Non-Fungible Tokens (NFT) Sales and Copyright Assignment: Part I (The Contract is the Key)

(Editor’s note: If readers are unfamiliar with what Non-Fungible Tokens (NFTs) are and would like an explainer, you can refer to our earlier post by Awani Kelkar here. Adarsh’s two-part post goes on to do a deep dive including into some of the questions raised there.)

NFTs have been all the rage quite recently, and many would have come across the articles on some NFTs being been sold for huge money by way of auction (here, here). But what does this mean from a copyright law angle?

I want to restate a few fundamental principles of copyright law before I proceed any further:

1. An original work can be in any medium, including, for example, a digital piece of artwork or a new musical composition;
2. Barring some exceptions, by default, the author/creator of the work is the 1^st owner of the copyright in the work;
3. The copyright in the work is distinct from a copy of the copyrighted work; and
4. Even if a copy of the work can be accessed online publicly or even freely, does not imply waiver of the copyright over the work.

The lawyer’s understanding of NFTs

NFT is simply a digital mechanism to help authenticate ownership claims. Title/sale deeds for immovable properties is a good analogy. Typically, you acquire title over immovable property by way of a registered sale deed. That document (registered sale deed) records the owner. The sale deed/title deeds represent ownership over the property, which is why, for instance, a mortgage can be created by deposit of these title deeds with the bank. An NFT is similarly a digital token representing an ownership interest in an underlying asset, for instance, in a piece of digital art or music.

In the immovable property analogy, one has a registration authority that is tracking and authenticating this ownership. The authenticity of this NFT, in contrast, is due to its reliance on blockchain technology. Blockchain technology involves a ledger or database that is simultaneously present/shared across a P2P network. Again, a ‘tangible’ analogy could be a physically executed contract executed in multiple counterparts. All parties maintain the original versions of the contract. Any alleged tampering will not succeed unless all the counterparts with all the parties are simultaneously tampered with. That significantly reduces the chances of tampering. This is what blockchain achieves in the digital front. Since the ledger is distributed/maintained across multiple users (perhaps even thousands or millions) on a P2P network is almost impossible to falsify or illegally modify the records.

As the name implies, the tokens are non-fungible, i.e., unique. Money, for instance, is fungible – you can exchange an instrument for Rs 100 for two Rs. 50 instruments – the value is fixed; there is no one original or unique instrument. Instead, consider a Rs 100 instrument with Kapil Dev’s autograph on it (just my example) – this is unique and may have different values for different people. Of course, even this can be exchanged – I could trade this with, say, a Rs 100 instrument with Sachin Tendulkar’s autograph. For me, these values could be equivalent but maybe not for others. The point is that in the autograph example is that the item has unique properties.

There are several resources across the Internet on blockchain and NFTs, which provide an information overload on these concepts. As I understand, there are several NFT marketplaces for creators to use (here).

Are NFTs associated only with copyrighted works?

The answer is ‘no’. In principle, the underlying asset or item linked to the NFT need not be an original work on which copyright subsists; it could be a limited-edition collector’s item or anything else for that matter. Here is an example that Swaraj shared with me.

NGTs, digital works and copyright

These NFTs have come to the rescue of digital creators/artists because it overcomes the single most problematic issue in the digital realm. Digital works, once accessible, can be replicated/reproduce/copied and distributed at almost zero cost. The artist/creator may set up technological measures to prevent this, but this may create business issues for upcoming creators/artists, and circumvention and policing have always been an issue.

This problem is easily solved with NFTs the original work can be identified by associating it with an NFT. The other copies of the work floating around will not be related to the NFT. If I own the NFT for artwork, I can proclaim to hold the authentic/original of the art. I am sure people can relate to the real-world analogy to masterpieces.

Purchase of NFTs = copyright assignment or license?

Some claim that the purchaser of the NFT is simply a transfer of ownership in the NFT and nothing more; there is no copyright assignment or license. Here is one such resource, and here is another.

In my opinion, however, it depends! As I will explain below, I am unable to provide a definitive answer at present, but the current trend seems to be pointing to no copyright terms.

Before I share my view, please note my two reasonable assumptions:

1. There is copyright subsisting in the underlying work/digital asset.
2. The owner of the copyright has created the NFT

If these assumptions apply, in my view, the answer simply depends on the contract. After going through the websites of a few of the NFT marketplaces, it appears they all work similarly: the artist/creator ‘mints’ the work into an NFT, which is a reference to creating a unique file on the blockchain. This NFT will include a smart contract as well. When the sale occurs (say, after an auction), the NFT is sold under a contract with the consideration being paid from the buyer to the seller and the platform making a commission/service charge for this transaction.

Unfortunately, I could not locate a copy of the sale contracts in most of the big marketplaces unless I signed up and attempted to purchase something[1]. Dapper Labs, one of the first to employ NFTs, has put an open-source license that could be used for NFT sales: NFT License. If these terms as employed, the purchase of the NFT only gives you a limited license to do certain things with the underlying art. The album released by the Kings of Leon through NFT (here) was through YellowHeart. Their terms and conditions stipulate that the company owns the IP in the art, and only a limited license is given to the NFT purchaser. Similarly, Christie’s terms and conditions, which auctioned the now-famous “Everydays: the First 5000 days” for more than USD 69 million, specifies that all lots are sold without any copyright license or assignment.

I am uncertain whether all NFTs are being sold under similar terms. It is possible for the smart contract associated with the NFT to expressly and clearly stipulate that the transaction shall amount to an assignment of the copyright in the underlying work. Nothing in Indian law, for instance, precludes such an assignment agreement. If that is so, the transaction would be a copyright assignment in the underlying asset (e.g., the digital art/music etc.). Or depending on the actual terms, it could be a copyright license, or it could just be a sale of the copyrighted article without any license or assignment of the underlying copyright.

However, likely, this digital space is also being built on existing real-world commercial practice: what is auctioned is only the one original/authentic ‘copy’ without an assignment of, or a license to, the copyright itself. My best guess is that the contract would make this explicit, as seen in the examples above – it would be illogical not to have such a contractual term while valuing the NFTs to have such high values.

I observed an interesting point based on my visit to some of these NFT marketplaces. The creator/author is entitled to set up a recurring royalty term on future downstream sales by the purchasers. Readers may recollect the 2012 Amendments to the Indian Copyright Act, 1957, stipulating downstream royalty rights for lyricists/music composers. These NFTs gives the flexibility to implement this requirement with ease.

Immediately, one can recognise the value to content creators in the digital space, especially upcoming ones. Many hail this as revolutionary. But what if my two presumptions are incorrect? Are there other problems?….to be continued in Part II.

[1] I would be keen to see this contract if someone has had a chance to try this out; I could not register myself from India with most of the popular global crypto-wallets and the crypto-wallet I did register from India was not being recognized by many of the NFT marketplaces.

Note: I represent/have represented clients on related and unrelated issues. Views expressed here are personal.

Please click here to view Part II of this post.