Intellectual property attached to NFTs has been widely misunderstood ever since these digital artworks entered the mainstream. Abstruse language applied by some issuers in relation to terms of purchase and ownership has greatly contributed to the confusion surrounding the rights that buyers acquire when they invest in an NFT.
A prime example is the ubiquitous and inaccurate statement that an NFT is “a unique and original piece of art,” implying that the digital asset is a kind of absolute that can be used, reproduced and repackaged as the collector sees fit. More accurately, an NFT is a blockchain-held token that offers a permanent record of ownership linked to a creative work, linked being the operative word in this definition.
According to attorney Edward Cavazos, who is a managing partner at Pillsbury law firm in Austin, Texas, and an expert in IP and tech litigation, buyers need to understand the difference between the tokenized asset they are purchasing and the related image. “The NFT should be seen as an isolated thing. It is not the art. The art is referenced by the NFT, and therefore it remains a separate entity from an intellectual property perspective,” he explains.
As such, crypto art is subject to existing U.S. trademark and copyright laws, which dictate that the creator of a work — be it a piece of writing, a physical artwork, a musical score or indeed a virtual asset — owns every element of that artistic endeavor. This ownership relating to “creations of the mind” is not automatically transferred when an NFT is produced, even if the art is technically embedded in the digital files, as is the case with generative NFTs. Unless it is stipulated in a separate license (more on this later), the purchase of an NFT only grants the buyer the right to use, copy and display the NFT; it does not permit the commercialization or monetization of this asset.
“I like to use the analogy of a sports stadium,” says Cavazos. “Brands may benefit from a sponsorship deal that gives them exclusive naming rights, like the O2 stadium in the UK or the Microsoft Theater in Los Angeles, but that doesn’t mean that the brand owns the stadium. Similarly, ownership of an NFT allows you to associate your name exclusively with that asset via a smart contract, but it doesn’t give you the asset.”
If ever there was a cautionary tale to highlight Cavazos’s point, it is the 2021 Dune NFT fiasco involving a nearly $3 million investment that went badly wrong for a cryptocurrency-backed consortium called Spice DAO. Its members bought a rare book at a Christie’s auction that contained the artwork and storyboards for Alejandro Jodorowsky’s unproduced 1970s screen adaptation of Frank Herbert’s classic sci-fi novel Dune.
The group’s intention was to divvy up the book, known as the Dune bible, into a series of animated NFTs and burn the hardcopy to create a sense of exclusivity, granting buyers a slice of celluloid history via the metaverse. However, a significant oversight thwarted these plans: Spice DAO did not own the copyright and therefore had no legal authority to financially benefit from any such project. Investors had bought a rare book of Dune storyboards, not the rights to adapt it into other mediums.
“The best analogy for an NFT is that one is buying a limited-edition print of an artwork,” says British barrister and author Guy Tritton, who specializes in intellectual property, IT, tech and commercial law. “Generally, all that means is that you can use it and sell it. Whether you can do anything more will depend on the license that goes with it. The underlying IP is copyright, and copyright law is very similar throughout the world.”
Sometimes creatives can find themselves in hot water, too. Quentin Tarantino’s venture into NFTs — centered on his 1994 hit movie Pulp Fiction and comprising exclusive interviews and previously unseen content — was mired in a legal morass because the director did not own the film’s redistribution rights. Miramax claimed that Tarantino was infringing the studio’s rightful copyright, while the director’s legal team argued that NFTs, which did not exist at the time of the film’s release, did not fall under the remit of redistribution. The two parties recently settled out of court.
The Tarantino case demonstrates that NFT IP law is a complicated subject that requires nuanced thinking, especially if you’re an artist producing a crypto work inspired by an existing entity, be it a movie, painting, manuscript or any other creative asset.
For collectors, the key is to fully understand the small print. “If I were to buy an NFT from a U.S. artist and sell it to a UK customer, I would have to comply with both U.S. and UK copyright law,” says Tritton. “But as copyright law is essentially identical and artworks, tweets, photographs, et cetera, are protected by copyright in almost all countries in the world, the real analysis should be applied to what the smart contract and any associated license allow you to do. If it does not expressly allow you to manufacture sellable merchandise, then you cannot do it.”
His point is echoed by Cavazos, whose practice has facilitated a number of high-profile independent agreements, including one governing the sale of CryptoPunks’ IP to Bored Ape Yacht Club creator Yuga Labs and leading to commercialization rights for CryptoPunks NFT holders. Yuga Labs based this acquisition on the Bored Ape business model, noted for its broad copyright license, which allows owners to make commercial use of their Ape NFTs, including creating new derivative works.
“Creators of NFTs are free to dictate contractual terms to buyers that change the default rules,” Cavazos explains. “Some creators have said, ‘Hey, I want to participate in any future income that arises from the transfer of the NFT associated with my work,’ which relates to a royalty agreement. These independent licenses are not dictated by existing intellectual property law and are not included in the smart contract.”
Certainly, Bored Ape owners have full intellectual property rights over their NFTs, resulting in collectors using their own NFT avatars for commercial purposes, a bit like a pet with benefits, spawning everything from limited-edition Ape-themed beer and hoodies to a burger joint backed by Snoop Dogg.
But this flexible approach has its problems too: With a collection of 10,000 Apes, a transfer of IP rights has meant greater susceptibility to imitators and counterfeiters. In fact, Yuga Labs is currently embroiled in a lawsuit with artist and satirist Ryder Ripps, who has created his own independent collection of politicized Ape-like NFTs, which Yuga Labs maintains are a breach of trademark law.
“What’s interesting is that we are now seeing all types of experimentation within the world of NFT licenses,” says Cavazos, who is the first to admit he’s been kept on his toes by NFT issuers pushing the boundaries of intellectual property in Web3. “Some NFTs now come with complete transfer rights, so that purchasers not only own the NFT, they also own the art” — and, therefore, the IP.
“Then, there’s the extreme version known as the Creative Commons Zero license, or CC0,” Cavazos adds. “This dedicates the work to the public domain and was recently adopted by Moonbirds [a collection of profile picture NFTs, similar to CryptoPunks], essentially allowing anyone — collector or not — to do anything they want with their NFTs. So right now, we’re seeing a whole spectrum of IP choices, from artists retaining full control of their rights, to some allowing collectors a capped amount of commercial revenue, to others who are relinquishing ownership of their NFTs altogether.”
Considered a rogue move in IP law, the CC0 license initially had top IP lawyers like Cavazos scratching their heads. “You would never typically see an IP owner release all their rights under a CC0,” he says. “I mean, can you imagine Disney or Marvel, who own billions of dollars in IP assets, doing something like that? It’s unthinkable.”
But by doing so, the IP owner aligns “with the open-source software ethos, which was driven by a noncommercial incentive for the betterment of the digital landscape,” he notes. “If a creator gives the public total freedom to monetize their NFTs — conceiving TV shows, comic books, fashion lines, food outlets and anything else that sparks their interest — without legal repercussions, it may become a pop-culture phenomenon that everyone’s able to add to.” And while all this is happening, “the NFT holder still has something unique: an unbreakable association with an asset that is taking off in a big way,” Cavazos points out. “That could be interesting. That could be valuable.”