NFTs: Rights of use and legal battles | Brownstein Hyatt Farber Schreck

NFTs – or Non-Fungible Tokens – continue to raise new legal issues, especially involving intellectual property rights and the enforcement of these rights against bad actors.

Take the case to actor and comedian Seth Green. Green was the owner of an NFT titled Bored Ape Yacht Club # 8398, which features a Bored Ape avatar named Fred Simian. Bored Ape Yacht Club is an NFT collection of 10,000 monkey avatars, each with unique visual features, each worth thousands (and in some cases millions) of dollars. In an attempt to take advantage of the appearance of the Bored Ape Yacht Club NFTs, and to create a new type of series within the fame around NFTs in general, Green developed an animated show called White Horse Tavern with Fred as the main character. Then, in May 2022, Green’s NFT was hacked, raising a number of legal questions about his ability to generate revenue from an NFT over which he no longer had possession or control.

Copyright Act

Green’s NFT hack raises interesting and new questions about copyright. In general, according to the Copyright Act, the copyright is not sometimes transferred to a work from the work’s creator to the buyer of the work in the absence of an agreement or transfer of rights. According to the first doctrine of sale, when the creator of a work protected by copyright sells the work, only the right to “sell or otherwise dispose of” the work is transferred together with the physical ownership of the work. This means that the owner of the material work can resell, lease, lend, give away or destroy (subject to an artist’s moral rights, which in the United States may apply under state law or the Visual Artists Rights Act of 1990) the material object; the creator of the work, however, retains ownership of the exclusive rights granted to copyright owners under the Copyright Act: the right to reproduce, adapt, publish, publicly perform and display the work, and create derivative works of the work.

For example, according to traditional copyright principles, a purchaser of a poster print of the artist Jean-Michel Basquiat’s “Untitled” (1982) does not at the same time purchase any copyrights from Jean-Michel Basquiat’s property in the original work. This means that a buyer can resell or give away the poster, but could not make and sell copies of the poster, nor make new derivative works that replicate the painting (eg items with “Untitled” (1982)).

NFT licensing of rights and enforcement

Now, in the unknown territory of digital goods, NFT creators, through new licensing models, are changing the rules.

Uniquely, the Bored Ape NFTs include a broad copyright license that allows the NFT owner to make commercial use of the creative works included in the NFT. The Terms of Use of the Bored Ape Yacht Club Website state that ownership of a Bored Ape NFT “grants you an unlimited, worldwide license to use, copy and view it acquired art for the purpose of creating derivative works based on art ”(emphasis added). Green’s ownership of Bored Ape Yacht Club # 8398 gave Green a license to commercially exploit the content of the NFT itself, including the right to create new derivative works – such as an animated show – based on the character Fred Simian.

But Green’s plans for the White Horse Tavern were put on hold then four NFTs were stolen from his collection May 8, 2022, including Bored Ape Yacht Club # 8398, through a phishing attack. Green that he linked his cryptocurrency wallet to what turned out to be a fake website for another NFT collection. This validation allowed phishing hackers to use Green’s authorized credentials and then transfer the four NFTs from Green’s collection to other users.

And NFT hacking scams are reportedly on the rise, with phishing scams targeting collectors of valuable NFTs.

Without ownership of Bored Ape Yacht Club # 8398, Green would in theory not retain the benefit of the use, copying and display rights as well as the right to creative derivative works, granted through the Bored Ape license. In fact, Green lost the underlying intellectual property rights to commercialize the character Fred’s new series.

After the incident, Green turned to social media, and begged the new owner of Bored Ape Yacht Club # 8398 to return the work. In the time since Bored Ape Yacht Club # 8398 was illegally transferred from Green’s wallet, Green claims to have been in contact with the new owner, and they “work together to prosecute the original thieves.”

Currently, the NFT marketplace Green has used to purchase Bored Ape Yacht Club # 8398, a policy for stolen items that states that when the site is “notified of potentially stolen items” through a request form, the online marketplace “disables the ability to purchase, sell, or transfer “the stolen items. The electronic marketplace will also label potentially stolen NFTs as “compromised”. What remains unclear is exactly how and whether the marketplace will be involved in restoring ownership to users when NFTs are transferred to third-party collections without permission. In Green’s case, he allegedly paid nearly $ 300,000 to recover Bored Ape Yacht Club # 8398 from the user who purchased the NFT from the hackers. Green seems to have resumed the development of the White Horse Tavern series.

In light green’s predicament, the important question is how future cases of law enforcement of NFT ownership can develop. Senator Kevin Thomas of the state of New York has proposed a bill that regulates the theft and fraud of cryptocurrencies, and the Department of Justice has workforces that focus on cybercrime in cryptocurrencies. However, none of the initiatives seems to have addressed how cybercrime affecting cryptocurrencies and NFTs can affect the owners’ intellectual property rights. It also remains to be seen how NFT creators may or may not respect intellectual property licenses to use, copy, view and create derivative works, even if the NFT asset has been stolen.

NFT owners should be aware of the productive increase in hacking and scams through fake links and websites that appear to be legitimate NFT marketplaces. There is uncertainty about how traditional intellectual property rights will be used in the NFT context, and currently even more uncertainty in the enforcement mechanisms for these rights.