Photo Credit: https://www.fiverr.com/sailorshi/create-nft-crypto-art (last visited Nov. 3, 2021).
Authored By: Kristen Strickland
Executive Research & Writing Editor, American Journal of Trial Advocacy
In the past year, interest in non-fungible tokens (NFTs) has skyrocketed. One headline-grabbing case involved an NFT of a digital art collage made from 5,000 individual images created by the artist Beeple that sold for $69.3 million in 2021.[1] Now, other artists, celebrities, and businesses are joining the NFT craze. Kings of Leon selling their newest album as an NFT, Grimes selling $6 million worth of NFTs,[2] and a six-figure NFT of a LeBron James highlight video are a small sample in this crypto area.[3]
Owning such a digital representation of art has become popular over the last couple of years, despite being in existence since 2014.[4] An NFT is a digital asset, often purchased online with cryptocurrency.[5] The technology behind NFTs is similar to bitcoin, but NFTs are not exchangeable like bitcoin.[6] What makes an NFT desirable for many, and different from bitcoin,[7] is that they are unique, one-of-a-kind assets with built-in authentication.[8] Similar to how an artist’s signature authenticates a specific piece of art, the NFT on the digital image authenticates it, so any copies of it that have been uploaded elsewhere will not have this authentication to certify it as the original.[9]
The digital asset represents an object that exists in the real-world, such as art, music, and video clips.[10] For example, the owner of Beeple’s piece received the image and its unique token, or NFT.[11] This NFT is the “unique identifier for a cryptocurrency account” that “will convey ownership from the artist to its new owner.”[12] The token is “recorded on a digital ledger,” a blockchain, which will store details such as the new owner’s information, future owners if it is resold, and more.[13] These details are in the NFT’s metadata, which is “combined with a cryptographic hash function [to] turn[] the data into a unique, 40-digit sequence of letters and numbers” and create the unique identification.[14] The presence of this unique identification means that “even if there are thousands of NFTs being sold with digital images that look alike, the underlying information will all be different.”[15] As a result, “only one person can truly own digital assets backed by non-fungible tokens.”[16]
As NFTs increase in popularity, the implications of intellectual property law must be considered. NFTs often concern works of art, which are governed by copyright law.[17] Although NFTs involve digital art, they are based off a real-world work of art,[18] which more than likely has copyright protection. Copyright protection attaches as soon as a work of art is “fixed in any tangible medium of expression.”[19] No formal requirements are necessary, such as registration with the United States Copyright Office, in order for copyright protection to subsist in such a work of art.[20] The owner of the copyright has the exclusive right to reproduce the work, create derivative works from it, distribute copies of it to the public, and publicly perform or display the work.[21] These rules apply the same to digital art as they do to physical art.[22]
Currently, the buyer of an NFT owns the underlying asset, but the buyer does not own the copyright.[23] Therefore, if the buyer wants all of the rights to the digital asset, “the copyright holder would need to separately transfer the copyright by contract.”[24] If there is no transfer of copyright, then the owner of the NFT needs to be aware of what they can and cannot do with the underlying asset, or there may be liability for copyright infringement. If the buyer of an NFT does not own the copyright, then it will be the copyright owner, likely the original artist in this case,[25] who could generate new NFTs for any reprints they create,[26] not the NFT owner. Also, the artist who still owns the copyright may work with the NFT owner to display the artist’s digital art physically,[27] which would implicate the “public display” right of the work’s copyright, but the NFT owner cannot do this on his own without violating this right.
In some cases, the art piece underlying the NFT can be changed.[28] When a person changes a piece of art, they are creating a derivative work, which implicates the “derivative” right of the art’s copyright.[29] The NFT would remain the same, but the linked image would be different.[30] Therefore, someone who changes the art underlying the NFT may be liable for copyright infringement if they never got a transfer of copyright—it is only the copyright owner, not the NFT owner, who could make such a derivative work.
When purchasing an NFT, it is important to remember that such purchase does not give you ownership in the copyright in the work underlying the NFT. You own the digital art and its unique token, but you do not own the copyright, so you cannot infringe on any of the copyright owner’s exclusive rights granted to it under the Copyright Act, such as by reprinting it or modifying it. In order to be sure of your rights when buying an NFT, read the terms of the sale so you know exactly what you are and are not buying.[31] There are likely more intellectual property and contract issues to arise as the NFT marketplace expands,[32] but these are some of the principal considerations to take into account before buying an NFT.
[1] Kelly Crow & Caitlin Ostroff, Beeple NFT Fetches Record-Breaking $69 Million in Christie’s Sale, Wall St. J., March 11, 2021, https://www.wsj.com/articles/beeple-nft-fetches-record-breaking-69-million-in-christies-sale-11615477732?mod=article_inline.
[2] Amber Burton, Want to Buy an NFT? Here’s What to Know, Wall St. J., March 13, 2021, https://www.wsj.com/articles/want-to-buy-an-nft-heres-what-to-know-11615647601?mod=series_nonfungibletokens.
[3] Caitlin Ostroff, NFTs Explained: What’s Driving Prices for LeBron James and Kings of Leon Digital Collectibles, Wall St. J., March 11, 2021, https://www.wsj.com/articles/nfts-explained-whats-driving-prices-for-lebron-james-and-kings-of-leon-digital-collectibles-11615205133?mod=article_inline.
[4] Robyn Conti & John Schmidt, What You Need to Know About Non-Fungible Tokens (NFTs), Forbes, May 14, 2021, https://www.forbes.com/advisor/investing/nft-non-fungible-token/.
[5] Id.
[6] Crow & Ostroff, supra note 1.
[7] Id.
[8] Conti & Schmidt, supra note 4.
[9] Crow & Ostroff, supra note 1.
[10] Conti & Schmidt, supra note 4.
[11] Crow & Ostroff, supra note 1.
[12] Id.
[13] Id.
[14] Burton, supra note 2.
[15] Id.
[16] Ostroff, supra note 3.
[17] 17 U.S.C. § 102(a) (“Copyright protection subsists . . . in original works of authorship . . . .”).
[18] Conti & Schmidt, supra note 4.
[19] 17 U.S.C. § 102(a).
[20] 17 U.S.C. § 408(a) (“[R]egistration is not a condition of copyright protection.”); see also 17 U.S.C. § 401(a) (“[A] notice of copyright . . . may be placed on publicly distributed copies . . . .” (emphasis added)). However, to bring a claim of copyright infringement, the plaintiff’s copyright must be registered with the Copyright Office. Fourth-Estate Pub. Benefit Corp. v. Wall-Street.com, LLC, 139 S. Ct. 881, 886 (2019).
[21] 17 U.S.C. § 106.
[22] Lizerbram Law, NFTs & Copyright Law, Lizerbram L.: Keep It Legal Blog (Mar. 11, 2021), https://lizerbramlaw.com/2021/03/11/nfts-copyright-law/.
[23] 17 U.S.C. § 202 (“Ownership of a copyright . . . is distinct from ownership of any material object in which the work is embodied. Transfer of ownership of any material object, including the copy . . . in which the work is first fixed, does not of itself convey any rights in the copyrighted work embodied in the object . . . .”); Burton, supra note 2.
[24] Burton, supra note 2; see 17 U.S.C. § 201(d)(1) (“The ownership of a copyright may be transferred in whole or in part by any means of conveyance . . . .”).
[25] See 17 U.S.C. § 201(a) (“Copyright in a work protected under this title vests initially in the author or authors of the work . . . .”).
[26] Burton, supra note 2.
[27] Ostroff, supra note 3.
[28] Michael Dore, Legal Issues to Watch in Navigating the Secondary Market for NFTs, L.A. & S.F. Daily J., Apr. 27, 2021, https://www.gibsondunn.com/wp-content/uploads/2021/05/Dore-Legal-issues-to-watch-in-navigating-the-secondary-market-for-NFTs-Daily-Journal-04-27-2021.pdf.
[29] See 17 U.S.C. § 101 (“A ‘derivative work’ is a work based upon . . . preexisting works, such as a[n] . . . art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted. A work consisting of . . . elaborations, or other modifications which, as a whole, represent an original work of authorship, is a ‘derivative work.’”).
[30] Dore, supra note 27.
[31] See Lizerbram Law, supra note 22(“If you are creating (‘minting’), buying, or selling an NFT, read the terms of sale of the marketplace that you’re using. You want to make sure that you know what you are actually buying.”).
[32] See generally id. (explaining that there are still outstanding intellectual property issues, such as when someone mints or sells another person’s art as an NFT, who owns an NFT created by an algorithm, how smart contracts apply, and possible trademark issues that may arise).
American Journal of Trial Advocacy 