NFTs: Usage Rights And Legal Fights

15 July 2022

AUTHORS

 Sarah Dewar , Emily R. Garnett and Airina L. Rodrigues

Brownstein Hyatt Farber Schreck, LLP

NFTs-or Non-Fungible Tokens-continue to raise new legal questions, particularly involving intellectual property rights and the enforcement of those rights against bad actors.

Take the case of actor and comedian Seth Green. Green was the owner of an NFT titled Bored Ape Yacht Club #8398, which depicts a Bored Ape avatar named Fred Simian. Bored Ape Yacht Club is an NFT collection of 10,000 ape avatars, each having unique visual characteristics, and each valuing thousands (and in some cases millions) of dollars. In an attempt to capitalize on the prominence of Bored Ape Yacht Club NFTs, and to create a new kind of series within the fame surrounding NFTs generally, Green was developing an animated show called White Horse Tavern with Fred as the main character. Then, in May 2022, Green’s NFT was hacked, raising a host of legal issues about his ability to generate revenue from an NFT over which he no longer had possession or control.

Copyright Law

Green’s NFT hack raises interesting and novel copyright questions. Generally speaking, under copyright law, copyright in and to a work does not transfer from the work’s creator to the purchaser of the work in the absence of an agreement or assignment of rights. Under the first sale doctrine, when the creator of a work protected by copyright sells the work, only the right to “sell or otherwise dispose of” the work is transferred along with the physical ownership of the work. This means the owner of the tangible work itself can resell, lease, lend, give away or destroy (subject to an artist’s moral rights, which in the United States may apply under state law or the Visual Artists Rights Act of 1990) the material item; however, the creator of the work retains ownership of the exclusive rights afforded to copyright owners under the Copyright Act: the right to reproduce, adapt, publish, publicly perform and display the work, and create derivative works of the work.

For example, under traditional copyright principles, a purchaser of a poster print of artist Jean-Michel Basquiat’s “Untitled” (1982) does not simultaneously purchase any copyright rights from Jean-Michel Basquiat’s estate in the original work. This means that a purchaser may resell or give away the poster, but could not create and sell copies of the poster, nor create new derivative works replicating the painting (e.g., merchandise featuring “Untitled” (1982)).

NFT Licensing of Rights and Enforcement

Now, in the uncharted territory of digital goods, NFT creators, through novel licensing models, are changing the rules.

Uniquely, the Bored Ape NFTs include a broad copyright license permitting the NFT owner to make commercial use of the creative works comprised in the NFT. The terms of use from the Bored Ape Yacht Club website provide that ownership of a Bored Ape NFT “grants you an unlimited, worldwide license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art” (emphasis added). Green’s ownership of Bored Ape Yacht Club #8398 granted Green a license to commercially exploit the content of the NFT itself, including the right to create new derivative works-such as an animated show-based on the character Fred Simian.

But, Green’s plans for White Horse Tavern were put on hold when four NFTs were stolen from his collection on May 8, 2022, including Bored Ape Yacht Club #8398, through a phishing attack. Green that he connected his cryptocurrency wallet to what turned out to be a fake website for a different NFT collection. This validation allowed the phishing hackers to use Green’s authorized credentials to then transfer the four NFTs from Green’s collection to other users.

And, NFT hacking scams are reportedly on the rise, with phishing scams targeting collectors of valuable NFTs.

Without ownership of Bored Ape Yacht Club #8398, Green in theory would not retain the benefit of the use, copy and display rights as well as the right to creative derivative works, granted through the Bored Ape license. In effect, Green lost the underlying intellectual property rights to commercialize the character Fred his new series.

After the incident, Green turned to social media, and pleaded with the new owner of Bored Ape Yacht Club #8398 to return the work. In the time since Bored Ape Yacht Club #8398 was illicitly transferred from Green’s wallet, Green claims to have been in contact with the new owner and they are “working together to prosecute the original thieves.”

At present, the NFT marketplace Green used to purchase Bored Ape Yacht Club #8398, has a stolen item policy that states when the site is “notified of potentially stolen items” through a request form, the online marketplace disables “the ability to buy, sell, or transfer” the stolen items. The online marketplace will also mark potentially stolen NFTs as “compromised.” What remains unclear is exactly how and if the marketplace will be involved in restoring ownership to users when NFTs are transferred to third-party collections without permission. In Green’s case, he reportedly paid nearly $300,000 to recover Bored Ape Yacht Club #8398 from the user who purchased the NFT from the hackers. Green appears to have resumed development of the White Horse Tavern series.

In light Green’s predicament, the important question is how future cases regarding the legal enforcement of NFT ownership may develop. New York State Sen. Kevin Thomas has proposed a bill regulating theft and fraud of cryptocurrency, and the Department of Justice has task forces focused on cryptocurrency cybercrime. Neither initiative, however, appears to have addressed how cybercrime affecting cryptocurrency and NFTs might impact owners’ intellectual property rights. It also remains to be seen how NFT creators may or may not honor intellectual property license grants to use, copy, display and create derivative works, even if the NFT asset is stolen.

NFT owners should be mindful of the prolific rise of hacking and scams through false links and websites appearing to be legitimate NFT marketplaces. There is uncertainty in how traditional intellectual property rights will be applied in the NFT context, and at present, even more uncertainty in the enforcement mechanisms of those rights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Originally Published At The Mondaq Platform

https://www.mondaq.com/unitedstates/copyright/1212090/nfts-usage-rights-and-legal-fights?email_access=on