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Legally Speaking — NFTs, Blockchain, and Copyright Issues

by | May 9, 2022 | 0 comments

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Column Editor:  Anthony Paganelli  (Western Kentucky University) 

Against the Grain V34#2

Blockchain technology has begun to enter many facets of businesses, education, and healthcare.  The technology that is a secure distributed ledger system has been implemented in various ways to decentralize services, such as the use of Blockcerts in higher education, which was introduced by the Massachusetts Institute of Technology in 2017.  The Blockcerts allow students to receive a digital diploma that includes their transcripts from a secured Blockchain system.  Upon graduation, students are able to share their digital diploma with the transcripts to potential employers as their official transcripts.  This service bypasses the need for the student to contact the registar’s office and pay for their official transcripts to employers for degree verification. 

Blockcerts is one of many applications that organizations are utilizing Blockchain technology that is beneficial for the organization and those they serve.  While Blockchain is most noted for cryptocurrency, there other uses beyond decentralizing services or providing a secure system for businesses.  A recent use for Blockchain has been in the realm of entertainment, which is causing some issues that includes the use of Non-Fungible Tokens (NFT). 

This relatively new concept is complicating the already complicated world of intellectual property protection.  This column will examine two recent legal issues that involve the popular book and movie Dune and a few other issues of copyright infringement through the use of NFTs.  While this paper is noting copyright litigations, NFTs are also an issue with trademarks, as Nike and Hermès recently filed lawsuits in the United States in March. 

Non-Fungible Tokens

Of course, we have to understand the concept of Non-Fungible Tokens, which is about as easy as defining the Internet or Blockchain technology.  According to Mottet, et al. (2022), “NFTs stand for ‘Non-fungible tokens’ (non-fungible meaning non-interchangeable, a thing that cannot be directly exchanged for something else of equal value).  They are digital assets that represent real-world objects like drawings, music, videos, clothes, handbags, etc.  They can be minted (created) from any work and are bought and sold online, frequently with cryptocurrency.” 

These NFTs are creating value, primarily because of the rarity of the item.  In other words, the more rare an item is, the more value the item is worth.  An example of this is the CryptoKitties craze in 2017 that allowed people to purchase a digital kitten through Blockchain technology, which the kitten was specially bred using a computer algorithm that makes each kitten unique and rare.  It is the equivalent of Pokémon or Beanie Babies collectibles.  In other words, people are purchasing these digital items because they are rare. 

During the peak of the CryptoKittie craze, some kittens were being sold between $23.06 to $117,712.12 (BBC, 2017).  Because these are considered collectibles, people are able to sell to others similarly to baseball cards.  This is also an example of how NFTs can become complicated in regards to copyright.  Those that purchased a cute picture of a CryptoKittie do not own the image.  Instead, those that purchased a CryptoKittie have actually purchased the computer code, which is the same concept of the baseball card.  A person that owns a baseball card is typically not the copyright owner of the image of the baseball player. 

Basically, the token is a certificate of ownership, which is the reason for the recent copyright issues.  While an NFT is proof of ownership of an object, it does not mean that the person is the copyright owner, which people are purchasing artwork, videos, literature, etc. and attempting to sell the NFTs.  Mottet, et al. (2022) people are making the understanding that purchasing an NFT is considered “buyer beware.”  They (2022) stated, “As a consequence, the transfer of an NFT does not automatically entail the transfer of the copyright on the work.  Usually when an NFT is sold, what is exchanged is not the work itself nor its support, but the associated unique token.  An NFT seller (that is also the owner of the copyright on the work) can, of course, also transfer the copyright to the buyer.  However, said transfer must be contractually stipulated in writing.”

Of course, this is no clear cut case of copyright infringement should someone sell a token of ownership.  As mentioned by Motett, et al. (2022), “Anyone is indeed able to mint an NFT from a work, even if he or she does not own any rights to the specific work.  Although this practice would seem to be a clear case of copyright infringement, it is not that simple.  Indeed, the NFT is neither the original work or a copy of the work, it is merely a token, a ‘receipt of ownership’ so there is per se no unauthorized reproduction, copy or sale.” 

Mottet, et al. (2022) also noted, “However, there might be copyright infringement if:  The process of minting an NFT involves making a copy of the underlying work without the consent of the copyright holder;  An image is used as an illustration of the NFT without the necessary permission;  The minter of the NFT first creates a digital file of a copyrighted work without any permission;  and the metadata does not contain the correct information about the author of the work (violation of the moral rights of the author).”

Dune

A recent issue of NFTs and copyright infringement involves the rare book (approximately 10 copies exist) about the filmmaker, Alejandro Jodorowsky and the book Dune.  According to Angeleti (2021), “The group Spice DAO planned to sell NFTs based on the contents of the book, which details Alejandro Jodorowsky’s ambitious but failed adaption of Frank Herbert’s sci-fi novel.”  The Spice DAO (Decentralized Autonomous Organization) is one of several DAOs that are purchasing rare items and creating NFTs.  This organization purchased the book for $3 million in November 2021 at a Christies’ auction in Paris. 

The intent of the Spice DAO was to place portions of the book into NFTs for sale and then eventually burn the physical copy.  Angeleti (2021) noted the organization’s goal to “issue a collection of NFTs that are technically innovative and culturally disruptive, a first-of-its-kind, and that burning the book would be an incredible marketing stunt which could be recorded on video.”  The video would also be sold as an NFT, along with a digitized copy of the book for sale.  In addition, the organization was going to create an animated series for streaming based on the derivatives of the book. 

The organization also Tweeted their intentions “We won the auction for €2.66 M.  Now our mission is to: 1. Make the book public (to the extent permitted by law);  2. Produce an original animated limited series inspired by the book and sell it to a streaming service;  3. Support derivative projects from the community.”  While the intent to place the book online for free is currently available, so this goal is not the issue.  However, creating works based on the book’s content is a violation of copyright law. 

Even though there have not been any attempts to follow through with their goals of producing works based on the contents of the book, it does bring to the forefront the issue of placing copyrighted items into the NFT realm for profit.  In other words, Spice DAO thought the purchase of the book entitled them to copyright, but it did not, which has brought a spotlight on NFTs and intellectual property protection as other organizations enter the market, such as Rarible, OpenSea, SuperRare, and Nifty Gateway. 

NFT Market and Other Copyright Issues

According to Tiwari (2022), “The NFT industry has grown faster than even its participants could have imagined.  The market sales surpassed $40 billion in 2021 just on the Ethereum blockchain … The prime reason for this growth is the hype that has surrounded these assets for the last two years from minting platforms, games, marketplaces, exchanges and others.”  Tiwari also noted that these platforms have opened a massive issue with scams and copyright violations.  Due to this new innovation, the marketplace will have to have further copyright regulations, since this is a space for authors and creators to sell and promote their works. 

Due to the increase of copyright issues with NFTs, there is more awareness to patrol these new mediums.  Tiwari (2022) noted that “A platform called GuardianLink is using its proprietary artificial intelligence technology to monitor the web for any duplicate, rip-offs and copy-cat NFTs of the creators using their platform.  This enables both creators and collections to protect their NFT assets.” 

Other issues with copyright and NFTs include several major artists, such as Jay-Z and Quentin Tarantino.  According to Hale (2022), “In June 2021, Roc-A-Fella Records initiated a lawsuit against its co-founder Damon Dash for allegedly attempting to ‘mint’ and sell Jay-Z’s album Reasonable Doubt as an NFT.  Roc-A-Fella’s complaint alleges that Dash planned to sell an NFT of the Reasonable Doubt copyright through an auction on an NFT platform.”  The court agreed that there was the attempt of copyright infringement and barred “Dash from altering, selling, or otherwise disposing of any copyright or other property interest in Reasonable Doubt, including the auction of an NFT reflecting such interest.” 

Tarantino’s case is a little more complicated because he was being sued by the production company Miramax for his “intention to auction seven ‘exclusive scenes’ in the form of NFTs from his handwritten Pulp Fiction script.  Miramax’s complaint alleges that NFTs do not fall under Tarantino’s limited contract rights for the film” (Hale, 2022).  This case will be important in how NFTs impact not only copyright but also contracts. 

Issues with NFTs

Poritz (2022), noted that “Some of the legal liabilities in NFT projects may arise from a misconception that innovations in blockchain technology can replace the legal legwork needed to defend against costly lawsuits, attorneys say.”  As noted by Poritz, Blockchain’s ability to create “smart contracts” does not mean that these are actual contracts, which has caused some confusion, and implies that some sellers are attempting sell items without understanding how the technology works. 

In order to avoid issues of copyright, the sellers will need to clearly indicate all information regarding the NFT.  This information will include ownership, copyright or trademark rights, licensing agreements, and other important information to the buyer.  The more information provided by the seller will best prevent some issues of copyright infringement.  Of course, there will need to be more regulations and best practice standards regarding NFTs in the future. 

References

Angeleti, G.  (2021).  Cyrpto group shamed for spending $3 million on ‘Dune’ book, mistakenly believing it had acquired copyright to produce NFTs.  The Art Newspaper.  Retrieved from https://www.theartnewspaper.com/2022/01/17/nft-group-shamed-jodorowsky-dune-book-copyright

BBC.  (2017).  CryptoKitties craze slows down transactions on Ethereum.  Tech.  Retrieved from https://www.bbc.com/news/technology-42237162

Hale, C.  (2022).  NFT Lawsuit Roundup.  Frost Brown Todd Attorneys, LLC.  Retrieved from https://frostbrowntodd.com/nft-lawsuits-2022-roundup/

Locke, T.  (2021).  What are DAOs? Here’s what to know about the ‘next big trend’ in crypto.  CNBC.  Retrieved from https://www.cnbc.com/2021/10/25/what-are-daos-what-to-know-about-the-next-big-trend-in-crypto.html

Mottet, A., Santantonio, O., & Meunier, A.  (March 7, 2022).  What are the copyright and trademark implications of NFTs? Lexology: Lydian.  Retrieved from https://www.lexology.com/library/detail.aspx?g=f4d3980f-d63c-464f-b1b7-e21f184e4584

Poritz, I.  (2022).  Caked Ape lawsuits show need for clear contracts in NFT art.  Bloomberg Law News.  Retrieved from https://news.bloomberglaw.com/ip-law/caked-ape-lawsuits-show-need-for-clear-contracts-in-nft-art

Tiwari, A.  (2022).  ‘Wave of litgation’ to hit NFT space as copyright issues abound.  Cointelegraph.  Retrieved from https://cointelegraph.com/news/wave-of-litigation-to-hit-nft-space-as-copyright-issues-abound  

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