NFTs: U.S., EU, And UK Key Copyright Considerations – Intellectual Property


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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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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