Judge dismisses lawsuit over ownership of $1.47M NFT

A federal court last Friday dismissed a lawsuit that questioned the ownership rules surrounding an NFT called “Quantum,” which Sotheby’s sold for $1.47 million in 2021 as the first of its kind. The legal battle had become part of a larger effort to define ownership rules for digital works of art.

A Canadian company called Free Holdings filed the complaint last year against the auction house and the artist, Kevin McCoy, who created the artwork in 2014 as a demonstration of blockchain’s potential to record artwork on a digital ledger system. The artwork itself looks like something out of a science-fiction movie, like it was an alien wormhole pulsing with neon colors.

The dispute arose because the blockchain system that McCoy used for “Quantum” also required him to periodically renew his ownership rights. (Most web domains operate under similar rules.) But the artist failed to renew the terms of ownership, allowing Free Holdings to purchase the registration and claim ownership of the work itself. The company then accused Sotheby’s and McCoy of defamation and commercial disparagement.

James Cott, a magistrate judge for the US District Court for the Southern District of New York, dismissed the case, writing that Free Holdings had failed to establish its claims of ownership and damages.

“Free Holdings has demonstrated nothing more than an attempt to exploit open questions of ownership in the ever-evolving NFT field to claim the profits of a legitimate artist,” Judge Cott said in his dismissal.

William Charron, an attorney representing McCoy, said in an email that he believed the judge’s decision would clear up some confusion in the market. “The significance of this case is that it prevented a party from using somewhat obscure blockchain usage rules to appropriate the work product of an artist,” Charron explained.

During a phone interview, McCoy said his court victory “showed that blockchain technology protects artists’ rights.”

Derek Parsons, a spokesman for the auction house, said in a statement that the dismissal of the case “is a full vindication of Sotheby’s position”. He added, “We are pleased with the win and its significant impact on digital artists and marketplaces.”

Moish Peltz, who argued on behalf of Free Holdings, said the company’s legal team is “evaluating the options.” He declined to identify the company’s owners, who remain anonymous.

The bull market that was responsible for the bidding war that produced such a high auction price for “Quantum” no longer exists, and the broader market for NFTs, or non-fungible tokens, has seen a 97 percent drop in sales. But that hasn’t stopped the industry from making money, nor has it discouraged creators from using NFTs as records of ownership for their digital artwork.

There was a setback for the NFT industry in February when fashion brand Hermès won its trademark lawsuit against artist Mason Rothschild and his NFT project parodying the company’s Birkin handbags. Rothschild is in the process of appealing this decision, which had classified his NFTs as more akin to commodities than works of art.

By comparison, some legal experts see the “Quantum” decision as empowering digital artists.

“It’s a window into challenges that could come for the NFT industry,” said Nelson Rosario, an intellectual property attorney in Chicago who is not affiliated with the McCoy case. “An artist needs to understand how to make the rules of ownership clear so that a federal judge can recognize them in the event of a dispute.”