NFTs and ownership
For the vast majority of art and collectible NFT projects, buyers are granted little more than a narrow, non-commercial licence to display or reproduce the associated content for personal use (such as for a profile picture on social media or to hang in a virtual gallery). In fact, for a significant number of projects, no express usage rights are granted at all.
This has made NFTs an easy target for critics, who boast that they can simply ‘right click, save’ the NFT image that is trading for thousands of pounds. Unswayed by these criticisms, NFT collectors are quick to reply that: (a) this is the same case for buying physical art from a gallery – a buyer is not granted any intellectual property rights, nor do they expect to be; and (b) for certain projects, the artwork is half the story – the NFT acts as a key to unlock other benefits, such as access to private community messaging groups, in-person events, utility or governance tokens, air-drops, early access to other projects, and more.
What’s more, with blockchain technology enabling artists and creators to emulate property ownership through artificial scarcity and provable provenance, intellectual property rights were not at the top of collectors’ minds in the early days of NFTs and were not determinative of a project’s value. But, the NFT space moves quickly…
The emergence of commercial NFT rights
Inspired by the iconic Bored Ape Yacht Club (BAYC), there are a rising number of creators taking a different approach to intellectual property and starting to give NFT holders commercial usage rights over their NFTs.
BAYC, one of the most successful NFT projects to launch last year, gives holders an “unlimited, worldwide license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art”. Holders have taken full advantage of this, with Adidas sporting a Bored Ape as its official Web3 avatar and itself launching a derivative NFT; Universal Music’s 10:22PM label signing a new group called Kingship, consisting of four characters from BAYC; and one ape being signed with CAA for future commercial opportunities.
Another popular NFT project, The World of Women (WoW), took the leap earlier this month of transferring to NFT holders all copyright associated with the artwork. This move was clearly a popular one, as the floor price rose by 400 per cent only a couple of days after the news was announced.
A precedent has been set with high-profile projects now under pressure to deliver similar benefits to holders and discerning collectors beginning to see the value of intellectual property rights.
With this latest shift to more traditional forms of licensing and copyright ownership, we are beginning to see the legal challenges that arise and the tension between the promises of ownership and transferability expected from Web3 and the formality and accountability tenets of the law.
Copyright ownership and licensing
Buying and selling NFTs on the open market has become like trading stocks; typically there is no negotiation between buyer and seller. A seller proposes a sale price on a marketplace and a willing purchaser connects their wallet and accepts the offer. For more sophisticated projects, there may be some accompanying T&Cs that are embedded in the metadata or linked to within the description of the NFT. The enforceability of these EULA-style contracts, particularly as against consumers, is an open question and one for another article. Nevertheless, it is fair to say that, currently, the only negotiated variable in an NFT sale on these marketplaces is the price.
As a growing number of projects start granting extensive commercial usage rights and copyright assignments to holders, and as those holders begin exercising those rights in more sophisticated ways, thought will need to be given to how new buyers can be sure that they are purchasing an NFT that has not been encumbered in some way.
Usually when businesses enter into licence agreements or purchase copyright, they conduct due diligence on the seller and demand a set of warranties, indemnities and other protections from the licensor or seller to gain assurances over what they’re buying. NFT marketplaces are not set up to facilitate this level of diligence or even enable sellers to disclose encumbrances or existing licences that have been granted. So where does this leave buyers and sellers?
Licences
“I have a licence to use artwork associated with my NFT for commercial purposes from the NFT creators – what happens to the sub-licences I enter into when I sell my NFT to someone else? For example, I have granted a clothing company the right to print my NFT artwork on T-shirts and sell them to retail, but now I want to sell the NFT.”
This depends on the construction and terms of the licence that has been granted from the creators. As explained above, most of these projects have EULA-style terms and conditions that apply to each NFT holder. When an NFT is sold on to a new holder, the seller does not transfer the licence rights to the new holder; instead the licence granted by the project creators to the original holder terminates and a new licence is formed between the project creator and the new holder.
Some NFT T&Cs expressly state that any sub-licences granted during the term of the licence will automatically terminate when the NFT is sold (see the T&Cs for RTFKT1 (recently acquired by Nike)). For those T&Cs that are silent on sub-licensing and termination (such as the BAYC T&Cs2 ), we must fall to contract and copyright law principles. Under English law, the rights of a licensee are not proprietary and, unless the licence from the NFT creator (the head licence) can be construed otherwise, a sub-licence will terminate upon the termination of the head licence on the basis that you can’t grant rights you don’t have. 3
This leads to potential exposure for all involved:
- Sellers: The licences you may have granted to others during your ownership may automatically terminate upon a sale, potentially exposing you to a contractual claim from a sub-licensee. To avoid this, you will need to terminate the licence or convince the buyer and sub-licensee to novate the licence and release you from the contract.
- Buyers: Be aware that your NFT may have been previously licensed and may be subject to a dispute between the seller and a sub-licensee.
- Sub-licensees: Proceed with caution when taking licences from NFT holders and insist on appropriate contractual protections.
Assignments
“I have been assigned the copyright to the artwork associated with my NFT from the NFT creators – what happens to the licences I enter into when I sell my NFT to someone else?”
Unlike the licence example above, for these projects, the rights carry with the NFT and are transferred from holder to holder upon a sale (or at least, that is the intention).
Under English law, licences granted by the copyright holder are binding on every successor in title (every subsequent NFT holder), unless the purchaser bought the NFT (together with the copyright title) in good faith, for valuable consideration and without knowing about the licence.4
The old adage of ‘let the buyer beware’ rings true here and underscores the need for proper due diligence to be conducted when acquiring copyright. Since the default position under English law is that licences will survive transfer of ownership, this means NFT buyers may be acquiring an NFT that is subject to existing licences (and possibly even an exclusive licence that may conflict with the NFT holder’s own use). While a buyer may have bought the NFT innocently, with no knowledge of the existing licences (which may well be the case if the purchase was made on a rudimentary open marketplace) it is the buyer’s burden to prove this.
The World of Women FAQs5 acknowledge these issues – for example:
“Q: I have authorized a third party to use my WoW as the logo of their brand. Can they still use it if I give away my WoW to a new owner?
A: Yes, they can.
Q: I’m thinking of acquiring a WoW. Is there a way for me to know how its IP has been used in the past?
A: Unfortunately, not yet. You’ll have to do your own researches, ask the current owner about it if they are available. Each WoW comes with a unique past and there’s no way around it!”
Final thoughts
Giving away intellectual property rights to NFT holders is a credible idea in principle, but it does inadvertently trigger various legal issues. The vast majority of people buying NFTs are not used to conducting due diligence on their purchases, and the marketplaces for NFTs are simply not set up to accommodate this. Conducting chain-of-title analysis of digital assets that are traded like stocks is near impossible. Buyers, sellers and licensees will likely be exposed to liability as these issues start to rear their head.
- rtfkt.com
- boredapeyachtclub.com
- Austin Baldwin & Co Ltd. v. Greenwood & Batley Ltd. and v. Magnetic Car Company Ltd (1925) 42 RPC 454
- Copyright, Designs and Patents Act 1988, section 90(4).
- notion.so
In-depth 2022-017
