Decentralized autonomous organizations and the art world

Online non-fungible token (NFT) marketplace OpenSea recently partnered with a popular decentralized autonomous organization (DAO), Friends with Benefits (FWB). As part of the project, OpenSea commissioned ten contemporary artists, who are members of the DAO, to create “phygital” (ie physical and digital) artworks that were featured on the marketplace’s website. The artworks were displayed both online and in real life at an FWB festival and conference in mid-August 2022.

FWB is a network of collaborators with more than 3,000 active members that includes creators, thinkers and developers focused on shaping the Web3. DAOs like FWB have gained considerable popularity in Web3 in the last year. DAOs have no central management and the decisions of each are proposed and voted on by the members. A majority of DAOs have rules contained in “smart contracts” that allow most internal disputes to be easily resolved and the community to effectively decide initiatives. For example, the FWB voted on whether to partner with OpenSea, and the community overwhelmingly approved the initiative. Also, the community worked collectively to assemble a team of curators to oversee the partnership.

The DAO’s background

DAOs have been used by many projects as a way to engage community members, while providing a sense of utility to owners of cryptoassets. Three states—Wyoming, Tennessee, and Vermont—have moved forward to regulate DAOs. The DAO-friendly laws have been criticized for requiring premature operational decisions for entities that often begin as a loose group of members connected by social media platforms. However, the attempts at regulation are evidence that regulators are paying attention to the importance of DAOs and Web3 in the modern business world.

However, unless a DAO is formed under one of the DAO-specific laws that extend traditional legal protections of formal legal structures to DAO members, DAO members risk exposure to personal liability if a DAO is deemed to be a general partnership. This issue is currently being litigated in the first-ever putative class action of its kind pending before the Southern District of California. IN Sarcuni et al. v. bZx DAO et al. (SD Cal., May 2, 2022), members of a DAO filed a class action against the founders of the DAO and individuals and companies that invested in the DAO. The lawsuit arises from a data breach that resulted in the loss of $55 million in cryptocurrency for The DAO. The plaintiffs allege that the DAO breached its duty to keep the project safe despite the fact that the “entity” is a decentralized autonomous organization. The claim that the DAO is a general partnership is a focal point of the lawsuit, because if the DAO is considered a general partnership, the members could be held jointly and severally liable for the DAO’s wrongdoing.

Intellectual property disputes

Aside from the issue of corporate governance, the “open to the public” nature of DAOs is expected to generate a flurry of intellectual property disputes arising from the public’s lack of familiarity with intellectual property litigation. More specifically, the involvement of members of DAOs in the curation and production of works of art can muddy the waters of copyright and ownership for several reasons:

• First, DAOs can eventually commission artwork, meaning that a syndicate, rather than an individual creator, can own a copyright in the commissioned work if the commission is properly set up as a “work-for-hire” deal. The Intellectual Property Act contains very specific requirements for agreements on work for hire, and failure to comply with these requirements may result in the rights in question not being transferred in the way the parties intended. Museums and galleries interested in exhibiting “phygital” objects must be aware of who is the correct rights holder and possibly secure licenses from all parties involved.

• Second, artists within DAOs will likely be able to transfer their copyright to the DAOs, further strengthening these entities. But what if the artist incorporated another person’s work into the artwork without securing rights to it? To avoid significant litigation, the DAOs and those who collaborate with them to exhibit artwork may need to put appropriate contractual provisions in place (for example, through representations and warranties from the original creator) that no third-party works were involved or that appropriate assignments were performed. secured by the original creator. Well-intentioned but misplaced confidence that a member’s work does not infringe another’s copyright can lead to serious legal consequences for the DAO and its individual members.

• Furthermore, if the DAO members choose to create a joint or collaborative work of art, who owns the copyright and who can license rights becomes even more complex questions. A joint work is authored when two or more people intend that their contributions should be combined into inseparable parts of a unified whole. According to the Copyright Act, joint authors are co-owners of the copyright of the entire work, but unless otherwise agreed, each co-author may freely use the joint copyright-protected work, subject to the obligation to account for any financial benefits for the other co-owner (i.e. form of licensing). An exclusive license cannot be granted without the consent of all co-owners. Nor can a co-owner’s interest in the copyright be transferred without their consent. Allowing multiple artists to claim joint copyright to a single work of art can be far too burdensome for individuals wishing to license the rights to derivative works – a common practice in the NFT sector.

Needless to say, while a DAO can benefit a community, when it comes to intellectual property rights, an already complex problem becomes more complicated.

A look ahead

The partnership between OpenSea and FWB will not be a one-off event. Decentralized curation is a breath of fresh air for the art industry. Museums and galleries have integrated NFTs into their portfolios and devoted considerable effort to attracting Web3 web users. Following the route taken by OpenSea and the FWB, museums and galleries may be forced to give the public the decision of what is shown, and each institution will have to decide with what degree of curatorial control, or lack thereof, they are comfortable with. , and balance that against the potential for such projects to generate much-needed revenue by appeasing the DAO community.

As we have seen, the use of DAOs by institutions is not without pitfalls. As more DAOs use the community approach to generating art, their transactional counterparts must be particularly sensitive about addressing copyright and other intellectual property issues for all transactions. Additionally, without the proper regulatory regime that reflects the reality of DAOs, many DAOs risk exposing each member to joint and several liability.