EACCNY “Digitalization” Series | NFTs & Copyright Issues in the EU and U.S.

With the help of our members, this thought-leadership series explores the acceleration of “digitalization” due to COVID-19 on both sides of the Atlantic, and across various industries. Today, we present Lisa A. Ferrari, Co-Chair, Copyright Practice at COZEN O’CONNOR in New York City, USA; along with Camille Truchot, Associate at GIDE LOYRETTE NOEL in Paris, FR. They will address: “NFTs & Copyright Issues in the EU and U.S.”.

An NFT, or “non fungible token” is a token, registered on a blockchain, which is unique (or is one within a limited unique series of token). The token is linked to an underlying asset, which may be a digital artwork, video, sound file, a physical asset, or access to an online or real-world experience or service.

NFTs have become a new way for digital artists to value and monetize their work and benefit from their work success as the NFTs, through the smart contract, determine a percentage that will be received by the artist, or any designated party, each time the NFT is resold.

However, NFTs present various copyright issues. First, artists need to decide what rights they want to give to the NFT purchasers. Second, “minters” need to ensure they hold the proper authorization or the necessary IP rights to mint NFTs linked to preexisting and protected works. When they don’t, artists and brands may need to take action against NFT counterfeits. The NFT marketplaces also have a role in the fight.

1. Rights Obtained by NFT holders when they acquire an NFT

Web3 is a new iteration of the Web based on blockchain technology and the concept of decentralization. Its original philosophy was to avoid overly centralized systems and to empower the “community”. Many therefore consider that the community has a role to play in every initiative and should, for instance, be able to freely use and exploit the visual artwork of the NFTs they own.

The Bored Ape Yacht Club (BAYC) is the most famous example of the decentralized model as the company licenses to NFT holders the commercial rights on the Ape associated with the NFT they hold. NFT holders are allowed to make any commercial use of and to monetize their Ape’s image. This has led to a plethora of businesses based on Apes’ images, including the creation of comics, IPA, restaurants, music clips, etc.

Such exploitation by the community is deemed beneficial to the initial artist or brand, who receives a percentage on each sale of the NFTs, as well as to the community which may fully benefit from the asset bought.

On the other hand, other artists or brands that have already developed high value IP or have a protective IP policy may wish to limit the rights granted to the NFT holder in order to retain control on the use made of the artworks associated with the NFTs.

This being said, how are the purchasers of NFTs granted any IP rights or authorizations on the NFT artwork they buy?

Under U.S. law, the Copyright Act, 17 U.S.C. § 204(a), provides that a transfer of copyright ownership, other than by operation of law, is not valid unless it is in writing and signed by the copyright owner or the owner’s authorized agent.  Similarly, under French law, Article L. 134-3 of the Intellectual Property Code requires that a transfer of copyright ownership be made in writing, in a document that includes mandatory legal provisions specifying each right transferred, as well as the geographical scope and duration of the transfer. Thus, for both jurisdictions, the mere sale of an NFT does not, without more, transfer ownership of the copyright rights.

With regard to NFTs, the license agreement may be included in the Terms and Conditions of the artist or platform’s website or, in order to follow the NFT through secondary sales, in the NFT Terms and Conditions. Such NFT Terms and Conditions may be included as a link in the NFT description in the NFT metadata. The NFT Terms and Conditions may be either hosted on a “Web2” website, which is centrally hosted and can therefore be amended in time, or on decentralized networks such as IPFS, which better ensure the document integrity but are less user friendly.

Market practices as to the manner of bringing Terms and Conditions to the subsequent purchasers’ attention are still evolving.

2. Necessary rights to mint an NFT and fight against counterfeiting

Those who are interested in minting NFTs should be careful to determine their rights to do so. In the EU and the U.S., it is necessary to (i) be the author, (ii)  to have an express assignment of the copyright rights, or (iii) to have been expressly transferred or licensed the right to use the work as an NFT.  In the U.S., cases alleging a variety of intellectual property violations in the minting of NFTs are working their way through the system as U.S. courts address issues surrounding this new technology.  Claims of copyright infringement, but also trademark infringement, unfair competition, design patent infringement and right of publicity violations are among the claims that have arisen under U.S. law in connection with the unauthorized selling of NFTs.

Even if a company is not pursuing the sale of NFTs, it should nonetheless remain vigilant by monitoring NFT marketplaces; submitting takedown notices, a relatively easy process under the U.S.’s Digital Millenium Copyright Act (DMCA); sending cease and desist letters; and participating in programs offered by platforms to locate infringers.  If use of NFTs is intended, consideration should be given to registering the user’s trademark as an NFT brand.  There are also vendors who offer services to help track infringement online or block NFT spammers from stealing works.  Last, company employees should be trained that the unauthorized use of NFTs, just like with other forms of intellectual property, is not allowed.

In the EU, while internet platforms may not have a general surveillance obligation, they have to take down infringing content of which they become aware. The recent European Copyright Directive, which is a framework for Member States to draft their own laws, and the Digital Services Act (DSA), very recently adopted, reinforce safeguards and mechanisms for the removal of illegal products, services or content online. They include, for example, the obligation to implement a report mechanism and to make best efforts to avoid infringing content to reappear in the future.

Although internet platforms in both the EU and the U.S. generally cooperate in removing content alleged to be infringing, the decentralized nature of NFTs makes it nearly impossible to identify the infringers themselves and to pursue legal remedies, leading some to avoid the NFT marketplace.

To conclude, some purchasers buy NFTs as a financial investment.  Others purchase NFTs for the sentimental value, for the status of owning a unique collectible, or because they want to form a connection with the creator.  Given the range of reasons that purchasers seek to acquire NFTs, it seems clear that NFTs are here to stay and that the legal and regulatory systems in the U.S., France and other countries will have to catch up to this wildly popular and developing technology.

Authors:

• Lisa A. Ferrari, Co-Chair, Copyright Practice, COZEN O’CONNOR
• Camille Truchot, Associate, GIDE LOYRETTE NOEL

We hope you enjoy these Thought-Leadership pieces written by our members: Cozen O’Connor & Gide Loyrette Noel.

Stay tuned for more on this series!