply possible. However, in practice we still sometimes see previously valid blocks or transactions being invalidated. This is, however, a heavy measure that can also cause other damage (e.g. a block can contain several transactions that are also affected).
Lawyer NFT and copyright
Do you have questions about NFTs? We are specialised in crypto, blockchain and NFTs as well as in intellectual property rights. Feel free to call or email me: 013-2077107 or W.Dammers@lawfox.nl.
