A Copyright and Trademark Perspective on NFT
Publication date: February 27, 2023
The arrival of NFT on the market has started to cause some new copyright problems. In national courts, we can more and more often encounter court proceedings regarding infringements of NFT copyrights. One of the more interesting examples of the importance of copyright in the context of NFT is Quentin Tarantino’s NFT. At the end of 2021, he announced that he would “mint” seven iconic scenes from the movie “Pulp Fiction” in the form of NFT. Each such NFT consists of digitized chapters from the original handwritten script, as well as unreleased scenes and Quentin Tarantino’s personalized audio commentary. The film studio Miramax, to which Tarantino sold most of the rights to the film, became interested in the case. However, the director retained the rights to the script. Miramax studio filed a lawsuit for infringement of their copyright because they decided that yes, Tarantino owns the rights to the script, but that NFT will use the brand owned by the studio, so it should benefit financially from the tokens. Currently, the case has calmed down a bit, because the parties agreed to a compromise in a private meeting and testified in court that they wanted to focus on cooperation and joint creation of NFT, unfortunately the terms of such a settlement were not disclosed.
Creating NFTs
NFT can be divided into two types of creation, recorded on the blockchain (On-Chain NFT) and in the form of an entry to the blockchain that simply refers to creative content via a link (Off-Chain NFT).
The off-chain NFT development process starts with source creation. Creating a source means sending your content to an online repository, or so-called online storage. Such action is an explicit act of reproduction under Art. 2 of the InfoSoc Directive (The Copyright and Information Society Directive 2001 (2001/29)). The right of reproduction is the author’s essential and exclusive right, therefore any unauthorized creation may infringe copyright. In addition, creating a source may affect the author’s right to make publicly available. The InfoSoc Directive does not precisely define the scope of “communication to the public”. The concept of the InfoSoc Directive consists of cumulatively applied requirements; “act of sharing” and “making available to the public”. As for the first requirement, there is no doubt that it does, but in the case of the public disclosure requirement, it may arise. Looking at the jurisprudence of the CJEU, the concept of “making available to the public” refers to an indefinite number of potential recipients and indicates that this should be a fairly large group of recipients. Therefore, the question arises whether placing content in an online repository will reach more people. When content is uploaded to the repository, a URL is created so that the person who uploaded the content has access to it. It is worth noting, however, that the URL is very long and not obvious. Therefore, you must have the exact URL, no more than 80 characters to view the content. Therefore, it seems unlikely that such a procedure would be classified as making it available to the public. Especially looking through the prism of the InfoSoc Directive, which excludes too few or negligible number of people. Access to such content is limited only to the buyer of the token and does not reach an indefinite number of potential recipients.
Metadata, on the other hand, is written in code and therefore is hard to access and requires translation of intermediate stages to be read. From the perspective of copyright law, the creation of metadata is not treated as an act of reproducing a work under Art. 2 of the InfoSoc Directive. The content itself is not reproduced, only a link to it. In addition, the creation of metadata cannot be considered as publicly available because, as in the previous case, it is sent to the repository and therefore has a URL that is not easily located by the public. It is worth noting that only a person with the appropriate knowledge will be able to obtain information from metadata stored in the JSON format, and according to case law, there must be no other intermediate stages in order for public disclosure to take place. With this in mind, the creation of metadata is not an activity that is relevant to copyright.
The last step is to create a token on the blockchain. This process involves stamping metadata on the token with its unique identifier, which is later implemented in the blockchain. From a copyright perspective, this process is not regarded as reproduction, as token minting is not an act of reproduction under Article 2 of the InfoSoc Directive. In the case of public sharing, as mentioned earlier, it is required that the token be available to an indefinite number of potential recipients, e.g. by being able to search for it using a search engine. However, simply placing a token on the blockchain without publishing it on the NFT marketplace does not make it publicly available. If the appropriate steps are not taken, the token will not be searchable using the search engine, and therefore only a selected number of people with the token identifier will be able to find it.
On-chain NFT minting differs from off-chain minting in that the metadata, instead of being stored in IPFS (InterPlanetary File System), is stored directly on the blockchain. This type of storage cannot be considered publicly available as in the case of off-chain NFTs. However, this process can be considered as reproductions within the meaning of Art. 2 of the InfoSoc Directive, as the minting process is directly copied to the blockchain. Therefore, permission from the author is required to mint this type of NFT.
NFT transactions
Selling and offering NFT on relevant NFT markets with intent to sell includes: NFT source upload, NFT presentation and actual transaction. In addition, when offering NFT on the market, it is also important to present the content that is represented by NFT. Viewed through the lens of copyright law, the representation of content in this way includes “reproductions” and “publicly available” under the InfoSoc Directive. In addition, Article 5 para. 3 and Article 1(j) of the InfoSoc Directive provide that Member States may provide for exceptions or limitations to the rights provided for in the article “use for public advertising of an exhibition or sale of artistic works, to the extent necessary to promote the event, to the exclusion of any other commercial use”. It is worth noting that the implementation of such an exemption is not mandatory for Member States and it is not clear whether it actually applies.
Registration of a new owner of NFT by selling a token does not lead to public sharing of works, because it only happens in the respective wallets of the seller and the buyer. The mere change of ownership in this case does not lead to a new audience, since the content related to NFT was made publicly available at the time of creation of the offer. However, it is worth considering whether the NFT transaction can be treated as an act of distribution within the meaning of Art. 4 sec. 1 of the InfoSoc Directive. Article 4 and Article 1 of the InfoSoc Directive provide that the author shall have the exclusive right, in respect of the original of his work or copies thereof, to authorize or prohibit the public distribution of his work in any form, by sale or otherwise. However , since the sale of the NFT does not constitute the sale of the underlying work itself, the sale will not be subject to the distribution right.
Rights Granted to Buyer of NFT
Once a physical work of art is acquired in the real world, the purchaser becomes the owner. Of course, unless it has been previously agreed that the author of the work does not remain the owner of the copyright. In the case of NFT, the situation is very similar, the purchaser of NFT acquires no rights to the work represented by NFT. What they acquire is only the right to hold the NFT in their wallet as well as the right to sell it. However, as with the purchase of a physical work, the granting of usage rights is also possible with the purchase of NFT by contract. Such an agreement may be written in the form of a smart contract or may be included in the general terms and conditions of use of the Internet platform, if the author using the platform has agreed to it.
In order to obtain exclusive rights to the content, appropriate consent is required (in some countries this consent must be in writing). The consent should also apply to the file that is linked to the NFT and contains the relevant content. What the buyer buys therefore depends on the license agreement, which may be presented, for example, in the terms of use of a specific platform or smart contract. OpenSea and Rarible are currently the two most used platforms for selling NFTs. The terms and conditions of these platforms govern access to and use of their software, tools and features provided in connection with their services. However, in both cases, they explain that they only provide “marketplace” services and are not a party to any contract between users. OpenSea and Rarible users must represent and warrant that they will comply with all applicable laws when using the services. In addition, users are also prohibited from using the platforms to infringe intellectual property rights. Rarible further states that in the absence of an explicit legal contract between the creator of an NFT work and purchasers, “there can be no guarantee or assurance for purchase and possession[1].” OpenSea expressly does not guarantee that any NFTs visible on OpenSea will always remain visible or available for purchase, sale or transfer. OpenSea also notes that each NFT may be associated with individual terms and conditions of purchase governing the use of the NFT. These terms of purchase are very significant in determining what rights the buyer acquires with the purchase of the NFT, in addition to ownership of the token. Rarible, on the other hand, does not refer to such terms of purchase, although such terms and conditions would still apply in the absence of a separate provision.
An interesting approach is taken by the Foundation platform, which states that the buyer “gets a crypto token representing the creator’s artistic content as part of the property, but does not own the artistic content itself or any intellectual property rights, can view and share the artistic content, but (the buyer) has no proprietary rights, other rights in connection with purchase, and title to any copyright, trademark, or other intellectual property rights in the Art Content, except for the Limited License to Art Content granted herein.[2]” This license, according to the terms, “includes a limited, worldwide, non-transferable (except for sale or transfer to another purchaser), royalty-free license to display the artistic content underlying such digital work for (purchaser’s) non-commercial purposes only”[3]. Therefore, as a general rule, the buyer of NFT does not acquire any license for the work, which is the core asset of NFT.
An exception to such rules may be the example of the NFT project of the Austrian Belvedere museum, concerning Gustav Klimt’s famous painting The Kiss. This platform had the following terms and conditions: “Rights acquired upon the purchase of such NFT “Kiss” include an exclusive, worldwide, perpetual, irrevocable, non-sublicensable, and transferable license to use “The Kiss” NFT(s) purchased, and due to the nature of NFT, rights include in particular the right to make the NFT available in the wallet, show it in the metaverse galleries, download or print it. In addition, the platform gave the opportunity to print a certificate at the time of purchase. It is worth noting that by purchasing NFT “The Kiss” you do not obtain any rights to the analogue version of the image.
An interesting solution is also presented by the “CryptoKitties NFT” project. The platform license provides that the purchaser of NFT receives the right to use NFT-related graphics for merchandising purposes, provided that the annual turnover does not exceed $100,000.
The granting of usage rights is also possible via smart contracts. Smart contracts are not contracts in the legal sense, but at most they implement contracts as automated computer programs. The decisive factor for creating a smart contract should be ensuring that after the first sale no resale was possible. In addition, the smart contract can be programmed in such a way that the creator of the NFT automatically participates in a certain percentage of the resale amount. If the creator does not provide for such security in the smart contract, it can be assumed that the creator has consented to the resale.
Trademark and NFTs
If NFT is protected by a trademark and its use is not authorized by the owner, it may be grounds for trademark infringement. There are disputes in America regarding NFT and trademarks. In January 2022, it was reported that the French company Hermès was suing an artist named Mason Rothschild for selling unauthorized Birkin Bag in NFT form, each of which sold for five figures[4]. Some of the 100 unique so-called “MetaBirkins” are decorated with famous artwork such as “Salvator mundi”. Hermès has sought an injunction to destroy all such NFTs and is seeking damages for trademark infringement. Hermès argues that the “MetaBirkins” brand is similar to Hermès’ “Birkin” trademark, and only added the generic “meta” prefix. After the first cease-and-desist letter, OpenSea removed the collection from the platform.
Another example is the case between Nike and StockX[5]. Nike sued StockX in February 2022 for selling NFTs with images of Nike shoes without permission, claiming that NFTs infringed Nike’s trademarks. Nike claims that the NFTs are “virtual goods” and therefore infringe Nike’s intellectual property rights, while SockX says it does not sell its NFTs as digital art. Currently, there is no clear result in this case and complaints to the court regarding trademark infringement continue to be filed.
Looking at the examples above, trademark owners today should consider extending protection to additional classes to be protected even in the so-called Metaverse, where virtual products based on blockchain technology are likely to be sold in the future. Although NFT can be classified as class 9 when registering the mark, it is also worth considering class 42, which covers services provided by representatives of professions such as chemists, physicists, engineers, computer specialists, lawyers or similar services. As can be seen, trademark protection is also an area affected by NFTs and a harmonized approach to the classification of virtual assets in the form of NFTs is crucial in business turnover.
[1] https://static.rarible.com/terms.pdf
[2] https://foundation.app/terms
[3] ibid
[4]Hermes International et al. v. Mason Rothschild, case number 1:22-cv-00384, US
[5]Nike Inc. v. StockX LLC, case number 1:22-cv-00983, US
