NFTs, Intellectual Property and Third Parties

Special thanks to Guang-Yi, Legal Counsel at the Ethereum Foundation, for feedback and review. All views expressed are mine.

What are NFTs and what are my rights associated with it?

Non-fungible tokens (”NFTs”) are digital representations (tokens) of an underlying asset. For the present purposes, we shall refer to NFTs as those that point to images — think the likes of BAYCs and CryptoPunks.

Acquisition of such an NFT that points to an image, such as an NFT pointing to an image of The Last Supper, does not, ipso facto, grant the owner any rights over The Last Supper itself. Instead, the NFT holder merely owns the rights over the token (the right to freely sell, transfer, dispose of the NFT etc.) and for the former to happen, there has to be a legal agreement between the owner of the image — the “copyright holder” — and the NFT holder outlining the rights the NFT holder has apropos the image.

Present issues

It is improbable that the idea of entering into a legal agreement with the copyright holder would have crossed the minds of the vast majority of NFT buyers and this is unsurprising when one considers the way these agreements are often entered into. These legal agreements often take the form of terms and conditions contained within the licence issued by the NFT project and the rights of the NFT holder flow directly from these terms, assuming the NFT project themselves have the appropriate rights to begin with.

At present, these legal agreements are often “click-wrapped” or “browse-wrapped” and that inevitably casts doubt on the assent of the buyer. Assent is of especial concern for certain browse-wrap agreements where it is contained within the terms that mere use of the site the NFT project is hosted on would constitute assent. Where the agreements are “browse-wrapped”, the terms of the agreement are often contained within a link and, typically, this link is either buried deep within the NFT project’s webpage or located at an inconspicuous corner of the webpage. It is no wonder that the Ninth Circuit in Berman v Freedom Financial Network asserted, albeit dicta, that, under California law, click-wrap agreements (those that users have to scroll to the bottom of, and positively click on an “I accept” button) are presumptively enforceable, while browse-wrap agreements are per se unenforceable.

Blue chip licences

Crucially, I went through the terms of the licences of BAYC, MAYC, CryptoPunks and Azuki with the purpose of answering the following:

Where rights are conferred by the copyright holder unto the NFT holder, what happens to these rights upon secondary sales? Put another way, do the licensed rights, if any, persist and bind the downstream purchasers of such NFTs?

While examining this question, various other questions arose:

1. Is there a mechanism for the assignment of rights from the one purchaser to another?
2. Are subsequent purchasers privy to the aforementioned legal agreement between the NFT project and the initial purchaser?
3. Where it is expressed in the licence that use of the website constitutes assent to the terms of the licence, can the downstream purchasers be said to have expressed assent if the transaction was concluded on secondary marketplaces?

I will attempt to address these questions as I examine the individual licences below.

BAYC/MAYC

Yuga Labs, a behemoth in the NFT space, was one the pioneers in issuing IP licences that granted commercial rights to NFT holders. However, within the BAYC and MAYC licences (”the Ape Licences”) lie a contradiction pertaining to who the true copyright owner is. The following is provided in the Ape Licences:

1. You Own the NFT. Each (Bored/Mutant) Ape is an NFT on the Ethereum blockchain. When you purchase an NFT, you own the underlying (Bored/Mutant) Ape, the Art, completely …
2. Personal Use. Subject to your continued compliance with these Terms, Yuga Labs LLC grants you a worldwide, royalty-free licence to use, copy, and display the purchased Art…
3. Commercial Use. Subject to your continued compliance with these Terms, Yuga Labs LLC grants you an unlimited, worldwide licence to use, copy, and display the purchased Art…”

As mentioned above, when you purchase an NFT, you merely acquire the rights to the NFT and not the underlying asset. At first blush, it would appear that Yuga Labs intends to transfer the IP rights of the underlying asset to the purchaser of a BAYC/MAYC NFT. However, that cannot be the case as, in the subsequent paragraphs, Yuga Labs purports to grant the holder a licence to the IP of the underlying asset — one cannot grant a licence to what one does not own.

Additionally, the Ape Licences are silent on assignment of rights and on any transfer of rights from the initial purchaser to all downstream purchasers.

What about downstream purchasers?

Notwithstanding the contradiction that exist in the Ape Licence, assent, as provided in the Ape Licence, is taken to be at the point the NFT owner uses the website. However, the question of assent is made more complicated when one considers the method by which such downstream purchasers typically purchase these NFTs: these subsequent sales often conclude on secondary marketplaces and the secondary purchasers typically do not access the website at all. As such, it can hardly be said that downstream purchasers expressed assent to these terms, if they were even privy to the terms of the Ape Licences.

CryptoPunks

With Yuga Labs announcing the release of intellectual property (”IP”) rights to CryptoPunks owners much like how it did with BAYC NFTs, it ought to be outlined exactly what these rights are. In the CryptoPunks licence terms (“the Punks Licence”), cl. 1 outlines clearly the exact copyright rights that the NFT holder owns, and which are licensed to them. In cl. 13(b), it is provided that “[t]hese Terms will transfer and be binding upon and will inure to the benefit of the parties and their permitted successors and assigns”. While this appears to be an attempt in the Punks Licence to address the question of whether the rights in the licence terms bind downstream purchasers, it still fails in practice because, for cl. 13(b) to have effect, the NFT holder must first assign the rights to the subsequent purchaser and thus circles back to the initial question of assignment of rights.

Next, cl. 13(l) provides that “parties have agreed to contract electronically and, accordingly, electronic signatures or any other forms of acceptance permitted by law, will be given the same effect and weight as original signatures”. Notwithstanding this, it remains unclear as to (a) which point acceptance is effected if the transaction is concluded on a secondary marketplace, and (b) who the contracting parties are — initial purchaser and subsequent purchaser, Yuga Labs and initial purchaser or Yuga Labs and subsequent purchaser.

Interestingly, the following is stated in the header of the Punks Licence:

“These terms (“Terms”) are a legally binding agreement by and between Yuga Labs, Inc. (“Yuga Labs”, “we” or “us”), a Delaware corporation, and any owner of a CryptoPunk NFT”

Ostensibly, this appears to be an attempt to sidestep the issues of privity and acceptance by imposing the terms on any and all owners of a CryptoPunk NFT and it remains an open question whether this can be accorded any weight at all.

Azuki

Azuki’s license agreement (“the Azuki Licence”) is, arguably, the most comprehensive one out of the three licences examined. Among others, it clearly delineates between the rights the NFT holder owns and those that are licensed to them and it also clearly states what constitutes acceptance. In the Azuki Licence, acceptance is taken to be the point “when you acquire an Azuki NFT” and it is also clearly expressed that an NFT holder only owns “personal property rights to the token underlying the Azuki NFT” but not the “associated artwork, brand, or other intellectual property associated with that Azuki NFT, except for the specific licensed rights set forth below” and these “specific licensed rights” are essentially the rights associated with a non-Commercial and Commercial licence.

On the issue of transfer of rights, the following is also provided in the Azuki Licence:

“Transfer. The licenses granted above are non-transferrable, except that if you sell or transfer your Azuki NFT, you will no longer be granted the foregoing licenses in the Azuki NFT Art, and such license will transfer to the new owner of the Azuki NFT associated with such Azuki NFT Art. In connection with any sales, transfers or similar transactions of the Azuki NFTs, the transferee agrees that by purchasing, accepting, or otherwise acquiring the Azuki NFT, they shall be deemed to accept the terms of this License.”

Here, the Azuki Licence makes an attempt to address the issue of whether the rights associated with ownership of an Azuki NFT transfer to the downstream purchasers. While this is an attempt to address the issue of transfer of rights, the question of privity remains and thus, the impasse remains unresolved.

Thoughts

It appears that in order for the issues canvassed above to be resolved, there is a great need for a mechanism for the terms of the agreement to “travel” together with the NFT and one such way might be to encode these terms in the metadata of each NFT.

Until such a mechanism is established and adopted by NFT projects, NFT purchasers should pay special attention to the terms of the license agreement if they are aware of the existence of one. If they are not aware of said existence, then it is advisable that purchasers should either seek it out or contact the NFT project to ask for a copy of it. This way, NFT purchasers can know exactly what rights they have and not be at risk of unlawfully using any intellectual property.