Olta Andoni, fintech and IP Attorney at Zlatkin Wong and adjunct professor at Chicago Kent College of Law, Tonya Evans, visiting Full Professor of Law at Penn State Dickinson Law School and host of the podcast Tech Intersect, and Stuart Levi, co-head of the Intellectual Property and Technology practice at Skadden Arps and coordinator of the firm’s Blockchain and Digital Asset practice, break down the legal issues surrounding NFTs. In this episode, they discuss:

  • how the law looks at non-fungible tokens (1:25)
  • why owning an NFT is different from owning the rights to the underlying asset making up the NFT (3:12)
  • problems that blockchain solves for creators  (5:09)
  • how corporations (aka content intermediaries) are handling NFTs (6:53)
  • what rights the purchase of an NFT gives a buyer (11:51)
  • derivative artwork, the fair use copyright law, moral rights, and how U.S. law views NFTs (15:53)
  • how to determine the jurisdiction of an NFT (25:00)
  • what type of legal recourse is available to artists whose art has been stolen and redistributed as an NFT (32:37)
  • the differences in the terms of services between NFT marketplaces  (36:26)
  • why the first sale doctrine may not apply to digital assets (43:16)
  • what a buyer is getting when purchasing a blockchain license (46:12)
  • how NFT creators should protect their work (51:43)
  • whether a fractionalized NFT is a security (55:25)
  • how NFTs will change the business of content creation (58:44)

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Transcript

Laura Shin:

Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago and, as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time.

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Laura Shin:

Today’s topic is legal issues around NFTs. Here to discuss are Olta Andoni, FinTech and IP attorney at Zlatkin Wong and adjunct professor at Chicago-Kent College of Law, Tonya Evans, visiting full Professor of Law at Penn State Dickinson Law school and host of the podcast Tech Intersect, and Stuart Levi, co-head of the intellectual property and technology practice at Skadden Arps and coordinator of the firms’ blockchain and digital asset practice. Welcome, Olta, Tonya, and Stuart.

All:

Thank you for having us. 

Laura Shin:

Let’s start with the basics, and since there are multiple speakers, I’ll just actually call on one person to begin, so we can get acquainted with your voices. Olta, what would you say NFTs actually are in a legal sense?

Olta Andoni:

I think that’s a great question. It’s hard to get a straight definition of NFTs in a legal sense. First of all, what do they digitally mean? For myself, despite the fact that there are many definitions out there, to me, they represent just the digital asset in a serial form. The way that the serial number addresses the digital assets and what is included in that code… that kind of raises a lot of more legal questions that probably we’re going to talk about in this podcast.

Laura Shin:

And Tonya or Stuart. Do you want to add anything to that?

Tonya Evans:

Well, sure, definitely. I certainly agree. When I think of NFTs, they are a way to prove ownership of an underlying asset. It is a record that points to the underlying asset as well. It’s helpful for people to understand that the NFT, in addition to evidencing ownership, also points to where the content is at the time that the NFT is created.

Stuart Levi:

Yeah. I totally agree. Those are great points. And I think conceptualizing it the way we might ask: if I had a piece of paper that indicated some sort of ownership rights and some sort of work, what does the legal piece of paper mean? That’s a good way to look at NFTs as well. Even though, obviously, there are some clear differences in terms of what rights they’re attached to.

Laura Shin:

And so, actually, I did want to ask Tonya about this ownership idea. I did see online that someone was saying — this was on a TechnoLlama blog — they were saying that there’s a misperception that an NFT is a digital title to the original, that it’s an actual claim of property. But this person was saying that actually, an NFT is more like a receipt that you own a signed version, but maybe not the actual thing itself. Is that what you meant?

Tonya Evans:

I guess it depends. I hate to give you a lawyerly answer. By default, it in some sense depends on what the underlying asset is. So I absolutely understand the emphasis or the nuance in ensuring that that it’s not an ownership of some original thing. It truly does depend. When I think of an analog complement to that, and I think about physical art, or I’ve heard other rough analogies to, Stuart’s point, some evidence of, let’s say real estate, that my deed is not the property, but it is my ability to exercise control and to exploit — not in an exploitative way — but to actually transact with that physical property the same way I think of some type of title of ownership to a physical piece that I might have in my home to that specific physical asset. We’ll certainly get to this later, about the underlying intellectual property, the intangible aspects of ownership, but literally the representation of that unique file, that unique digital asset, that unique physical asset. And so that’s in the way that I understand it. So I don’t know if it’s necessarily a contrary point of view, but a bit of a nuance.

Laura Shin:

And so before we dive into the meat of today’s discussion, I actually also wanted to ask you, Tonya, can you briefly describe what problems exist for creators in the internet age that NFTs or blockchain technology can resolve? I notice you’ve written about this before.

Tonya Evans:

Yes. There are hosts. I’m really excited about so many different ways where, when we think of the end of the last century, and the run-up when I think of peer to peer technology and Napster and Grokster and all of the challenges to copyright intensive industries that relied on some type of ability to say if I have a copyrighted asset that someone can’t duplicate it. What Satoshi did, whomever he, she or they are, this idea of solving for the double spend in the cryptocurrency space is the same idea of protecting the ability of someone to not only have a perfect digital copy of something, but then to allow a hundred or a thousand of their closest, or not so closest friends, to actually copy it as well. Interestingly, the same technology that was the great challenge in copyright intensive industries, now, because of the nature of blockchain technology, the persistence of that information, and an “immutable” form, that might be a way for creators to actually protect with the very same technology in a different form that they weren’t able to do at the end of the 20th century in the ramp-up of the 21st.

Laura Shin:

As a creator myself, it’s something that I am personally excited about. So while it is true that, obviously, NFTs could help creators with a number of these issues, it’s also true that right now, it’s kind of like a little bit of a Wild West out there. This is creating problems for creators out there, or at least questions. And so let’s just start with some of these basic ones that I feel are kind of occurring a lot now that there are all kinds of different ways that these NFTs are being created. So just like from the beginning, what rights are required for any one person to create or mint an NFT if any?

Stuart Levi:

So I’ll jump in on that one. It’s a great question. And it’s one that, I think, is going to take a little bit of time to shake out in a variety of different industries. The reason for that is that for some artists — be they musical, digital, other — they have all the rights to their work, so they don’t have to worry about whether they have the appropriate rights. They’re the sole creator. They hold the entire well, what we call in the IP world, the entire bundle of rights. For a lot of works out there, the rights have been allocated amongst the different amongst a number of different parties. So it could be that some party owns the distribution rights, some party owns the display rights, some party owns the performance rights, and some party contractually has a right to commercialize.

And so if you’ve got all those parties together and said, now we want to create an NFT of that work …which rights holder has the appropriate rights to do that? And can they do that unilaterally without the other rights holders? That is something that I think is going to take a little bit of time to shake out. I think what we’re seeing already — and NFTs have been around for a while, but this wave is pretty recent — a lot of different industries with libraries of very valuable intellectual property, already building into their contracts to make explicitly clear who has the right to mint an NFT of a work and what exactly that means. I think we’re going to continue to see that just as with other new technologies, as they’ve evolved, people started folding them into the litany of rights that are granted or withheld.

Olta Andoni:

And I agree with Stuart. I think the biggest confusion that I see right now in this space is that it’s not only about the rights that creators are giving away or buyers are buying with these NFTs. I think the misconception is what do these rights include? And I think the analysis gets even more complicated, especially when we’re talking about copyright ownership that, let’s say, includes multiple copyright authors. If you are dealing with multiple copyright authors for a single work, my question is, or we called this joint work of authorship. I think the analysis is going to be slightly different. I think it’s much easier when you’re dealing only with one copyright owner because then you can determine whether or not, I mean, majority of these platforms, I hope they’re doing their legal work, or they’re putting good due diligence when they build these platforms, but I think it gets more complicated when we’re dealing with joint authorship of these works, especially when companies are owners of the copyrights. You have many companies that are out there with big IP portfolios. It will be interesting to see if we see the impact of the NFTs and how they’re going to kind of translate into the protection of those IP portfolios for those companies.

Tonya Evans:

That’s a good point because when I think about it, certainly we have NBA Shot as an example, but also what has recently happened with DC Comics, and having their independent contractors kind of stand down while they flesh out exactly the precise nature of what’s going on with their work. And so, it will be very interesting to see what these companies do because, oftentimes, when we have a company and an independent contractor or an employee for that matter, creating on behalf of the platform, generally speaking, we’re always talking about work for hire, but that can be very narrowly construed. And what was the intention of the parties at the time of contracting these new rights? Are they any different, or are they just a new face on what already existed? Or is this something that wasn’t contemplated by them? It has the potential for quite a bit of revenue. So time will tell how this all shakes out.

Laura Shin:

Just for listeners, work for hire is when, even if it’s an independent contractor doing work for the company, the company retains the copyright or intellectual property. The freelancer doesn’t have any claim, those things, which I, as a freelancer, know a lot about. So I’m Olta touched on this briefly, but, you know, at these times when NFT purchasers are buying NFTs, what rights are they actually buying? Does it just depend on what platform they’re on, or are there some things that are sort of agreed upon that are transpiring so far?

Olta Andoni:

I’ll continue since I started this sort of topic. When the buyer of the NFTs is buying the NFT, I always like to put the analysis that we are sort of dealing with three parties. We’re dealing with the author of that work. We’re dealing with the creator of the NFT. Then, we’re dealing with a buyer. I mean, probably we’re going to have more buyers, even in other markets, secondary markets, et cetera, which probably is going to complicate this analysis.

But under US copyright law, the buyer of the NFT is just purchasing that NFT. They’re not getting ownership of the underlying asset or underlying work. I have to emphasize this because I think there are a lot of misconceptions out there. If you were to get ownership of that underlying asset or work, you need a license from the author of the work. And one of the distinctions, or probably exceptions are, is if you are dealing with a Creative Commons copyright license. Under this Creative Commons copyright license, it’s one of the several public copyright licenses that means that the owner of that work, or the copyright owner, they are allowing for this copyrighted work to be distributed publicly. Usually, creative copyright, a Creative Commons copyright license, is used only when the author truly intends to give away other people the right to use that particular work. So, for now, the owners of the NFT are not getting ownership of the underlying asset of the author’s work. They’re just getting the ownership of the NFT. And I think it’s very important for the platforms that are listing these NFTs, for them to specify the terms under. And by the terms, hopefully, they’re going to be included in their smart contracts in order to define those rights that NFT purchasers are getting from the NFT creators.

Stuart Levi:

I think what’s interesting to think about is that you’re not only not getting ownership of the asset itself, but you’re also not getting any ownership of the intellectual property rights with that work. In this respect, it’s really no different from the physical art world. If I buy a painting at auction or otherwise, that does not — that gives me the ownership of that physical to hang on my wall — but I don’t have the intellectual property rights in that painting unless they were separately assigned to me. I can’t make posters of the work that’s hanging on my wall. I can’t create pictures on coffee mugs. T-Shirts. I have no intellectual property rights to the work. I just own the physical work itself. In a way, that’s sort of the corollary here. The other key point and this is why, as Olta was saying, what the terms of use are in the marketplace you’re buying from are critically important, is that silence on the conveyance of intellectual property rights means you don’t get them. 

So if the assumption is, well, it didn’t say anything, so I’m assuming I’m getting the IP rights along with that work. It’s actually the contrary. You don’t get intellectual property rights with the work. Most marketplaces are very explicit to tell you that, just to eliminate any ambiguity, doubt and to protect themselves. But really are just getting the NFT rights, the ownership rights of that, the bragging rights that you’ve got some connection to that work, but not a deeper intellectual property right to use that work. Which means not the right to copy it, distribute it, perform it, display it, or things like that.

Laura Shin:

What about like, if you wanted to kind of create a remix of some other derivative, can you do that, or no?

Stuart Levi:

So there, the analysis would be very similar to what it would be if there wasn’t an NFT. So there’s the concept of the fair use doctrine in the United States, which gives you certain rights to be able to use the work of someone else in a transformative way. It’s very, very case-specific. So it’s hard to set hard-line guardrails or rules as to what you can and can’t do. But the NFT would not give you greater or lesser rights than someone else who’s making what we would call in the IP world the fair use of that work.

Laura Shin:

So these are actually pretty restrictive rights that purchasers are getting. And so this question that I had actually is maybe just gonna elicit the same answer, but I was also wondering when you own NFTs in a very specific world, such as real estate in Decentraland, is that even more restrictive in terms of what you own? Or is it pretty much, you know, what you guys have been explaining so far?

Tonya Evans:

The best way to describe it is there’s nothing unique or specific about this measure of exercising ownership and control over some type of asset that is so radically different that we can’t reasonably analogize what already exists. That’s not to say that the technology is not challenging as we kind of sort through these issues. The point that Stuart made is really important when we talk about the various factors that a court is going to work through in order to determine whether… ordinarily when I hear the fair use factors apply, oftentimes artists are asking me: “I’m appropriating something that already exists in order to create something that I intend to mint as an NFT.” And that’s more likely, at least for me, when I hear about concerns over, “can I appropriate this without the acquiescence of the owner of that copyright at work?” And that depends, and it’s really, really challenging for artists, but that has always been the case, not just in the NFT space about how much is too much. 

Certainly, not all unauthorized use of some copyrighted work is going to be actionable as a matter of law, even if it’s technically an infringement. The problem is, you’re not going to know until you’re in court. You’re not gonna know until after the fact someone has challenged you, and you have to make a great guess with a great lawyer — the ones that are on this podcast — now about whether or not you’ve made some transformative use. And so it’s really, really challenging to kind of unpack that the fair use factors there.

Laura Shin:

And so when you give that example, are you talking about how maybe a creator wants to mint an artwork that has some ubiquitous cultural icon in it, for instance, painting of a room, a child’s room, and then there was like a stuffed Mickey mouse in there, and they want to make an NFT of that. Is that an example of that?

Tonya Evans:

It is, particularly because even if the artist is right, in your example, I think that it would be completely fine that you’re capturing a room that happens to have a copyright at work there, but the artist is using it for what Stuart said earlier about a transformative purpose. That goes to the heart of the first factor for factor analysis. But that doesn’t mean you won’t be sued. So we do want to support artists in understanding how a court might actually work through the fair use factors, see what is militating towards fair use and against. And so yes, artists are bringing this up a lot. 

The Banksy example is something that’s interesting and related. There are some distinctions, to be sure, but what happens if an artist is appropriating something that already exists and using it for some type of creative output? I would argue that that is common criticism. You know, sometimes we see parody or satire. Those are certain types of purposes that the law actually prefers.

Laura Shin:

Just for the audience, can you remind them of the Banksy NFT and what happened with that?

Tonya Evans:

Absolutely. So a group buys a Banksy piece of art and actually burns it down to the ground. And from that, creates a new type of art that it then mints as an NFT. And the question is, one, whether they have the right to do that, and that takes us to something that we might also talk about in terms of moral rights that are not, in most instances, protected in the United States in a way that they are in European nations. But the reason I say it’s a slightly different issue is because if I have a book, I have the right to burn the book. I don’t have the right to prepare derivative works or create copies or publicly perform or display or distribute. But as to my actual ownership over that particular property, I have the right to do what I want to.

So I don’t see that as a problem unless there is what we call moral rights that are attached to it that have basically two things. One is the right to attribution that the author or the creator is always attached to the work no matter who owns it. And the second part is the integrity of the work, which gets to this fundamental point that no matter what, you don’t have the right to destroy it unless there’s some other agreement to the contrary. So there are stronger rights to actually protect the integrity of the work outside of the United States. There are very limited exceptions here in the United States for certain types of visual art, but that is something that is difficult to understand as well.

Olta Andoni:

I think that’s a great point. And I would like to add a little bit more about the moral rights because I think we’re missing that distinction about, as Tonya mentioned, there is a strong distinction between the way we protect the moral rights of authors here in the United States and moral rights how they’re protected in Europe. 

Here in the United States, we use the Visual Rights Artist Act, if I’m not mistaken. Under, it’s called VARA; under VARA, it protects only one group of authors, and here is included the visual artists. And probably I have to be a little bit more accurate here because usually, they protect those who create these works of visual arts. And these works include paintings, and they include drawings, they include sculptures, et cetera, they exclude specifically. This act excludes the posters, the maps, I think, the globes, if I’m not mistaken, all electronic publications, et cetera. So there is a strong distinction, even about the timeline of how we protect these rights here in the United States versus how they are protected in other countries. Let’s say in France, they are perpetual, meaning that I mean they last forever. 

In the United States, they are protected. I mean, they expire upon the death of the author. And then I think Canada, pretty much, protects these rights even 50 years after the author’s death. So when we’re considering these decentralized platforms, because we’re dealing with decentralized platforms, of course, we have to keep in mind even the jurisdictional approach and how much this jurisdictional approach is going to impact these platforms, meaning what laws are going to apply. And I’m not talking here only about the United States copyright laws because these are definitely completely decentralized platforms, which probably, for now, are not considering so much the legal issues. I mean, they’re concentrated mostly on the hype.

Stuart Levi:

And I think the point that Olta just made is really critical. We sort of backed into the jurisdiction issue a little bit on the moral rights side because that’s an example where the rights of an artist might differ from country to country. It really is critically important that, if you are a marketplace or a purchaser, or in some cases, just the creator of the NFT, knowing the law of the jurisdiction, which country’s laws jurisdictionally apply to that work is really important and really can make a difference. You know, what Olta was saying and Tonya as well when you go to Europe, moral rights, which is sort of the right of an author besides their economic right, they have sort of rights in their work is very different from here.

This could include very conceivably an artist saying, I know that you own my work, you bought my work, but I don’t want my work associated with an NFT. I just don’t want that to happen. I don’t want my name associated with NFTs. I don’t like the energy consumption of blockchains. I don’t like cryptocurrency. I don’t like this whole field. I know, there’s a million things they could say, and they possibly have a strong argument that their moral rights are being violated by you creating an NFT of a work that you purchased of them in ways that, again, might be different from country to country, depending on where the artist is from.

Laura Shin:

So then the jurisdiction that applies is the one where the original artist resides? Is that kind of the general way it goes or…? 

Olta Andoni:

I think this is going to depend. I mean, I think from the work that I have done in this space, I would say that the jurisdiction is pretty much the one that applies between the platform and the creator of the NFT. I predict that probably we’re going to see a lot of more jurisdictional issues coming up, especially if we are dealing with infringing. If you have authors of not only paintings or of musical work, because we have seen NFTs also in the gaming industry, so if we are going to see more infringement actions, then I predict that these jurisdictional issues are going to come up and be a little bit more dominant in the industry and probably are going to determine even what sorts of remedies the plaintiffs are going to have.

Laura Shin:

And do you think it would be possible in the future for an NFT creator to somehow embed into the NFT which jurisdiction would apply in case of a dispute?

Olta Andoni:

I would hope so, but I think that that would be a great burden on the platforms.

Tonya Evans:

I think that’s true. Think about the fact that you have to contemplate and kind of foreshadow all of the things that might happen on the front end because once you mint it, it’s minted. And so that presents interesting concerns. If you’re thinking about smart contracts, programmable tokens, that’s the beauty of the technology, but the reality of once it’s minted, it is what it is. We’re likely to see and really test how smart contract code and NFTs are more fully integrated with plain language contracts as well. I think we’re asking a lot of artists, who generally speaking, don’t like to involve themselves at this level, but I’m seeing a real sophistication emerge among artists who are kind of taking off their artist’s cap and really thinking through, at a bare minimum, the technology issues that are driving some of the legal questions that we are grappling with today.

Stuart Levi:

It’s also interesting on the jurisdiction front, as all the marketplaces have a governing law. They have a jurisdiction section. A lot of them have arbitration sections. That probably only relates to jurisdictional issues or, you know, what jurisdiction would apply, what governing law would apply, with respect to issues that you have with the marketplace itself. If there’s a dispute with the marketplace, it probably does not then wash over to mean, well, the rights of the artists are covered by that governing law or the rights of the purchaser is as the NFT moves around or still back to what that marketplace initially said. It probably will be interpreted to just issue vis-a-vis the marketplace and the buyer and the seller against the marketplace.

Olta Andoni:

I think it would be interesting to also… now that I’m kind of thinking more about this… and because… We do not have any precedence right now in the United States. I’m not wishing that we see more infringement action. My point is that probably we’re going to see a little bit more from the courts later on because the courts are going to determine, or kind of establish, probably that framework that is going to be applicable in case we have these questions about jurisdictional issues that platforms probably should integrate into their metadata, into their smart contracts, and the way they’re going to structure, as I said, especially when it comes to the legal terms and terms of services that they would include. So, unless we have some precedent in regards to the NFTs, maybe, I mean, we’re just sort of brainstorming right now. And it’s a good question, but it’s a very hard question to answer.

Laura Shin:

Yeah. I agree. In a moment, we’re going to discuss more about the different rights associated with NFTs, as well as the different marketplaces, but first, a quick word from the sponsors who make this show possible.

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Laura Shin:

Back to my conversation with Olta, Tonya, and Stuart. So we were discussing the different rights. One thing that I’m curious about is who has the rights to the revenue stream from an NFT?

Tonya Evans:

Well, it’s interesting. My research assistants and I’ve been pouring over —I know the others on today are also doing the same — pouring over the terms of service to see how things are shaking out. It started kind of from a best practices point of view. Well, I won’t use the term best practices. But one of the most forceful, comprehensive, and complete comes from NBA Top Shot, but it’s essentially a centralized environment.

So you kind of roughly use them by analogy to look at the OpenSea’s and the Nifty Gateway’s of the world to see how they are categorizing the revenue split there. One of the powerful components of programmable tokens is the ability to participate, not just in that initial purchase but also for downstream revenue, as it continues to flow automatically to various addresses. Each platform is offering a different split. 

We really first saw this in the context outside of the NFT space with, I think of like Imogen Heap, and what she was doing in music and some of those platforms that were testing this idea of shared revenue for the platform, for the artists, or any other artists who may participate, or have the right to receive royalties both, you know, for each and every sale. And so we see that now in the NFT context as well. And it’s a powerful way to empower artists. This is one of the other things, to your earlier point, about how to meaningfully empower artists in the way that currently has traditionally been missing in the entertainment industry.

Laura Shin:

And so, at this moment, there are a number of works or a number of artists that have been finding that their works have been stolen and minted as entities without their consent or knowledge. So what recourse do artists have in a situation like that?

Stuart Levi:

So it’s complicated. It mostly gets to their ability to, you know, who is it that they can go after? So, in the first instance, if there’s a marketplace that offered that, the artist has recourse against or an approach towards the marketplace to get them to take down the work. So there’s — under the Digital Millennium Copyright Act — the idea that you can go to a platform that’s not vetting works, that’s just sort of agnostic in putting things up and say, you’re offering for sale my work, and there’s infringement out there, and I want you to take it down. They have an obligation to go to the other party and see really who has the rights. But, assuming you were successful in that, and the DMCA takes it down and all the marketplaces, the NFT marketplace, at least the mainstream ones, provides you with how to go about doing that as they’re required to do.

So that gets your work off of the marketplace. What’s not then clear… what does that really mean? 

So now, there’s no longer the image of your work on that marketplace. It’s not available. They won’t allow it to be available for sale, but there are a couple of things. One is, it doesn’t mean you necessarily have now stopped the NFT holder. Although maybe you take some comfort in the fact that they now own an NFT to a work that’s been taken down. So maybe there’s less value there. But it does not also protect you from the fact that your work might be out there in the world on different platforms, and you might need to go out on a case-by-case basis and try to get it taken down there as well. The IPFS, the interplanetary file system, a lot of people don’t realize, actually also has a DMCA takedown provision. So you could reach out to them and say, my work is on there, and it’s being infringed, and I didn’t authorize it, and it needs to come down. So enforcement in this area is going to be difficult, and it’s a great concern for the large rights holders out there who have large intellectual property and valuable intellectual property, portfolios, and libraries. This is yet another area they’re going to have to go out and police, as people try to monetize their works without permission.

Olta Andoni:

I agree with Stuart. I think they’re all great points. The other issue that I see right now, especially when it comes to the remedies and the course of actions that potential plaintiffs are going to have in the future. I think the biggest issue is, first of all, how you are going to identify, as Stuart mentioned, but how are you going to authenticate who is the creator of the work? We’re dealing with pretty much only with a blockchain address. And I mean, how can you determine who is the owner of that blockchain address? And the other thing that kinda worries me is that some of these platforms, they are, if you read their terms of service, you see that pretty much they’re stating there that you all the participants in these platforms, they are at their own risks. Only some curated, well-curated platforms, I see that they’re doing a great job at establishing those terms of service and probably providing for some limited liability for the participants in that platform. Unless we see these terms of services very well structured, I think that this is going to be a big issue when it comes to what sort of remedies or course of action plaintiffs are going to have in the future.

Laura Shin:

Can we actually dive into that because I want to just layout for the audience what the different terms of service are in these different NFT marketplaces because I do see already, just this early on, that there’s kind of a range. So maybe just name some of the more popular ones and the ways that they’re addressing these issues.

Tonya Evans:

Well, you look at something like OpenSea. So I think it’s the first, it’s certainly the largest for user-owned digital goods, collectibles, gaming items, domain names, and the like. And so, basically, they’re saying that there are specific rights to royalties, and they have a laundry list of what that actually means. When they get to the terms of service for intellectual property rights in particular, where they begin is they talk about user conduct and that you agree that you will not violate any law, contract, intellectual property, or other third parties, right? That you are solely responsible for your conduct while accessing or using the service. And then it has a list of what that means. And so they’ve gone into great detail. 

Nifty Gateway is pretty much the same as well. It, too, has its own focus on intellectual property. And it says outside of Nifty Gateway content, all other trademarks, product names, logos on the site, et cetera, are the property of the respective property owners. And so, there’s a limitation of liability and indemnification language. Some platforms are not as well evolved, but I think that is changing now because there’s so much attention. All of us know the ERC-721, and that standard is not new, but it’s new to so many people in a way that is forcing platforms to reassess this because everyone’s being asked. Rarible has similar terms. And again, as I said earlier, although NBA Top Shot is separate, I view that as separate because of its centralized notion and the underlying rights, that language that they use is interesting as well.

Laura Shin:

Can you just say a little bit how something like NBA Top Shot is different from the marketplaces?

Tonya Evans:

Absolutely. So the marketplaces are, and I know we hate this word in the blockchain and crypto space, but an intermediary — or let’s say a facilitating transaction, right? Bringing buyers and sellers together. We’ll say it that way. Not intermediary. That’s a very bad word. 

So that’s very different from NBA Top Shot that says, we see a really great opportunity here, and we own a lot, and people really want it, right? And so they are leveraging the technology in a way that bridges the divide from traditional collectibles, the basketball collectible cards in their packs, but their language is very specific: we own all of this. When you purchase an NFT in this space, you are getting the right to this pack and the ability to collect. You can only buy it from this platform. There is no protection for you if you buy it in the secondary market. They have a whole other list of things that are prohibited activities. So obviously, you’re not going to see that for like a SuperRare or something like that because they just function in different spaces where SuperRare doesn’t own any of the underlying properties. They just facilitate transactions.

Stuart Levi:

I was gonna say, I think that the market, as we go forward, because you know, a lot of questions that we get are where’s this all going? I think the market’s going to divide between, at least within the creative workspace, between things like NBA Top Shots, which is owners of proprietary content opening their own store. Maybe they build their own platform. Maybe they rely on a third-party provider based on a sort of a buy versus build analysis. Then marketplaces where, as Tonya was saying, it’s sort of this intermediary to match buyers and sellers. They’re gonna look very different in terms of the terms of use, in terms of what you’re getting. Obviously, the proprietary rights holders are going to want to be much more restrictive in terms of it’s their property and what they’re allowing you to do and not do with, it as opposed to the intermediate marketplaces saying, look, we’re kind of washing our hands of this. We’re protecting ourselves. Buyer beware, here’s rights you’re getting, here’s rights you’re not getting. We’re just, you know, sort of the platform to address that. 

One thing I just wanna just go back to is sort of enforcement, which is interesting. SuperRare has a provision in there that if it turns out that you’re an artist and you’ve posted something, and it turns out there is, as I was referring to earlier, a DMCA takedown, and that work comes down, you’re responsible for refunding the ETH that you made on that sale — either to the purchaser and/or SuperRare. So how that works out in practice, I don’t think it is yet clear, and I hope they have not had too many use cases like that. But at least they’ve built in the concept that if it turned out you didn’t have those rights, you’re giving the money back, which is a little bit unusual, but an interesting way. So they curate a little bit, what’s more on the site as opposed to just being an intermediary. And I think that’s an interesting model we might see as well.

Laura Shin:

Yeah, I think that’s good for creators. And I would imagine that a lot of creators probably would flock more to platforms like that. That’s just maybe my personal opinion as a creator myself. That kind of leads me to another question. So, are some of these platforms doing more to verify that the minters of these NFTs actually do have the rights? Or are they all pretty much, you know, kind of like scout’s honor-type situations?

Olta Andoni:

I think right now what we’re seeing because even working with clients in this space, it’s been interesting to see how these platforms are approaching, especially, of course, the legal questions. And, I think right now, and I don’t want to say that we’re dealing with a bubble because probably people are not going to like this, but I think we are dealing with a bubble.

And while you’re dealing with a bubble, especially in the crypto industry, I don’t think anyone is paying attention to due diligence and to provide, I’m not saying the best rights to the participants in the platform. I do see not the only misconception, but I do see a lot of abuse from some of these platforms. And I think the more we start working altogether, not only as legal professionals but even to kind of deliver a little bit more knowledge out there about these misconceptions and kind of to raise some higher standards for the platforms to apply. I think this is definitely going to be helpful to the NFT industry because there is so much potential. And as I always like to say, if there is potential, then we really have to be smart to use this potential.

Laura Shin:

So I want to also touch on, to my mind, related issues. One is the first sale doctrine. Can you define that and explain how that would apply to NFTs? And then I think that leads us into the topic of licensing as well. If you could maybe also describe, you know, what licenses do and how they’re different from rights.

Tonya Evans:

Well, when we were talking about the Banksy issue earlier, that is a great example of the first sale doctrine. When I use the analogy of purchasing a book, and I’m not purchasing the underlying copyright to copy, distribute, prepare derivative works, publicly perform, publicly display, but I am acquiring a property interest to use and enjoy the physical book that I’ve purchased or the electronic asset that I have purchased. I have the right to do with it what I want to do, as long as I am not otherwise infringing on any underlying rights. And that includes the right to, you know, burn a painting or resell my casebook or something of that nature. So that is the first sale doctrine that protects my ability to exploit the copy of a work that I purchased to further distinguish between that copy and the actual underlying rights that the copyright holder has.

Stuart Levi:

Well, so what’s interesting in the NFT space is… what does that allow me to do? So I suppose you could create, and if you could convince someone to buy this, but let’s say you were a famous person and you had a physical copy of a book and you said, you know, this is the first book I read on whatever. And you know, if people want to buy an NFT and sort of own the rights in that, maybe you could do something like that. What’s interesting in the digital space is it’s not clear, NFTs aside, whether the sort first sale concept applies to digital works. So as Tonya was saying, you know, I buy the book, it’s my book. I can resell the book. I don’t have to go back to the author and say, are you okay if I resell this book to my friends. It’s not as clear, say if I have purchased a digital work, I might think, well, same thing. I bought this digital work. I own it. Now I’ll create an NFT from my copy of it. It’s not so clear from the copyright office and from a couple of court cases whether you have the actual right to do that, whether the first sale applies to digital works. Can I create an NFT because I went out and bought something, and now it’s mine to go do with it what I want?

Laura Shin:

Yeah. I was wondering about that because even when Tonya was describing the NFT, the Banksy, I thought, oh, but then they did kind of create a derivative work. Right, and then they sold it. So then is that commercial use? It’s probably not quite clear yet. I think some of the ways that some of these different platforms are kind of tackling this is to offer these licenses instead. So when a user gets a license, as opposed to, you know, getting the rights, which they’re generally not when they’re getting an NFT, what are they getting when they have this license?

Tony Evans:

That license is definitely going to define the terms, so it’s difficult to answer that question. The power is in the hands of the licensor to define the terms to ensure that there are certain uses that are within scope. That means that anything that is not, I can’t remember how it’s specifically phrased in some of the cases, other attorneys help me out here, but anything that might be outside the scope, there’s some latitude for what might be reasonably contemplated. Clearly, if you’re having, if you are creating a well-worded license that defines the specific terms, the ideas, if any, they may also include language that says in anything that expressly provided for is hereby reserved in some way that creates perhaps a brighter line even though we shy away from bright lines in the space.

And one final thing, about the point that you made before, with the Banksy example, what immediately comes to mind — and Olta and Stuart I wonder if you feel the same — I think of some of those cases with the Annie Lee cases when there were transforming, and the question was, and it depended on the circuit, that you could have basically the same facts of someone who buys an Annie Lee and whether it was a mounting or whether it was a derivative work, completely differed jurisdiction to jurisdiction. And unless and until the Supreme court here in the United States says one way or another. It’s interesting to see how… that’s why it makes it so difficult and so interesting.

Olta Andoni:

I agree with you. I think that the problem with that is going to complicate this a little bit because if we see different interpretations from different courts, when I mean, it’s about a time to address this legal question. But going back to the licensing, I think that it’s… I see that for people who are in this space, I’m sure they understand what the licenses include or what rights should be included in that license, but this license actually has to be in writing. Another misconception that I see is that they think that only by recording this license on a blockchain ledger, that will do it. So it’s not only the recordation. It really is important what sort of rights the author, the original author of that artwork, or other underlying work, is giving away. So even if you were to have this license and recording on the blockchain, you really have to understand what rights are getting with that license.

Stuart Levi:

I think that when you look out at the licenses today… Generally, today, when you buy an NFT, the marketplace is defining the scope of your license through their terms of use. They tend to be pretty detailed in terms of what you’re getting. As an example, they won’t allow you to make commercial use of the work. They won’t allow you to take that work and embody it in something else. The Dapper Labs folks came out with this NFT 2.0 license, which was a form of license that people could use, that actually allowed commercial use up to a hundred thousand dollars, just as a sample. So you could do that if you chose to do that. But most marketplace license grants are very specific. You can display the work in connection with selling it. You can enjoy it for yourself — display it for your own personal use — but they usually have a list of prohibitions to make clear what you can’t do with the work. You could argue that even if it was silent, you wouldn’t have those rights, but I think to eliminate any ambiguity, they’re pretty clear in terms of what you’re getting and then a fairly robust list of what license rights you’re not getting with the work.

Laura Shin:

And for that Dapper Labs NFT license template, are a lot of people using that? Like, do you feel like that will become pretty commonly used through the industry?

Stuart Levi:

So it’s interesting. It’s hard to say. I think the limited commercial use probably concerns people because it’s not clear how you’d even police that. And I think there’d be a lot of concern by creators, artists, rights holders of large intellectual property libraries, that once you open the door for some commercial use, then how do you police the fact that they went up to, but didn’t pass whatever the dollar threshold is. How are you going to count that? How are you going to enforce that? I think most rights holders today and creators are much more comfortable with a flat, you have no commercial rights to the work at all, enjoy the NFT, enjoy however you’re going to describe the NFT to people like your friends and family about what you have, but you can’t go make commercial use of my work. I think it’s going to still be that sort of binary for awhile.

Olta Andoni:

And I think I’m okay with that binary for now because I think it definitely kind of facilitates the industry a little better. As Stuart mentioned before, if we are opening that pass about commercial use, I would be more worried about not only policing it but even enforcement, especially. I mean, how do you enforce it? That will definitely raise many other questions.

Laura Shin:

And so, at this moment in time, how would you all recommend that artists protect their rights when it comes to NFTs? 

Stuart Levi:

Look, I think there’s a couple of things that are going on out there. I think that, and Tonya mentioned earlier, the DC Comics example of, you know, pushing out to their creatives: you don’t have the right to create NFTs for work that you created for us. I think a lot of the big rights holders are looking out to push statements out into the marketplace to say we have not authorized any NFTs of our work. If you’re buying one, it’s infringing – it’s unauthorized. I think you’re going to see some of that in terms of protecting works. The big rights holders, who already have enforcement divisions built into their company, for sure, are looking at this space and figuring out a strategy for how they’re going to go after and protect the work.

For the individual artists, it’s hard. They have had this issue historically with any digital work that that issue has always existed. I think NFTs, while providing tremendous upside and benefits to artists, has also, unfortunately, created, like with everything, piracy, infringement, and unauthorized use that has now created a headache for them to go out and police their work in ways where they might not have the capabilities — just the time and resources — to be able to do that. But I think it’s going to be a little bit of a challenging time for artists who are just working alone and not part of a large organization with that infrastructure built-in.

Olta Andoni:

I agree with Stuart. I think it’s a good word of advice for all the artists and especially businesses because we’re going to see why more businesses and other participants come up in this industry. I think that it’s very important to not only consider very carefully and to be mindful of the risks that are associated with NFTs per se, but especially the ownership of intellectual property. And, I think, when it comes to developing an IP strategy or incorporating that IP strategy when you’re dealing with NFTs, this definitely requires a lot of more due diligence and a lot of other considerations. So you really have to, first of all, I know that everybody’s in the space right now because, of course, everybody wants to monetize, and it’s this fear of missing out… My point is that, definitely, we need to be super, super careful understanding, first of all, that IP strategy that we would like for these platforms, especially participants in the platform, to integrate.

Tonya Evans:

So in terms of empowering artists, I really want to encourage them to take their time. FOMO is real, and the craze in the market is real, but if this space is to have longevity, and if you are to have longevity as an artist, you need to take care of business. This is an exciting time, I think in particular for underestimated and traditionally marginalized artists as well. And so for women, and people of color, when I think of the black art movement in this space and the power, there’s a lot of excitement around it. Micah Johnson, Corey Van Lew, so many are doing some great things in the space. You have to take your time and learn the business and the legal sides before you jump in because this isn’t a world where you can easily undo things. So you have to be mindful and protective of your art and the space.

Laura Shin:

Yeah, that’s a good point. All right. So we’re gonna switch to one unrelated topic before circling back to this because I couldn’t really figure out how to fit this into the discussion, but many in the NFT community, such as MetaKovan, the founder of MetaPurse, whose organization bought EVERYDAY, which was the Christie’s auction NFT piece for $69 million. So a lot of these people would get excited by the fractionalization of NFTs, but I wondered, how does that intersect with securities law?

Olta Andoni:

I am not a securities lawyer. I mean, I do have a very good understanding of securities law and securities laws. And, of course, I work with other attorneys in the space. My understanding is that the SEC has already made clear that everything fractionalized is going to be a security. So I am not sure how this is going to translate to NFTs right now, but I think that it’s very much high risk. And I think there is just a small gap, as I like to say, when an NFT can cross that line between a non-security to a security. And, of course, there are many factors that need to be considered, and especially the way these platforms… how the creators are marketing these platforms. And I don’t want to go into details about the Howey test, but this is something that is interesting about fractionalizing. Everything that is fractionalized, I mean, per the guidance so far from the SEC, maybe a security.

Stuart Levi:

Just to add to that, I’m also not a securities lawyer. I think it sort of goes to sort of the scheme of how the NFT is being filled. And so, just on its own, breaking up an NFT into, you know, ten different pieces and saying, instead of having one NFT owner of the work – the piece of music, or whatever it might be – there’s going to be 10 NFTs attached to that. That in itself probably isn’t an issue. And having, for sure, just a one-off NFT tied to an asset is not an issue. 

But we’ve literally had people describe to us, and this is where you start to see how you can quite innocently trip over securities law, is someone saying, well, how about I build an NFT as a sort of an investment, and they literally have used this word with us, you know, as the investment, I get different people to invest in this, this digital installation that I want to do, and I’m going to then hype it and market it, and we’ll together, increase the value of it.

And then everyone will be able to sell it as a profit, not realizing that they’re potentially describing what could be turning an NFT, innocently enough, into a security. So I think that while there’s, you know, in ways too much about securities laws, you know, tied up with this space generally, I think you could, as I said, quite innocently, create something that you’d have to get some securities law advice, just thinking, well all I was doing was getting people to invest in my art, and we were going to hype it together, or I was going to hype it for them and try to increase the value and let my fans make a profit from it. You have to be mindful of it. 

Laura Shin:

So let’s wrap up with a look to the future. In a column for CoinDesk, blockchain lawyer Preston Byrne wrote, “my suspicion is legally enforceable copyrights, and hard-coded on-chain monetization mechanisms will be a valued feature for NFT platforms. The platforms with the most effective monetization schemes will attract the most in-demand content creators, and therefore the best content.” And I wondered, did you guys agree with that? And do you think that enforceable copyrights will be embedded in the NFTs themselves? In general, how do you think NFTs will change the current business landscape for content creators?

Olta Andoni:

I agree with Preston. I think he made some great points in that article. Personally, I remain very optimistic about NFTs because I think it’s great… it’s a very good mix of emerging technologies. I really like the subculture, or the culture also included here. I think that non-fungible tokens definitely are a very strong, powerful form, or type, of tokens that are representing those non-fungible assets on a blockchain. 

When it comes to the monetizing aspects, as Preston mentions in the article, something that I’d like to add is that, for now, it’s kind of hard to understand the goal or the reasons why people are getting involved. Of course, there’s the monetization part, but for some of them, maybe even a little bit more cultural, or it’s just the idea, like why this person can buy the NFTs. And I see this a lot, even from my clients, and why can I not buy? So are we here right now for the experience? Are we here for the monetary part? Or are we here just because we have been going through all this quarantine and it’s very much more convenient, you know, as we always like to say to see these digital images, et cetera because we’re not getting the real-time real-life experience.

My point is that it depends. Definitely, I think, that the NFTs, if we are careful with addressing the legal questions, are here to stay. Probably, we are going to see a lot more coming up as the space kind of clears out from some projects that probably are not there yet.

Tonya Evans:

I definitely understand Preston’s point. I’m concerned about it though. Particularly because, from a United States point of view, this idea of the economic incentive is going to drive culturally valuable properties is concerning to me. And it’s because of the traditional gatekeepers in the art space, predominantly white art institutions, museums, historians, they serve as the gatekeepers and also the ones that deem something valuable. And if we are only looking at the economic value, that’s concerning to me. But still, that technology certainly has the potential to allow more voices, more perspectives, and empowerment of those, again, that have traditionally been marginalized if we don’t adopt the same traditional structure that assesses what value is that therefore drives access.

Laura Shin:

Okay, and Stuart, go ahead. 

Stuart Levi:

I think that the hype and sort of the silly things that are going on out there with people just overpaying, probably, for digital art because they want to be sort of part of the experience, I think that’s going to wash away. I think that the reason NFTs are here to stay and are going to be so dramatically important is the number of rights holders with significant and valuable intellectual property rights who are looking at this market incredibly seriously; it is actually astonishing to me because it has happened so quickly. We kid around in our group that for a lot of these companies, I’m sure back at the end of 2020, the business plan for 2021 did not include an NFT division and NFT revenue stream.

And here we are in mid-March, and they’re all like building them out and thinking of whether they should have a platform to sell these. And I think that’s really going to happen. So I don’t think that’s going to go away. I think even if all the other people spending a lot of money on digital art that no one kind of gets why you spent money for — even if all that washes away, I don’t think it all will, but some of it well — I think that’s going to remain. And what will really, really be interesting to see is for years, all of us in this space have talked about, you know, what is the moment where people start to pay more meaningful attention to blockchains and cryptocurrencies? And maybe this is it. The number of people who know today what a MetaMask is, who didn’t know three months ago, I would bet you, this has been the event that’s really changed that probably in the most dramatic way. Part of it is the spike in Bitcoin. But I think a lot of it is this, and this really could turn out to be a watershed moment, writ large for the space.

Laura Shin:

Yeah. I agree. Fred Ehrsam tweeted some variation on the notion that it was something like, it turns out a lot more people care about music and culture than they do about finance and technology. And I was like, yep!

Stuart Levi:

I think the Dapper Labs folks have said for a while, not to misquote them, that, you know, games and entertainment is what’s going to bring people to this space. Maybe more so than financial instruments.

Laura Shin:

All right. Well, this has been a fascinating discussion. Where can people learn more about each of you and your work?

Olta Andoni:

I am on Twitter. My Twitter handle is @AndoniOlta. I’m also on LinkedIn. I also write for CoinDesk for Decrypt. I’m happy to answer any questions.

Tonya Evans:

You can find me at advantageevans.com, and also I live on Twitter. So I’m happy to engage there and keep the conversation going. I’m @IPProfEvans. 

Stuart Levi:

I’m also on LinkedIn and accessible through the Skadden Arps website.

Laura Shin:

Perfect. All right, well, thank you all so much for coming on Unchained.

Laura Shin:

Thanks so much for joining us today. To learn more about Olta, Tonya, and Stuart, and their respective organizations, check out the show notes for this episode. Don’t forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to youtube.com/c/unchainedpodcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, and Mark Murdock. Thanks for listening