©2021. Published in Landslide, Vol. 14, No. 1, September/October 2021, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.
September 22, 2021 Feature
Next Picasso, Ponzi Scheme, or IP Boom? NFTs in the Eyes of the Beholder
Chris Katopis
NFTs have arrived, and they are continuing to rock the art world. The big news this year was a work by Mike Winkelmann, the artist known as Beeple, that sold for a record sum of $69,346,250 by Christie’s auction house.1 Everydays: The First 5000 Days is a collage of digital images in combination with a digital, non-forgeable blockchain code, and it was the highest recorded sale amount for a non-fungible token (NFT) to date. That surely was a lot of money for “a JPEG and [a] hyperlink.”2
The artwork’s purchaser was a Singapore-based entrepreneur and crypto investor who was proud to be the buyer of a “significant piece of art history” that was part of an important change and a shift in history and the art world.3 The magnitude of these shifts and changes is causing both the art world and the intellectual property (IP) community to assess the consequences.
Art aficionados already know that digital art and multimillion-dollar price tags are realities in the art world. Christie’s first began selling digital art embedded via blockchain in 2018.4 Artworks by modern celebrity artists have long fetched multimillion-dollar sales—e.g., Koons ($91 million) and Basquiat ($110 million).5 Some other notable NFT sale prices are just as astounding:
- Twitter CEO Jack Dorsey’s first-ever tweet earned him $2.9 million as an NFT.6
- An NFT video clip of LeBron James dunking sold for more than $200,000 on the NBA Top Shot website.7
- An NFT artwork of Paris Hilton’s cat brought her the equivalent of $17,000 in cryptocurrency.8
NFTs and Digital Tokenization
The paradox of this NFT phenomenon is the resulting value from the inherent combination of two unrelated elements. First, we experience the piece physically as art, through a digital audiovisual component, which may include an image, video, and/or musical piece. The fundamental characteristic of digital media is that it can be duplicated with a virtually perfect fidelity, instantaneously, and at practically zero cost. Then, a second and key component is that the NFT is a unique, digital asset with the equivalent of a serial number created through hash technology like that underlying cryptocurrencies. The digital serial number information provides the asset’s uniqueness and hence its “non-fungibility.” In an NFT transaction, the value of the digital asset relates to the underlying digital fingerprint afforded by the cryptographic blockchain digital ledger record information. It is this combination of the disparate elements of the audiovisual artwork and the digital blockchain information that makes the final works desirable and exceedingly valuable for art lovers, speculators, and investors. The resulting NFT becomes far greater than the sum of its parts.
Useful Arts and Sciences
The enduring strength of the U.S. copyright system is how it can evolve to adopt new forms of technologies and media within its ecosystem, e.g., piano rolls, VCRs, online file-sharing, holograms, and digital avatars. But when the framers of the U.S. Constitution drafted the patent and copyright clause to “promote the progress of science and useful arts . . . for limited times,”9 it was unimaginable that they could have foreseen a $69 million digital art transaction.
NFTs may be a relatively new digital technology, but the related IP issues are long-standing. Legal observers have identified a range of IP areas that are implicated in the current NFT craze, and many IP issues implicated in the current NFT nascent asset class market are underlying legal issues that have faced artists for more than a century. Once we peel away the craziness of the multimillion-dollar price tags, a host of core IP issues come into sharp focus: questions about the artistic work’s authorship, ownership, and subsequent transferability, and all the other IP rights and remedies that arise. An essential aspect of this new market seems to be evolving such that the buyer of an NFT asset has an obligation to pay a royalty back to the artist upon subsequent sale. It is unclear which legal regime controls these obligations.
Rewarding Artists for Their Creative Labor
A fundamental premise of copyright law is the quid pro quo to secure the exclusive rights in a work for a limited period, as a means for the author to derive the economic benefits arising from the author’s work in exchange for public dissemination.10 Historically, the focus of U.S. law has been on economic rights, rather than other objectives, such as what are commonly known as moral rights (e.g., an artist’s right to attribution). In Mazer v. Stein, the U.S. Supreme Court said, “[t]he economic philosophy behind the [copyright] clause . . . is the conviction that encouragement of individual effort by personal gain is the best way to advance public welfare through the talents of authors and inventors.”11
As the late Justice Ruth Bader Ginsburg explained:
Rewarding authors for their creative labor and “promot[ing] . . . Progress” are thus complementary; as James Madison observed, in copyright “[t]he public good fully coincides . . . with the claims of individuals.” [The dissent’s] assertion that “copyright statutes must serve public, not private, ends” similarly misses the mark. The two ends are not mutually exclusive; copyright law serves public ends by providing individuals with an incentive to pursue private ones.12
The bulk of U.S. copyright theory, history, and jurisprudence confirms that a fundamental goal of copyright is for the economic benefit of authors and creators, while simultaneously ensuring future benefits for the public and society at large. Unfortunately, this grand theory is all too often in discord with practical reality. In some scenarios, the artist of an original may sell the work at a modest price, but the artist cannot easily enjoy the subsequent financial benefit from the future appreciation of a work. This is sometimes known as the “starving artist’s dilemma.”13
The fine art market and the music industry—and all creative fields—have evolved as complicated systems featuring many stakeholders, disproportionate bargaining power among entities, and often arcane business practices. Related existential threats such as forgeries and online piracy are always lurking. At the same time, the economics of the traditional creative market often do not favor the vast number of new, up-and-coming young authors and artists. But NFTs may prove to be a welcome form of creative destruction. And some artists consider NFTs as a harbinger of a greater change concerning the intersection of art, media, and commerce.
In an op-ed this year, Mikel Jollett, lead singer of Airborne Toxic Event, argued how NFTs could finally empower artists and be the technology creating true change for the industry:
[W]e’ve been told that the internet was going to save music. . . . But at each new point of disruption . . . [major corporations] found a way to harness technology to continue reaping the profits that come from selling our art to our fans for themselves. . . . We always heard that the internet was going to change music by empowering artists, and that might finally be happening.14
The awesome, democratizing potential of NFTs may be the technology that can leverage the power of the internet, and other networks, to allow artists and creators to realize a greater and more equitable share of the value of their work, rather than the way that the media business distributes profits today.
The Issue of Enduring Value for Artists and Their Work
Historically, a manifest inequity for artists was being deprived of a percentage of future profits from the sale of their work—a challenge for artists for more than a century. In the 1970s, artist Seth Siegelaub and lawyer Robert M. Projansky pioneered the creation of an artist’s resale contract, known as “The Artist’s Reserved Rights Transfer and Sale Agreement.”15 The agreement begins, “[t]he ills it remedies are universally acknowledged.”16 While this agreement is still used by some artists today, no single contractual document has proved effective to remedy the resale inequity faced by artists.
The goal of preserving a future revenue stream for an artist’s work is at the heart of the NFT’s value proposition. A lesser-known feature of the Christie’s Beeple sale was the artist’s right to future resale royalties as provided by the sales agreement. An artist’s resale royalty right (ARR) is not expressly recognized by federal copyright law. In contrast, more than 70 nations recognize this ARR concept as a moral right known as droit de suite.
While many U.S. policymakers have acknowledged the defect arising from this absent ARR feature at home, the U.S. Congress has not reached consensus on any such proposal. In the 1990s, Congress directed that the U.S. Copyright Office study this issue. At the time, Ralph Oman, former Register of Copyrights, noted, “Like Puccini’s ‘La Boheme,’ which opened with an artist and a poet shivering in a Paris garret, the droit de suite grew from a European, particularly French, awareness of the state of affairs of struggling artists at the turn of the century.17
Droit de suite has its origins in 19th-century European legal philosophy. France adopted a droit de suite provision in 1920. More than 70 other jurisdictions followed in adopting it into their copyright systems. In the U.S., it is providing “artists with an opportunity to benefit from the increased value of their works over time by granting them a percentage of the proceeds from the resale of their original works of art.”18
A key issue for policymakers and stakeholders is that any type of legislative ARR would be a deviation from the current legal framework that places an emphasis on the copyright system’s first sale doctrine, which essentially divorces all rights from an artist upon the physical sale of work. Legislation establishing an ARR raises a host of policy questions, such as revisiting the economic concepts surrounding the copyright clause’s incentives, including whether a resale royalty would incentivize creativity and whether a resale royalty would negatively or positively affect the primary art market.19
An ARR is contemplated by the international copyright system. The landmark Berne Convention treaty provides a basis for signatory nations to adopt such provisions in their national law. In the U.S., proposals for an ARR have been introduced in Congress on several occasions. Various states, including California, Massachusetts, and New York, have proposed and enacted similar legislation.20 Many market-based voluntary mechanisms have also emerged where collecting societies manage artist royalty payments.
At the federal level, Congress has pursued a statutory ARR on several occasions—although without reaching a necessary consensus and political opposition from some stakeholders. But the strong interest in a legislative proposal is a clear and rare bipartisan acknowledgment of the market defect and equity issue for artists.
In the U.S., artists have traditionally not been able to enjoy a share of the subsequent economic upside of a work’s appreciation due to the Copyright Act. U.S. copyright law has long been guided by a concept known as the first sale doctrine, which essentially provides that “an individual who knowingly purchases a copy of a copyrighted work from the copyright holder receives the right to sell, display or otherwise dispose of that particular copy, notwithstanding the interests of the copyright owner. The right to distribute ends, however, once the owner has sold that particular copy.”21
In previous Congresses, lawmakers have championed the creation of an ARR with bills such as the American Royalties Too Act (ART Act).22 The ART Act would establish a federal ARR by amending the Copyright Act to provide creators of visual art a 5 percent royalty of the price paid for their art when it is resold at auction under limited circumstances articulated within the bill, as well as to establish a mechanism for the collection of royalties from auction houses and distribution to artists by copyright collecting societies.
In reintroducing the bill in 2018, a bipartisan and bicameral coalition of congressional leaders released statements about the urgency of amending U.S. law to include an ARR. These lawmakers argued that legislation was necessary to advance basic fairness and to remedy the injustice occurring in the artistic marketplace—namely, visual artists and other creators are prevented from sharing in the proceeds of a subsequent sale of their work or otherwise reaping in the benefits when that artwork increases in value.23 Senator Orrin Hatch (R-UT) observed: “The ART Act will help remedy this injustice by giving artists the right to a share of the proceeds when the art they create is later resold at auction. It will help ensure artists get a fair shake.”24
For several reasons, legislation to establish an ARR never gained sufficient momentum on the federal level for enactment into law, but the related deliberation yielded an enormous amount of thoughtful research regarding the policy questions and legal issues. In 2013, in response to congressional inquiries, the U.S. Copyright Office issued a report that was the result of specific questions to stakeholders. It turned out to be quite prescient in view of what we have today: (1) are artists in any way disadvantaged under the current copyright legal system as compared to other authors; (2) would a resale royalty incentivize creativity; (3) would a resale royalty negatively or positively affect the primary art market; (4) would a resale royalty negatively or positively affect the secondary art market; and (5) how might a resale royalty implicate the first sale doctrine?25
The ascent of NFTs in the art marketplace is an exciting development for artists, collectors, and those who can only dream of buying. And in some ways, the current craze allows for a very interesting, controlled art world experiment. The Beeple sales contract at Christie’s specifies a 10 percent resale royalty—higher than the percentage articulated in previously introduced federal legislation or some of the past exemplary artists agreements. NFTs may be a superior ARR means over a statutory mechanism by offering more flexibility around terms, providing a greater benefit to the parties, and achieving the necessary consensus for implementation.
The federal government will likely have a definite potential role in ensuring that any such NFT market-based system works transparently, smoothly, and fairly, through oversight and ensuring the development of best practices and standards.
Not So Comical Comics—and Other Issues in the New NFT Universe
NFTs often seem to draw upon many popular culture imagery and themes from such realms as comics, sports, and music. These pop culture elements may help with marketing to the buyers of demographics of a certain age who have also benefited from the recent cryptocurrency economic boom—here also offering them an added boost of nostalgia. A range of IP issues are likely to arise as NFT artists find their own fame and fortune in the art world. For example, a fundamental challenge around the economics and valuation of NFTs is that they have no inherent intrinsic value. NFTs are often described as objects like paper comic books or cardboard baseball trading cards. Coincidentally, the comic book world is at the center of this phenomenon, along with some of the first NFT-related copyright disputes.
NFTs have predictably given rise to IP disputes concerning authorship and ownership. Comic book artist José Delbo started working for DC Comics on the Wonder Woman character in 1976. Significantly, Delbo did not create the heroine, who was created by artist Charles Moulton and introduced in 1941. Delbo worked with another contemporary artist, Hackatao, on producing and selling Wonder Woman NFTs that earned a reported $1.85 million. The company released the following statement: “DC is exploring opportunities to enter the market for the distribution and sale of original DC digital art with NFTs including both new art created specifically for the NFT market, as well as original digital art rendered for DC’s comic book publications.”26
Purchasers of “memorabilia” NFTs will likely experience some of their own bewilderment as they attempt to understand the terms and conditions governing the subsequent uses of their collectible investment. Average consumers do not appreciate the IP and ownership issues around the media they consume, whether it is a music album, event photos, or streaming video—including that a purchase does not constitute all elements of ownership of a given work. The NBA’s own terms for use of its Top Shot digital blockchain collectibles shows how NFTs are becoming a part of consumer use today:
(ii) We Own the App. You acknowledge and agree that we . . . own[] all legal right, title and interest in . . . the App, and all intellectual property rights therein . . . .
(iii) No User License or Ownership of App Materials. [Y]our use of the App does not grant you ownership of or any other rights with respect to [the NFT’s content].
(iv) Further User Ownership Acknowledgements. For the sake of clarity, you understand and agree: (a) that your purchase of a Moment . . . does not give you any rights or licenses in or to the App Materials . . . ; [and] (b) that you do not have the right . . . to reproduce, distribute, or otherwise commercialize any elements of the App Materials . . . .
(v) User License to Art. [W]e grant you a worldwide, non-exclusive, non-transferable, royalty-free license to use, copy, and display the Art for your Purchased Moments, solely for the following purposes: [e.g.,] for your own personal, non-commercial use . . . .27
And a dazzling array of additional IP issues could well follow, including: the unauthorized use and tokenization of any audiovisual works and trademarks belonging to nonconsenting third parties; new proposed applications of the fair use doctrine; conflicts of law issues concerning the application of the Visual Artists Rights Act,28 any state, or foreign ARR provisions; the application of traditional U.S. copyright law provisions, such as the use termination right concerning an NFT that is designed to last in perpetuity; remedies against foreign purchasers and resellers; available remedies as the underlying token and asset change in nature; and other moral rights issues, such as the right of publicity by estates, just to name a few.
The NFT craze is still an exciting and evolving experiment. Whether it is a new normal for the art world or merely a fad is yet to been seen. Its fate will be controlled by many factors ranging from the digital scarcity of any given NFT series, consumers’ acceptance of post-purchase IP licensing terms, new business revenue models, and the public’s confidence in these intangible collectibles. All are likely to materially impact the future of these collectibles and their marketplaces. We are witnessing brand new markets engaging in a price discovery with collectible offerings at many price points, appealing to the super-rich as well as the not-so-rich memorabilia super fans.
Conclusion
A century ago, in a landmark copyright case, Supreme Court Justice Oliver Wendell Holmes cautioned that “a page of history is worth a volume of logic.”29 The irrational exuberance over the recent multimillion-dollar NFT phenomenon may represent a historic case of art world future shock. While NFTs are a new means, many of the underlying fundamental artist rights issues have been debated for more than a century. Tokenization is merely the latest innovation in a long series of technologies to transform art and media. The most significant transformation may be for empowering authors and artists, who will have greater means and tools to monetize their work, through negotiated agreements and even digital smart contracts.
NFTs will inevitably raise many novel copyright and trademark questions, particularly around the concepts of ownership, ARR, and fair use. The NFT phenomenon is an example of how a voluntary marketplace solution can solve a legitimate and long-standing problem, to address a long-absent feature in the U.S. copyright regime. Hence, it is the de facto creation of an ARR. Accordingly, NFTs may provide a solution that has long eluded national political consensus while invigorating the U.S. Constitution’s goal of promoting the arts and sciences.
Even after NFTs leave the front-page news, the innovations they engendered will continue to pose challenges and opportunities across the entire legal, business, and creative spectrum in the years to come. And some of us will love beholding it all.
Endnotes
1. Beeple’s Opus, Christie’s, https://www.christies.com/features/Monumental-collage-by-Beeple-is-first-purely-digital-artwork-NFT-to-come-to-auction-11510-7.aspx (last visited Aug. 23, 2021).
2. Robert Frank, Crypto Investor Who Bought Beeple’s NFT for $69 Million Says He Would Have Paid Even More, CNBC (Mar. 30, 2021), https://www.cnbc.com/2021/03/30/vignesh-sundaresan-known-as-metakovan-on-paying-69-million-for-beeple-nft.html.
3. Id.
4. In November 2018, Christie’s registered “the entire 42-lot Barney A. Ebsworth Collection of 20th-century American Art on the Artory blockchain.” Beeple’s Opus, supra note 1.
5. See, e.g., James Tarmy, What a $92 Million Painting Says about New Art Market Values, Bloomberg (Feb. 3, 2021), https://www.bloomberg.com/news/articles/2021-02-04/what-a-92-million-botticelli-painting-says-about-new-art-market-values.
6. Todd Haselton, Twitter CEO Jack Dorsey’s First Tweet NFT Sells for $2.9 Million, CNBC (Mar. 22, 2021), https://www.cnbc.com/2021/03/22/twitter-ceo-jack-dorseys-first-tweet-nft-sells-for-2point9-million.html.
7. Jabari Young, People Have Spent More Than $230 Million Buying and Trading Digital Collectibles of NBA Highlights, CNBC (Mar. 2, 2021), https://www.cnbc.com/2021/02/28/230-million-dollars-spent-on-nba-top-shot.html.
8. Liam Frost, Paris Hilton Sells Ethereum-Based Artwork for $17,000, Decrypt (Aug. 17, 2020), https://decrypt.co/38969/paris-hilton-sells-ethereum-based-artwork-for-17000.
9. U.S. Const. art. I, § 8, cl. 8.
10. Cf. Grant v. Raymond, 31 U.S. (6 Pet.) 218, 247 (1832) (noting that the patent system design allows the public to benefit from an invention while compensating the inventor with a temporary monopoly).
11. 347 U.S. 201, 219 (1954).
12. Eldred v. Ashcroft, 537 U.S. 186, 212 n.18 (2003) (citations omitted).
13. Brian L. Frye, Equitable Resale Royalties, 24 J. Intell. Prop. L. 237, 241–42 (2017) (recounting the advocacy of Albert Vaunois in support of droit de suite in 1893).
14. Mikel Jollett, Here’s What NFTs Are—and What They Could Do for the Music Industry, Artists and Fans, NBC News: Think (Mar. 16, 2021), https://www.nbcnews.com/think/opinion/what-are-nfts-what-could-they-do-music-industry-artists-ncna1261205.
15. Charlotte Kent, Artists Have Been Attempting to Secure Royalties on Their Work for More Than a Century. Blockchain Finally Offers Them a Breakthrough, Artnet News (Apr. 7, 2021), https://news.artnet.com/opinion/artists-blockchain-resale-royalties-1956903.
16. See id.
17. U.S. Copyright Off., Droit de suite: The Artist’s Resale Royalty, at ii (1992), https://www.copyright.gov/history/droit_de_suite.pdf.
18. Resale Royalty Right, U.S. Copyright Off., https://www.copyright.gov/docs/resaleroyalty (last visited Aug. 23, 2021).
19. See U.S. Copyright Off., Resale Royalties: An Updated Analysis 36–46 (2013) [hereinafter Resale Royalties Report], https://www.copyright.gov/docs/resaleroyalty/usco-resaleroyalty.pdf.
20. See Cal. Civ. Code § 986 (resale royalties); see also Cal. Civ. Code § 987; Mass. Gen. Laws ch. 231, § 85S; N.Y. Arts & Cult. Aff. Law §§ 11.01, 14.03 (moral rights).
21. U.S. Dep’t of Just., Criminal Resource Manual § 1854, https://www.justice.gov/archives/jm/criminal-resource-manual-1854-copyright-infringement-first-sale-doctrine (last updated Jan. 17, 2020); see 17 U.S.C. § 109.
22. H.R. 6868, 115th Cong. (2018); S. 3488, 115th Cong. (2018).
23. See Press Release, Nadler, Hatch, Leahy & Collins Introduce Bipartisan, Bicameral American Royalties Too Act (Sept. 25, 2018), https://nadler.house.gov/news/documentsingle.aspx?DocumentID=391396.
24. Id.
25. Resale Royalties Report, supra note 19, at 31–60.
26. Letter from Jay Kogan, Senior Vice President, Legal Affs., DC Comics, to Freelancers (Mar. 11, 2021), https://pbs.twimg.com/media/EwSvX1CXEAEN2Hx.jpg.
27. Terms of Use, NBA Top Shot, https://nbatopshot.com/terms (last updated Mar. 10, 2021).
28. Visual Artists Rights Act of 1990 (VARA), Pub. L. No. 101-650, tit. VI, 104 Stat. 5089, 5128–33 (codified at 17 U.S.C. § 106A).
29. N.Y. Tr. Co. v. Eisner, 256 U.S. 345, 349 (1921).