NFTs Key Copyright and Practical Considerations for NFT Minters

NFT


Collectible non-fungible token (NFT) minters have taken a wide range of approaches. In addition to variations in means of distribution, token standards, governing smart contracts, and platforms on which initial sales or transfers take place, content terms, conditions, and licenses (or lack thereof) ) under which users take ownership of an NFT often differ from project to project. the recent delisting by OpenSea of ​​the original version (or “v1”) of the popular “CryptoPunks” NFT art collection in light of a takedown notice issued in accordance with Digital Millennium Copyright Act (DMCA) by the creator of the collection, Larva Labs, and the subsequent DMCA Counter Notice by v1 owners, illustrates some of the challenges that can result from the absence of clear written legal terms governing a distribution of NFTs.

What happened to the cryptopunks?

In 2017, Larva Labs offered the original collection of 10,000 CryptoPunks NFTs (now commonly referred to as “v1” CryptoPunks) for free. However, Larva Labs quickly discovered that the Ethereum smart contract that governs the collection contained a code error which resulted in the buyer of a CryptoPunk receiving profits from CryptoPunk resales, leaving the seller without anything. This prompted Larva Labs to create a new “v2” collection of 10,000 NFT CryptoPunks governed by a different smart contract (without the v1 smart contract flaw), each of which is associated with the same CryptoPunk image as one of the NFT CryptoPunk v1. Due to the blockchain-based nature of v1 NFTs, Larva Labs was unable to simply repair or replace the problematic smart contract via an update or wipe and replace v1 NFTs. As indicated in a series of tweet by Larva Labs, after the creation of the new smart contract, each CryptoPunk v1 that was sold was returned to the wallet to which it was initially issued (i.e. the owner who originally received the NFT from Larva Labs for free). Each v2 NFT was then “airdropped” to the wallet address of the corresponding NFT v1 holder.

To add more complexity, CryptoPunks v1 was initially offered without any written content license or legal terms in place. In 2019, long after the release of CryptoPunks v1, Larva Labs announced, via a mail on the social media platform Discord, which had adopted a NFT license drafted by Dapper Labs as a proposed standard for NFTs. That license allows for limited commercial use of the content associated with an NFT, including the right to display it on a marketplace for purchase and sale and to sell merchandise up to $100,000 in gross receipts per year, but does not grant the right to create derivative works. . It wasn’t clear from that Discord post if that license was meant to apply only to v2 or v1 as well. In 2021, Larva Labs added a Terms and conditions page to the CryptoPunks website, but does not discuss the permitted use of NFT content and does not link or refer to the 2019 license.

About five years after the release of CryptoPunks v2 (which has become one of the most valuable NFT collections ever created), a community consisting of CryptoPunk v1 owners, developers, NFT enthusiasts, and others were able to fix the smart contract flaw. original to “container” v1 CryptoPunks on a new smart contract, which enabled the proper reselling of v1 CryptoPunks. What explained By the CryptoPunks v1 community, the only difference between the unwrapped CryptoPunks v1 (containing the smart contract flaw) and the wrapped CryptoPunks v1 (fixing the smart contract flaw) is the background color. The “renaissance” of v1 has led to the trading of CryptoPunks v1 and v2 and Larva Labs. cheep that NFT v1 “are not official CryptoPunks”.

So far, this has culminated in the Larva Labs DMCA. takedown notice to OpenSea and the removal of OpenSea from the CryptoPunks v1 listings to take advantage of the DMCA’s “safe harbor” protection against liability for copyright infringement (which service providers may claim with respect to content stored on their platform in the direction of a user). In response, the community that revived CryptoPunks v1 submitted a DMCA counter notification challenge the legitimacy of the takedown notice and seek restitution from OpenSea. Section 512(g) of the DMCA insulates service providers from liability for copyright infringement by reinstating removed content after receiving a “counter-notification” from the user who meets certain requirements, if the service provider promptly provides a copy of the counter-notification to the sender’s takedown notice and informs you that the content will be reinstated in 10 business days unless, before that date, you file an action seeking a court order to restrain the allegedly infringing activity.

Questions raised and practical advice

The “ownership” of an NFT, in the absence of written terms with the minter indicating more, generally evidences only the ability of the “owner” to own and control the disposition of the NFT (i.e., the token on the blockchain) itself. itself, and not the acquisition of any intellectual property right or license to any content to which the NFT is associated. The CryptoPunks story highlights some of the conundrums that can arise from the distribution of NFTs without clear written legal terms. For example:

  • What scope of license (if any) for associated content is impliedly granted to an NFT owner when the NFT is transferred to that owner without any express license? How will specific facts and circumstances (and, in particular, the technical aspects of blockchain-based NFTs and how they are created and distributed) affect that analysis?

  • In what cases can the copyright owner revoke or terminate such implied license?

  • To what extent can license terms “adopted” by a mint NFT after NFTs have already been issued without written terms effectively become the terms governing those NFTs and associated content?

  • To what extent can an NFT minter who owns the copyright to content associated with the NFT issue a valid DMCA takedown notice to an NFT marketplace operator requesting that the NFT be delisted, if the NFT is distributed without an express content license granted to the recipient?

  • To what extent can an owner of an NFT described in the previous question validly send a DMCA counter-notice to an NFT marketplace operator in response to the minter’s takedown notice?

  • What legal and practical approaches will be taken to effectively manage “product recalls” in the context of NFTs without undermining the philosophy behind blockchain-based digital assets?

  • Will Congress update the DMCA in light of new considerations raised by NFTs, the metaverse, Web 3.0, and other developments?? If so, how?

The CryptoPunks v1 ongoing issues serve as an interesting case study to illustrate certain key considerations for NFT minters, acquirers, and platform operators, such as:

minters

  • To avoid uncertainty as to whether the owner has been granted an implied non-exclusive license to the content, and what is the scope and nature of that implied license (if any), it is best practice to expressly grant the owner of the NFT a license for content associated with the NFT and specify the parameters of that license (e.g., whether personal or commercial use is allowed, whether the owner of the NFT can create derivative works, automatic assignment to the new owner upon resale of the NFT, what restrictions there are, and what rescission rights the content owner has).

  • To account for possible smart contract errors, it may be useful to specify the circumstances in which the copyright owner has the right to terminate the license or to correct or replace an NFT (or its associated content).

  • Clarity can be created by ensuring:

    • that the terms and conditions governing the initial sale or distribution of NFTs are written in a manner that is legally enforceable and accurately captures the intended scope of rights and licenses to be granted to owners of NFTs;

    • that the platform through which the initial sale or distribution of the NFT occurs implements those terms and conditions using mechanisms that obtain the affirmative agreement of the purchaser or recipient in a manner that creates a legally binding contract, and

    • continued availability of those terms and conditions on the official NFT collection website, so that subsequent owners of the NFTs can easily determine the rights and licenses they acquire (and any associated restrictions and limitations) when the NFTs are transferred to them.

acquirers

  • Understand the legal meaning of “ownership” of NFTs versus ownership of intellectual property rights in the content targeted by NFTs, and the implications of the specific terms and conditions (or lack of terms and conditions) governing the acquisition of an NFT and the owner’s rights to the associated content.

  • In particular, review the license grant language and the types and extent of uses of associated content it permits, and the conditions under which the license may be terminated or modifications made to the NFT or associated content. .

  • For significant acquisitions, given the general irreversibility of blockchain-based transactions conducted through smart contracts, have the smart contract code checked to assess whether there are any flaws that could compromise the security, accessibility, or transferability of the NFT or allow unexpected behavior.

platform operators

  • Implement DMCA-compliant takedown and counter notification policies and procedures.

  • Draft the current Terms of Service in a way that appropriately limits platform operator liability and creates clarity for users about the applicability of third-party terms imposed by NFT minters.

  • Given the borderless nature of NFTs and other digital asset transactions, it should be noted that the “safe harbor” provisions of the DMCA apply only with respect to US copyright, and copyright issues. worldwide copyright infringement should be considered more broadly.

Looking to the future

As the collectible NFT landscape continues to evolve and mature, it will be interesting to see if (and how) courts address IP issues specifically in the NFT context, to what extent the technical realities of blockchain and NFTs affect the analysis, and what technological and market standards ultimately prevail.

Yuga Labs, best known as the creator of the Bored Ape Yacht Club (BAYC) NFT Collection (which provides NFT owners with remarkably broad personal and commercial use rights, including the right to create and market derivatives of NFT images of Bored Ape), recently acquired from Larva Labs the intellectual property rights to CryptoPunks. It will be interesting to see how Yuga Labs addresses the scope of licenses granted to CryptoPunk NFT owners in the future.

© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 87