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Caked Ape Lawsuits Show Need for Clear Contracts in NFT Art

March 31, 2022, 8:45 AM

Two recent lawsuits over Caked Ape non-fungible tokens—digital depictions of apes covered with frosting and candles—spotlight a need for digital artists in the fast-moving and decentralized NFT community to recognize the risks of setting up a valuable project with informal, handshake agreements, legal experts say.

Members of the Caked Ape NFT art project, a spinoff of the highly successful Bored Ape NFTs, are suing each other based on financial agreements made over text messages on Discord, the popular messaging platform where many NFT projects are organized.

Artist Taylor Whitley, known as Taylor.WTF, claimed the project’s other founders infringed his copyrighted art by cutting him out of the project and his share of the NFT sales. The other four members countersued days later, alleging that Whitley misused federal copyright law to get the Caked Ape NFT’s taken down from OpenSeas, the largest NFT marketplace.

“Imagine they had an Etsy store,” said James Grimmelmann, a copyright law professor at Cornell University. “About 90% of the issues here would be exactly the same. They were exchanging terms via instant messaging. They were using terms that weren’t clearly defined.”

Copyright Dispute

Part of the dispute will hinge on the type of copyright license Whitley claims to have, said Jeremy Goldman, a co-chair of the Blockchain Technology Group at Frankfurt Kurnit Klein & Selz PC. While the countersuit is alleging that Whitley agreed to a non-exclusive license for his digital work to be used in the Caked Ape NFTs, Whitley said his license was contingent on receiving his revenue share, which he didn’t.

The case is novel because the assets in question are based on an emerging technology, even though this type of contract and copyright dispute has been litigated thousands of times, Goldman said.

A written agreement between the parties clearly defining the copyright license and revenue shares would have saved much of the heartache and litigation costs in this case, said Jonathan Schmalfeld, an attorney at Chilton Yambert Porter LLP who writes about NFTs.

Even a simple contract would turn a “multihundred-thousand-dollar lawsuit into a $10,000, dismissed on summary judgment lawsuit,” he said.

The recent spike in interest for NFT art only raises the legal stakes. A few years ago, a handshake agreement between friends may have been sufficient for an NFT project worth only a few thousand dollars, Schmalfeld said.

Now, successful NFT projects can make millions. The Caked Ape NFTs have generated $1.9 million in direct sales since January, according to Whitley’s lawsuit. The total sales for the Bored Apes NFTs have reached over $1.6 billion, according to blockchain data tracker CryptoSlam.

A written contract won’t completely eliminate the possibility of litigation, Goldman noted. He said that lawsuits are most likely when an expensive project fails and members start pointing fingers, or when a project is successful and members fight over how the money is divided.

“But I think you can avoid a tremendous amount of disputes and low-hanging fruit, not even necessarily by having lawyers at the beginning,” Goldman said. “You shouldn’t engage in a project that has upside potential without having those hard discussions with other members about what the deal is and putting it in writing.”

Legal Misconceptions

Some of the legal liabilities in NFT projects may arise from a misconception that innovations in blockchain technology can replace the legal legwork needed to defend against costly lawsuits, attorneys say.

NFTs are built on “smart contracts,” bits of software that can automatically record NFT sales and send revenue to the appropriate crypto wallets.

But that term can be misleading, Schmalfeld said. While smart contracts are useful because they can be programmed to divide up sales revenue, they aren’t legal contracts.

“A smart contract isn’t really a contract,” Schmalfeld said. “Think of it as more of a receipt or an automated program.”

Purchasing an NFT doesn’t necessarily mean the buyer is purchasing the underlying artwork associated with the NFT, or that the buyer has a license to display or use that art. Those questions need to be defined by the seller.

“Put it in the contract,” said Devika Kornbacher, an intellectual property lawyer at Vinson & Elkins LLP. “Not just ownership, but also licensing rights, display rights, whatever you want to give or keep, write it down.”

Yuga Labs LLC, which created the Bored Ape NFTs, grants an unlimited license to use the underlying digital image of the ape for purchasers of the NFT. In fact, the Caked Ape project was only possible because owners of a Bored Ape NFT are allowed to create and sell their own derivative artwork under the license.

Another popular collection of NFTs called CryptoPunks, which were released in 2017, originally didn’t come with any explicit copyright terms. The project’s creators attempted to create a retroactive copyright license, which Grimmelmann said was a legally dubious assertion.

The project was recently acquired by the creators of the Bored Apes, who are looking to grant commercial licenses for holders of the CryptoPunks NFTs.

“Buying and selling an NFT has no copyright consequence,” Grimmelmann said. “If you want it to affect copyrights and artistic works, you need to put in the legal work, not just write the code.”

The cases are Nygard v. Whitley, C.D. Cal., No. 22-cv-00425 and Whitley v. Maguire, C.D. Cal., No. 22-cv-01837.

—With assistance from Riddhi Setty.

To contact the reporter on this story: Isaiah Poritz in Washington at iporitz@bloombergindustry.com

To contact the editors responsible for this story: Renee Schoof at rschoof@bloombergindustry.com; Rob Tricchinelli at rtricchinelli@bloomberglaw.com