Copyright Issues & NFTs

Michael Nga and Madeleine Weber look at some of the copyright issues that a potential buyer of an NFT artwork should think about

The advent of blockchain technology with its omni-use cases, provides new financial opportunities to creators of digital assets and investors. One of its many use cases is non-fungible tokens (“NFT” or “Nifties”). Recent notable NFT transactions include the digital art of Beeple sold by Christies for $69m, the digital art of Grimes which sold for $6 million, an animated Gif of Nyan Cat (a 2011 meme of a flying pop-tart cat) that sold for $500,000 and, the first-ever tweet by Twitter’s founder Jack Dorsey which had bids for $2.5m.

This article seeks to explore some of the UK copyright issues that relate to Nifties in the context of a fictional client (who is a consumer) who commissioned a digital artist to create a digital picture NFT informally via an NFT community site and then acquired it on a NFT marketplace such as OpenSea. We will assume that the digital picture and the NFT (collectively as “the Works”) consist only of the digital artist’s intellectual property. If this were not the case, a licence from the licensor would be required although our fictional client, being a consumer, would have legal recourse against the digital artist under the Consumer Rights Act 2015 (“CRA”) (e.g. Section 41 – trader’s right to supply the digital content, or Section 34 - the digital content is not of satisfactory quality).

What are 'Nifties' or NFTs?

An NFT is a cryptographic asset consisting of information stored on blockchain with unique identification codes and metadata that certifies a digital file to be unique. This means that an NFT is “non-fungible”, and hence, different from other fungible cryptographic assets such as cryptocurrencies. For example, a Bitcoin is fungible because each Bitcoin (like money), has an identical value and can be swapped. Conversely, each NFT is non-fungible because it is unique and has its own non-transferable identity which cannot be replicated by other tokens. As such, it is well suited to be used as a digital representation of an asset or as a certificate of ownership.

An NFT is created when blockchains string records of cryptographic hash verifies a set of data to be unique, onto previous records therefore creating a chain of identifiable data blocks. The process of creating an NFT is known as “minting”. It is possible to “mint” any digital file into an NFT.

The most common standard for NFTs at the time of writing this article is the Ethereum 721 standard (“ER-721”). ERC-721 sets out the minimum functionality/information a smart contract must implement/contain to allow unique tokens to be managed, owned, and traded (hereinafter referred to as a “Basic Token” - the specification is here). ER-721 does not mandate a standard for token metadata or restrict adding supplemental functions/information. These could include the signature of an author/artist, description of the artwork, if royalties are payable for subsequent sale of an artwork and, contractual terms (hereinafter referred to as an “Enhanced Token”). ER-721 is used by NFT marketplaces such as OpenSea, Mintable and Rarible.

It should be noted that often, the digital artwork would be accessible from the NFT via a weblink rather than being incorporated into the NFT due to the size of the file. Many users like having live copies of the digital artwork available online, and thus it is not unusual that the digital artwork is stored on Google Drive or BitTorrent.

Copyright Considerations 

At the time of writing, copyright issues pertaining to NFTs and digital artworks are hardly addressed (if at all). Indeed, at the time of writing, it was reported that the NFT of the “Free Comb with Pagoda” drawing by Jean-Michel Basquiat was withdrawn from auction after the artist’s estate argued that the seller does not own the copyright in the artwork. This is likely to change as NFTs become more mainstream.   

Subsistence of Copyright

The first issue to consider is the subsistence of copyright in the Works.

Section 1 of the Copyright, Designs and Patents Act 1988 (“CDPA”) sets out a list of works that are protectable by copyright. In practice, when it comes to software and digital items, the categorisation of a work isn’t always straightforward. 

In the case of video games, different courts have reached contradictory decisions. In this regard, the French Courts in UNION FÉDÉRALE DES CONSOMMATEURS - QUE CHOISIR v S.A.R.L. VALVE (N° RG 16/01008) (17 September 2019) decided that video games should be defined as software. By contrast,  the German Courts in Urt. v. 21.01.2014; Az.: 15 O 56/13 (LG Berlin) held that video games are not software. Furthermore, the CJEU held in Nintendo v PC Box (C-355/12) (23 January 2014) that video games cannot be reduced to mere computer programs; and a similar view was expressed by the English Courts in Nova Productions Limited v Mazooma Games Limited and others [2007] EWCA Civ 219, 14 March 2007. The Court of Appeal held that the individual frames making up a video game were graphic works which attracted individual copyright protection.

On our factual matrix, it is fairly safe to say that the digital picture would be protected as an artistic work. If it included music or moving images, the music would be protected as a musical work or sound recording, and the moving images as a film.

The blockchain software that mints and underpins NFTs would be protected by copyright as a literary work. 

With regard to the NFT itself, in the case of a Basic Token, it would essentially be a smart contract on the Ethereum blockchain and consists of a collection of software code (its functions) and data (its state) that reside at a specific address on the Ethereum blockchain. As such, it is submitted that it is likely that the Basic Token would be protected by copyright as a literary work (as it is essentially software code), although there may be some argument to suggest that it is not copyrightable as it lacks “originality”1. If the NFT were an Enhanced Token, it should (as it contains a number of different metadata and would to a degree be similar to a normal contract) meet the originality requirement and, be protected as a literary work (but not because it is software). Applying the case of Nova Productions, it is submitted that individual components of the Enhanced Token such as (i) the software code and the description of the artwork would also be protected as literary works; and (ii) the signature of an author/artist protected as an artistic work.    

While this article has categorised the Works within the copyright categories of the CDPA, they may potentially be protected by copyright outside the confines of the CDPA if any of them were to be held as “a work” under the Copyright Directive 2001/29/EC (see Infopaq International A/S v Danske Dagblades Forenig (Case C5/08), Lovala Henglo BV v Smilde Foods BV, (case 310/17), Cafemel – Sociedade de Vestuario SA v G-Star Raw CV (Case C683/17) and SAS Institute Inc v World Programming Ltd [2013] EWC 69 (Ch)). Having said that, post-Brexit, it is open to the UK Courts to depart from the jurisprudence of the ECJ. 

Ownership and exploitation of  NFT and Digital picture

The next issues to consider pertain to ownership, moral rights and the ability to exploit the Works.

Ownership

On the issue of ownership, subject to certain exceptions, the author of a work is the first copyright owner of the work. In the case of a computer generated work, the author is “the person by whom the arrangements necessary for the creation of the work are undertaken”2.

In our example, the digital artist would own the copyright in the Works (if the NFT is of the Enhanced Token ilk). If the NFT is a Basic Token, subject to it being protected by copyright (see discussion above), there is some doubt as to whether the digital artist or the software programmer (who programmed the blockchain) would be the copyright owner. If the Basic Token is automatically generated by the blockchain, it is submitted that the author could be the blockchain software programmer rather than the digital artist.

Exploitation

In order to exploit copyrighted work and avoid copyright infringement, one has to own the copyright or obtain appropriate authorisation (i.e. a licence) from the copyright owner. 

To preserve our fictional client’s investment, he should ideally secure an assignment of the copyright in the Works and obtain a moral rights waiver from the digital artist. If he is unable to do so, he should at a minimum obtain a sole licence, or better still, an exclusive licence from the digital artist to carry out the activities specified in Section 16 of the CDPA including the right to grant any additional licences of any type to licensees or buyers of the NFT and the digital picture. It should be noted that if the digital picture is subsequently resold, the digital artist may be entitled to royalties under The Artist’s Resale Rights Regulations 2006. 

Implied terms 

If our fictional client failed to expressly address the copyright issues to enable him to exploit the Works, he may nonetheless be able to persuade the Courts to imply such terms into the contract which he had entered into with the digital artist. 

This article will briefly consider this issue in the context of a commissioned work and consumer protection legislation.

Commissioned Works

Unlike some countries such as the US and Malaysia, the author remains the copyright owner of commissioned works unless the copyright is assigned to the client (Robin Ray v Classic FM plc [1998] FSR 622). However, the English Courts have implied certain terms into contracts between suppliers and clients (including the assignment of the copyright in the commissioned work to the client or the grant of an appropriate licence). The precise terms that an English Court may imply would be fact specific.  

In the leading case of Robin Ray, Classic FM contracted Mr Ray (an expert in classical music) under a consultancy services agreement to create a catalogue and database of its music. The consultancy agreement did not address the issue of intellectual property rights ownership. Classic FM subsequently wanted to licence the catalogue and database overseas. Mr Ray objected to this use and commenced legal proceedings. The High Court held that terms can be implied into a contract if: (i) it is reasonable and equitable to do so; (ii) it was necessary for business efficacy; (iii) the implied terms are obvious, capable of clear expression and do not contradict any express terms; and (iv) the implied terms must be only those that are necessary and no more. On the facts, the Court held that Mr Ray owned the copyright in the catalogue and database, and Classic FM was only entitled to a non-exclusive licence to use the music catalogue in the UK. 

In Griggs and others v Ross Evans and others [2005] EWCA (Civ) 11, the Court, in applying Robin Ray v Classic FM plc, held that the client commissioning a logo from an advertising agency should own the logo because this was necessary to give the contract business efficacy in the eyes of an officious bystander. The logo would have been difficult to use if the company had not owned the copyright.  A very similar conclusion was reached in Fresh Trading Ltd v Deepend Fresh Recovery Ltd [2015] EWHC 52 (Ch), where the Court declared a commissioned logo was owned by the client. 

In Clearsprings Management Ltd v (Businesslinx Ltd & Anor [2005] EWHC 1487 (Ch) (14 July 2005), the Court considered whether an exclusive licence should be implied for the use of a software program. The Court decided that  it was not necessary to imply an exclusive licence based on the officious bystander test. Nevertheless, this case demonstrates that it is possible for the Courts to imply an exclusive licence. 

By contrast, in Orvec International Ltd v Linfoots Ltd [2014] EWHC 1970 (IPEC), it was held that a client commissioning a photograph obtained a non-exclusive licence to use that photograph, whilst the copyright remained with the photographer. It was reasoned that this was what was necessary to give effect to the contract as intended. 

Consumer Protection Laws 

Consumer protection laws mandate certain terms to be incorporated into consumer contracts. One provision that may assist consumers who find themselves in our fictional client’s predicament would be Section 35 of the Consumer Rights Act 2015. This section mandates that digital content must be fit for a particular purpose. To succeed under this section, the consumer must, in a nutshell, prove that before the contract was made, the consumer had made known to the trader (expressly or by implication) the particular purpose of the digital content for which the consumer is contracting for. 

Exhaustion of Copyright 

On this occasion, the authors will not be discussing the issue of digital copyright exhaustion in any detail or the cases of Usedsoft GMBH v Oracle International Corp 1 (C-128/11) (3 July 2012) and Nederlands Uitgeversverbond and Groep Algemene Uitgevers v Tom Kabinet Internet BV and Others (C-263/18) EU:C:2019:1111 (19 December 2019)3. Instead, the authors will limit themselves to discussing the exhaustion doctrine in general and solely in the context of reselling the Works, and highlighting some of the copyright challenges. 

The CDPA gives the owner of the copyright in a work the exclusive right to carry out certain acts in the United Kingdom in respect of the copyrighted works that he owns. Those exclusive rights are defined in Section 16(1) as “acts restricted by the copyright”. The acts restricted by the copyright include the exclusive right to issue copies of his work to the public or distribution rights (“Distribution Right”), although once exercised, the Distribution Right is extinguished and the copyright owner is no longer able to restrict the subsequent distribution, sale, hiring or loan of that work (“exhaustion doctrine”) (see Section 18(3) of the CDPA, Usedsoft GMBH v Oracle International Corp 1 (C-128/11) (3 July 2012) and Nederlands Uitgeversverbond and Groep Algemene Uitgevers v Tom Kabinet Internet BV and Others (C-263/18) EU:C:2019:1111 (19 December 2019)). It should be noted that the exhaustion doctrine does not apply to other acts restricted by the copyright. This means that in the case of a physical painting, the first buyer of the physical painting would be able to resell that physical painting without the risk of copyright infringement. However, if he sought to make additional copies of the painting without authorisation from the copyright owner, that would constitute copyright infringement as making copies is a separate act restricted by copyright.  

In respect of the Works, due to their digital nature, our fictional client and the buyer of the Works are unlikely to be able to rely on the exhaustion doctrine to resell/buy the Works. This is because the act of reselling by our fictional client and buying by the buyer is likely to involve other acts restricted by the copyright that are not subject to the exhaustion doctrine. 

If our fictional client were to resell the Works on OpenSea or Rarible, he would have to make a copy of the digital painting on OpenSea or Rarible and make them available for potential buyers to buy. Without the authorisation of the copyright owner, our fictional client would infringe Section 16(1)(a) of the CDPA - (to copy the work) and 16(1)(d) of the CDPA - (communicate the work to the public.) The buyer of the resold Works, after acquiring them would have to download a copy of them and this would infringe Section 16(1)(a) of the CDPA - (to copy the work). In addition, if the reselling of the digital picture requires it to be transferred onto a different physical medium (e.g. from a laptop of the seller onto a server or USB stick) there is also some uncertainty if the exhaustion doctrine would apply as the ECJ has held that a chemical process to transfer the ink from a paper poster (of a famous art work) onto canvas (i.e. from one physical medium to another physical medium) did not exhaust the Distribution Right.5 There is also a question as to whether marketplace such as OpenSea and Rarible would be committing secondary infringement of copyright (Sections 23 and 24 of the CDPA).

In view of the above, the application of the exhaustion doctrine in the context of a digital painting NFT is clearly unsatisfactory. Indeed, this is somewhat ironic since a raison d'être for creating a digital painting is to mirror the ownership principles in respect of a physical painting i.e. giving the buyer “ownership” of the digital painting.  

Conclusion 

The rise of Nifties presents opportunities to both digital content creators and buyers. However, copyright issues need to be considered and addressed by both parties. 

In April 2021, the Law Commission announced that it has commenced its digital assets project. The issues that it would address in its call for evidence include the ownership and possession of digital assets, digital asset tokens, and the transferability of digital assets. It is hoped that the Law Commission and/or the legislator will eventually address the main issues and challenges outlined in this article.  

In the meantime, those indulging in Nifties will need to get nifty!

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Notes

[1] See Funke Medien NRW GmbH v Bundesrepublik Deutschland (Case C469/17) EU:C:2019:623 (29 July 2019) – where it was held that military reports based on standard forms which were deemed not be copyrightable.

[2] Section 9(3) of the CDPA

[3] Diligent readers who would like to read up on the subject may like to review the articles Digital exhaustion after Tom Kabinet: a non-exhausted debate by Caterina Sganga - In T.Synodinou et al (eds.), EU Internet Law in the Digital Single Market, Springer 2021 available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3803940; and Exhaustion, Distribution and Communication to the Public – The CJEU’s Decision C-263/18 – Tom Kabinet on E-Books and Beyond by Ansgar Kaiser. GRUR International, Volume 69, Issue 5, May 2020, Pages 489–495 available at https://academic.oup.com/grurint/article/69/5/489/5854748 

[4] Groep Algemene Uitgevers v Tom Kabinet Internet BV and Others (C-263/18) EU:C:2019:1111 (19 December 2019)

[5] Case C-419/13 Art & Allposters International BV v Stichting Pictoright [2015] EU:C:2015:27

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Michael Nga has a long and varied legal career spanning over 15 years. He is a qualified lawyer in England and Wales, Malaysia, Ireland and New South Wales, Australia. He is presently the Head of Legal for UK and Ireland at BMC Software. Previous roles included Senior Legal Advisor at Oxford University Press and he has also practised as a solicitor in leading law firms in the UK and Malaysia. He is a well rounded commercial lawyer with specialisms in Technology, Intellectual Property and Data Protection. He regularly advises on high value and complex technology projects and transactions; and these include the Oxford Dictionary Online, Kerboodle! MyMaths, Oxford Owl and Oxford Journals. Some of his previous clients included Dragon Den contestants. He is also experienced in compliance matters.

profile picture of madeleine weber

Madeleine is currently a Legal Counsel at BMC Software where she has been working on tech law, commercial and data protection matters for more than 3 years. She is a Chartered Legal Executive, and in the process of qualifying as an Attorney-at-Law (New York) and Solicitor in England and Wales. 

The views expressed in this article are personal to the authors and should not be attributed to BMC Software nor construed as legal advice.

Published: 2021-06-07T14:00:00

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