Nearly one year after they became a household term, non-fungible tokens (NFTs) have begun to make their first appearances in American court decisions. These early cases involve two of America’s best-known names in media: recording artist Jay-Z and Playboy. While many legal questions about NFTs remain, these first decisions suggest that courts will apply traditional legal principles to at least some of the issues these tokens raise.
Non-fungible tokens in brief
An NFT is a type of digital record, a “token” that is issued, recorded and traded in a blockchain ledger. Fungible tokens have been used for years; cryptocurrencies are common examples, where one Bitcoin has the same value as each other.
The non-fungible character of NFTs is the innovation that makes them exciting today. Increasingly, businesses and consumers see value in tokens that can be uniquely associated with specific digital assets. When it is created (“minted”), an NFT can be linked in a blockchain to one or more “underlying assets” such as digital art or video clips. If the original holder of an asset sells, gives or licenses it to another person, then that transaction can be documented via an NFT in the blockchain for all to see. As the asset continues to be sold, given or licensed to others in the future, each such additional transaction likewise appears in the blockchain – part of an ever-growing public record that provides valuable certainty to all involved.
A Year of Legal Uncertainty
NFTs exploded in popularity in January 2021. Venture capital firms poured millions into companies working with them and the artist Beeple sold art via an NFT for a staggering $69 million.
Traditional industries took notice as well. Real estate professionals are considering new ways that NFTs can document property title records. Video game firms are exploring ways that NFTs can document and transfer in-game “real estate.” Breweries have launched beer-related NFTs, and a Scotch distillery has issued NFTs to document ownership of rare whiskeys. And musical artists (both up-and-comers and established bands like Kings of Leon) have sold music via NFTs.
In these industries and others, attorneys have advised clients that it is not entirely clear how the U.S. legal system will apply to NFTs. Attorneys advising clients about NFTs in 2021 have tended to focus on several legal questions:
- Securities laws: do these investor-protection laws, which can require detailed disclosures or registrations with government agencies before offering business opportunities, apply to NFTs?
- Tax issues: what do state and federal tax rules say about NFTs? Do buyers, sellers or others ever pay taxes relating to them?
- Rights of publicity: do you need permission from a third party to sell NFTs that use a person’s likeness? Does it matter whether they’re a celebrity or a passerby you filmed with your own phone?
- Trademark: do you need permission from a company to sell an NFT using its logo or name? Do trademark Fair Use laws apply to NFTs?
- Copyright: what rights attach to the NFT and to the art linked to it? When you “buy” an NFT, what rights are you actually receiving? Can you resell it?
It is easier for businesses to plan business models around NFTs if they can have predictability about these issues. And predictability is what courts provide when they begin answering legal questions about new technologies.
Two NFT Cases Provide Some Initial Guidance
The first two court decisions in the United States involving NFTs are Roc-A-Fella Records, Inc. v. Dash, No. 1:21-cv-5411 (S.D.N.Y. June 22, 2021) and Playboy Enterprises Int’l Inc. v. www.Playboyrabbitars.app, 2021 WL 5299231 (S.D.N.Y. Nov. 13, 2021). Both cases are from the federal trial court in Manhattan, one of the most respected courts with respect to media and commerce matters.
In the first case, the plaintiff is the Roc-A-Fella Records music label founded by the artist Shawn Carter (Jay-Z), Damon “Dame” Dash and Kareem Burke. The label alleged that Dash was trying to sell the copyright in Reasonable Doubt, a 1996 Jay-Z album allegedly owned by the plaintiff, via an NFT. The label also alleged that Dash was a shareholder in the plaintiff company but owned no copyright in the album. The plaintiff therefore sought a temporary restraining order (TRO) barring Dash from attempting to mint or sell an NFT relating to the album.
The court granted the TRO on June 22, 2021. The order barred defendant Dash from doing anything involving the copyright-protected Reasonable Doubt album, including minting or trying to sell it as an NFT. It is important to note that a TRO decision is not a ruling on the merits of a case, and the court in issuing it lacks the benefit of full legal briefing and detailed review of evidence. A court is simply holding that the plaintiff would probably win on the merits, so a TRO is appropriate to stop harm that would likely violate the plaintiff’s rights. The Roc-A-Fella Records decision therefore means that minting and issuing NFTs is the type of conduct that is likely to violate copyright.
Playboy Enterprises, another TRO case, dealt with trademark. The plaintiff media company in 2021 launched a line of NFTs relating to computer-generated rabbit avatars (“Rabbitars”). Counterfeiters soon began selling NFTs with nearly identical imagery on websites that used Playboy’s name and other registered trademarks. Playboy sought a TRO against the websites’ anonymous operators. The court sided with Playboy, ordering the defendants to stop their infringing conduct. (Enforcing that order is another matter, since the names and locations of the defendants are unknown). The court held that the defendants were likely confusing consumers by offering NFTs that exactly reproduced Playboy’s protected images.
In some ways, these two cases are unremarkable. It is well-established that one cannot sell material protected by another’s copyright or trademark, and courts routinely block such sales. So the significance of these cases is simply that they apply traditional intellectual property enforcement rules to this new technology. That outcome is what many business attorneys predicted, but now courts have confirmed it. It must be noted that other courts in the future might reach other answers, especially with slightly different fact patterns, but we now have the beginnings of an NFT legal framework.
Practical Legal Guidance
What do these first court decisions tell those interested in NFTs? At this point, only a little. We know that holders of intellectual property rights can secure TROs to block the unauthorized reproducing and selling of protected materials. This probably means that some other aspects of traditional copyright and trademark laws also apply to NFTs, but “probably” and “some” beg many questions. Our attorneys generally recommend assuming that traditional rules of copyright law apply to the underlying digital assets linked to NFTs. For example, we believe an NFT generally cannot transfer ownership or an exclusive license to an asset without a clear written document signed by the asset’s author. This is the longstanding rule for copyright-protected materials under Section 204 of the Copyright Act and we expect it to apply equally to NFT-linked works.
Non-exclusive licenses should also be documented in clear written NFT agreement terms. This issue mainly affects buyers, because a buyer who cannot show a written license to an NFT-linked work may hold only a weak license that that the seller can revoke at will. But sellers also will want written NFT license agreements to enforce their rights in the future and deter unauthorized resale.
We expect more courts to consider NFTs in 2022 in the wake of 2021’s boom. Most cases settle before reaching trial. But some will produce decisions on motions to dismiss or summary judgment motions, which typically provide far more useful clarity on legal issues than the types of TRO decisions described in this article. One dispute to watch is the case filed recently by Miramax against director Quentin Tarantino over his plans to sell NFTs relating to the film Pulp Fiction.
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