Finance, Intellectual Property

NFTs And Copyright: What You See Is Not What You Get

An NFT is more like a digital certificate of authenticity that proves that one owns a 'special' copy of a work of art. The purchaser is only buying a slab of code.

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Concept of non fungible token. Hand holding a phone with Text NFT. Pay for unique collectibles in games or art.Nonfungible tokens (NFTs) continue to trend as creators keep making them and collectors keep taking them. But, as deep as we are into the hype cycle, it continues to amaze that many sellers and even more buyers are wholly unaware of what an NFT transaction actually entails.

Technically — and legally — speaking, someone who buys an NFT is obtaining ownership of a particular alphanumeric code that lives on the blockchain, tucked away in a virtual wallet. In theory, this code includes a link to, or some sort of association with, a work of visual art or a song or a hamburger or just about anything else that somebody has thought to tokenize. Now, this code is unique — the “nonfungible” in the NFT initialism — and nobody but the buyer will own this code in this context after purchase. And that ownership will be indelibly inscribed on the blockchain to create a record of the transaction. But the art associated with the NFT is not itself stored on the blockchain or in any way secured, so the NFT is more like a digital certificate of authenticity that proves that one owns a “special” copy of a work of art.

While anything can be tokenized, most of the works that have made headlines have been works of visual art. Picture of anthropomorphic animals and pixelated head and torso combinations are particularly popular. Confusion has arisen because buyers of these NFTs, who at times pay lofty sums for the pleasure, believe that they are procuring more than just a chunk of code. But they are mostly wrong.

It helps to think of NFTs as digital baseball cards, those QFTs (quasi-fungible tokens) whose value for the most part peaked in the 1990s. While your 1989 Upper Deck Ken Griffey Jr. rookie card was not one-of-a-kind, it was (in theory) available only in limited quantities and thus valuable. And while owning the card had its benefits, the holder had no right to make copies of it or stop others from using the photograph on the card.

The same is true with an NFT. If I sold you an NFT associated with a drawing I made of Griffey, you would certainly be in a position to mock my inability to accurately render facial proportions, but you would not be in a position to do anything with that drawing other than hold it or trade it.

This is true due to two fundamental tenets of copyright law.

The first is that the purchase or obtainment of an object — physical or digital — does not give the buyer any copyrights in that object. It is axiomatic, as the court wrote in ITOFCA, Inc. v. MegaTrans Logistics, Inc., that “a copyright is not transferred automatically with the transfer of the copyrighted good [thus] when you buy a book, you don’t obtain the right to make and sell copies of it.” 322 F.3d 928, 931 (7th Cir. 2003). In the digital realm the same is true — if you buy an NFT associated with a monkey picture to use as your avatar you cannot make copies of it without the monkey picture’s author’s consent.

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The second is that ownership of a copyright is only transferred when an author signs a written contract that says so. Under 17 USC 204(a) of the copyright act, a “transfer of copyright ownership” is “not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner’s duly authorized agent.” This was designed to protect artists from giving their copyrights away and ensure a reliable record of copyright transfers. When an NFT associated with a work of art is sold, it is almost never the case that the author signs anything transferring any rights in the work.

Both of these concepts are germane to the recent dispute between NFT pioneer Larva Labs and holders of the first version of the now very valuable Crypto Punks NFTs. Each one of these NFTs were linked to artwork depicting blocky visages adorned with rock-and-roll motifs like gnarly haircuts or lit cigarettes. These number about 10,000 and are the most valuable collection in the marketplace by most metrics, which is not very punk.

Larva initially offered a version (v1) of the Punks that was marred with a programming flaw that allowed buyers to recover their payment for the NFT immediately after a purchase. Staying with the ballcard analogy, the v1 was the Fleer Bill Ripken of NFTs.

The v1’s error made transactions impossible, or not really worth doing, so Larva sent to all v1 holders a second version (v2) of the relevant Punk and declared the v1s to be worthless. This proclamation became LOL-worthy when it was later discovered that one of Larva’s founders sold off a bunch of v1s just before the proclamation went out, kind of like those senators selling off stocks right before the pandemic hit.

The v2s were exactly the same as the v1s except that the programming flaw had been rectified in the v2s. But this rectification created an issue — there were now two versions of a supposedly non-fungible asset, differing only due to the bug. After a few enterprising souls fixed the bug in the v1s and started selling them, Larva objected. It maintained that the v1s could not be sold and took steps to have them removed from mainstream marketplaces. Holders, though, felt otherwise and continued to offer them for sale. The dispute created havoc across Discord Nation, with cases being made for both positions.

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Larva may have the better argument from a legal perspective, though making it in court will shine a light on the messy fact that none of the Punk holders — v1 or v2 — have any real rights associated with the Punk art. Larva, assuming they continue to hold the copyrights, can argue that any use of the Punk’s visual art beyond what it allows is infringement.

An issue for Larva, though, is that when the v1s were first offered up to the public, it had no content license in place. So, it likely does not have the contractual right to force the removal of the v1s from the marketplace. But, it has a particularly powerful copyright position. As noted above, 17 USC 204(a) makes invalid any putative transfer that is not in writing and signed by the author. Larva has a copyright registration for the Punks that identifies it (Larva) as the author. So, when people took ownership of the v1s when first offered, they obtained a string of code, but by law did not receive any copyrights related to the art associated with the code. And ownership alone of the code conveys no real protection should Larva, the copyright holder, enforce the work’s copyrights.

Larva, did just that, using 17 USC 512 of the Digital Millennium Copyright Act to enforce its rights in the Punks. It reportedly issued notices requiring online platforms to remove the v1s, or at least the visual art that is associated with the v1s. Presumably, the platforms could use some other visual asset to identify the NFT, and avoid having to remove the NFT, but that may take the fun out of the process, as it would lay bare that the buyer is only buying a slab of code. The v1 holders are in their feelings over this approach but have not yet taken the step of initiating litigation.

Larva’s legal dispute with the owners of its NFTs is but one of many legal quandaries bubbling up along the blockchain. As the very first of these progress through the courts, it is likely that new forms of digital art will be, as they should, treated similarly to old forms of physical art and any claim that digital assets are somewhat different will take a long time to gain traction.

Scott_Alan_BurroughsScott Alan Burroughs, Esq. practices with Doniger / Burroughs, an art law firm based in Venice, California. He represents artists and content creators of all stripes and writes and speaks regularly on copyright issues. He can be reached at scott@copyrightLA.com, and you can follow his firm on Instagram: @veniceartlaw.

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