BL4SG Special Edition: Pulp or Fiction: Are NFTs Changing Intellectual Property Norms?
This is the third post in a series of eight about the discussions, leadership and community created at the first inaugural Blockchain Law for Social Good Conference held on October 20-21, 2022.
The third session of the day, titled “Pulp or Fiction: Are NFTs Changing Intellectual Property Norms?” was a lively discussion that covered how NFTs (non fungible tokens) have changed the world of intellectual property. Sarah Conley Odenkirk of Cowan DeBaets Abrahams & Sheppard LLP, Belle Borovik Associate General Counsel and Head of IP at the Chia Network Inc., Martin White, Head of Litigation and Employment at OpenSea, along with moderator Paige Pembroke, a Partner of Tectonic LLP surveyed a variety of issues surrounding NFTs in the legal field.
Belle Borovik started off the discussion talking about how an NFT works in the existing copyrights framework in the United States and what is actually included when an NFT is purchased. Ms. Borovik explained that the most common misconception that people have regarding NFTs is that once an NFT is purchased, the purchaser is now entitled to the underlying intellectual property that is associated with that NFT; however, this is not the case. She emphasized that to best understand this, a closer look at copyrights law would be required. “An NFT really is two parts. Under copyright law, a copyright is vested into a work of authorship that is fixed in a tangible medium.” The tangible medium when it comes to NFTs, is the set of data that’s recorded on the blockchain, and that is where the copyright information lives. Copyright law accounts for the dual ownership of the authorship and the tangible medium.
So what does this mean? It means that under current copyright law, any of the exclusive rights related to the copyright of a work (or works) are related to, but also distinct and separate from, the ownership from the tangible medium where they are embedded. This is where a major misunderstanding occurs between NFT creators and NFT purchasers. If purchasers knew that the underlying copyright of the NFT still belonged to the creator(s), there would likely be less confusion about what the purchaser’s rights are, and what they can do with the NFT that they purchase. Ms. Borovik went on to explain that without a separate copyright license agreement, meaning an agreement that is separate from the smart contract in which the NFT was purchased, the underlying copyrights do not transfer to the NFT owner unless such a license is specifically embedded in the NFT smart contract.
Sarah Conley Odenkirk discussed how she advises clients who want to create NFTs or NFT projects. The first question she asks is why the creator wants to use NFTs as the medium of artwork? Even though they are cool, she believes it is important to understand why an NFT is the best medium for the creator to create their art. Ms. Odenkirk explained that she describes NFTs to her clients as empty boxes in which you can put any content, so just using the word NFT doesn’t create some magical or more interesting result. She believes it is more important to figure out what the client is working with and why they are using this medium to sell their artwork. Ms. Odenkirk focuses on protecting her clients, in the sense that she focuses on areas in which rights are transferred and where rights are articulated.
Her perspective and approach rest on the proposition that smart contracts aren’t inherently smart. What does this mean? It means that smart contracts are just “if-then” transactions. So, where do you put the information that actually pertains to what a creator is selling? And, what is the best way to include what is actually being sold in a smart contract if the smart contract itself does not state these terms? Ms. Odenkirk went on to answer these questions almost immediately clarifying that this information resides outside of the smart contracts themselves. She explained that these terms can be included in the terms of service, terms and conditions, or even the frequently asked questions areas of the websites selling the NFTs. However, the terms and copyright licensing provisions are not typically expressly stated to the purchaser at the time the purchaser is buying the NFT despite the fact that these terms and rights should be attached to the metadata in the code where the NFT is stored directly.
When asked about the intellectual property risks that OpenSea faces, Mr.White stated that they focus on two levels of analysis: macro-level and micro-level. On a micro level, OpenSea as a platform for selling NFTs focuses on DMCA takedowns and IP takedowns when dealing with external parties, and internally, they focus on dealing with copies or duplicates of original NFTs or copyrighted work. On a macro level, OpenSea is facing the same issues that Ms. Borovik and Ms. Odenkirk were discussing and are working to clarify what rights people are getting when they purchase an NFT. OpenSea is addressing these issues by creating things like click through terms of service, where people can see what rights are being transferred when they purchase an NFT. Mr. White said that it is these boring, but practically important features that are helping creators and purchasers understand their own rights in the NFT space.
So what does this mean for people who want to continue to create NFTs? All three panelists agreed upon the fact that these rights need to be explained in a clearer manner. Unless you are an expert in copyright or intellectual property law, it is difficult to know what your rights as a creator or a purchaser are. This is where licensing agreements and terms of service come into play. Though they cannot always be included in the purchase smart contract, copyright information can be included with each work in a clear and concise manner so that everyone involved in the purchase or sale of NFTs knows exactly what is going on. Client education and prompt decision making by companies that host the sale of NFTs to include such information is the best way to address any potential issues. Overall, it seems as though NFTs are changing the way that people think about intellectual property, but are not changing the rules surrounding intellectual property.