By Mayra Hernandez, California Western School of Law
On June 25, the Association of American Law Schools presented, with California Western School of Law professor Emily Behzadi moderating, a panel discussion on “The Art of NFTs.” The panelists included Emilio Cazares, Chief Legal Counsel Officer at digital art marketplace SuperRare; Professor Zahr K. Said, Associate Dean of Research and Faculty Development at the University of Washington School of Law; Professor Natasha Varyani, Associate Professor of Law at New England Law; and Pamela M. Deese, partner at Arent Fox LLP.
What are non-fungible tokens, better known as NFTs? Professor Said offers us a useful working analogy: the difference between a digital work and an NFT is like the difference between luggage and a luggage tag, where the digital asset (often digital art but not exclusively) is the “luggage” and the NFT is the “luggage tag.” The NFT is “a way to identify one copy of something and track it through changes of ownership or transactions associated with it,” said Professor Said.
There were $2 billion of Non-Fungible-Tokens (NFTs) sales in the first quarter of 2021. NFTs are regulated under real property laws. We have no new or special NFT law, but we are struggling to fit NFT issues into existing contexts in part because some of the issues have not fully emerged. As Deese said, “We don’t want to get to the point where we think the law doesn’t apply.”
Professor Varyani reminded us, there is something fundamental about not only the objective act of owning something, but the psychological underpinning of how and to what we assign value. These concepts underlie many property rights concepts. In the case of NFTs, what is owned is the token, the luggage tag in Professor Said’s analogy. And people buy it because it is deemed to be special or unique.
NFTs are associated with a “Smart Contract,” but Smart Contracts generally are not legally enforceable contracts as opposed to Ricardian contracts. In theory, Ricardian contracts contain all the legal clauses we’d want on a traditional contract but is written in a way that a software program can execute so that both humans and computers can read and access it, executed by the parties that governs relationships between them. By contrast, a Smart Contract is not humanly readable but rather is a computer program that unilaterally executes pre-designated steps. As Cazares points out, the intent in a Smart Contract is not necessarily clear, creating ambiguities of interpretation that have consequences for the rights of the content creators, buyers and collectors, and the marketplace.
NFTs highlight the struggle of integrating principles of real property and intellectual property law. Since copyright law protects non-digital art, the overlap between copyright law and digital art NFTs is apparent. The copyright first sale doctrine gives the lawful owner of a copyrighted work the right to sell, lend or share (not for profit) without accountability to the copyright owner. But with an NFT, there is no copy that is owned. Hence, the digital first sale doesn’t apply (since you never bought a copy of the asset). There also could be implications for trademark law if trademarked images or phrases appear as part of NFTs.
Typically, uses of copyrights or trademarks by other people are controlled by licensing agreements. But if someone has a license from the NBA to mint clips from basketball games, what happens when the license expires? Does the NFT disappear? This remains an unsettled question. What about insuring NFTs? What if an NFT disappears? What if it turns out to be a counterfeit? What if the license owner stops paying maintenance fees? What if it drops in value to 0? How do we protect against loss? No clear answer yet.
Also, as in other areas of intellectual property, NFTs raise concerns with counterfeiting. For example, when the same asset is minted by different people, which is the real copy/owner (especially when they might be identical digital copies)? It is difficult to track who is doing the counterfeit due to anonymization of blockchain users even if one can know which is the counterfeit NFT. The speakers’ advice is to know your artist, deal with reputable marketplaces, etc. NFTs do not fit neatly into our current copyright and trademark law systems, creating new questions for how intellectual property owners can or should enforce their copyrights or trademarks if these rights are infringed by NFTs.