Bloomberg Law
July 16, 2021, 8:01 AM

What Copyright Lawyers Need to Know About NFTs

Simon J.  Frankel
Simon J. Frankel
Covington & Burling

One recent development affecting the art world is the use of non-fungible tokens (NFTs) to sell digital artwork. With art-based NFTs selling for millions of dollars, talk of NFTs disrupting the art market has grown.

In turn, many have begun to wonder what this new development means for copyright law. While many of the “old” rules of copyright law appear applicable to the sale and ownership of art-based NFTs, one open question is whether the first sale doctrine also applies to NFTs, and how.

NFTs in a Nutshell

NFTs are non-fungible digital tokens created for the purpose of recording and verifying ownership of a digital asset. Each NFT is stored on a blockchain and contains metadata that ties the token to its associated digital asset. This metadata includes a link that allows the NFT’s owner to access the associated digital asset.

In the context of digital art, artists “mint” their artwork into NFTs by uploading an image or video file of their work to a third-party platform. The platform then sends that file to be stored at either a unique digital web address or on the InterPlanetary File System (IFPS), a peer-to-peer file sharing system. Once minted, the token contains a unique link to wherever that file is saved.

When a buyer purchases an NFT minted from a digital artwork, the buyer effectively acquires a link to access the file that contains a copy of the associated digital artwork. Unless a sales agreement provides otherwise, the buyer does not acquire ownership over the original digital artwork itself. Moreover, the buyer does not acquire any copyrights in the original digital artwork.

These limitations in ownership and copyright rights are not much different from those that apply to the sale of a traditional physical artwork. For instance, an artist can make and sell prints of his or her original artwork. The artist, however, retains the copyright in and ownership over that original artwork.

The buyer of the print merely acquires ownership over that print and does not acquire any copyright in the image. As a result, the buyer cannot make copies of that print and distribute those copies. But the buyer can, pursuant to the first sale doctrine, resell the print that was first purchased without violating the artist’s distribution right.

Can NFTs Lawfully Effectuate a Digital First Sale?

This leads to one open question about the implications of copyright law for art-based NFTs: Does the first sale doctrine apply to NFTs?

In the context of traditional physical artwork, the first sale doctrine allows buyers of a particular piece or copy of an artwork to resell that same art piece or copy without violating the copyright holder’s exclusive right of distribution, and may make that resale without seeking the copyright holder’s permission.

Sale of a digital copy of a work, however, will ordinarily involve making a reproduction of that work, and courts have refused to find such conduct within the scope of the first sale doctrine. For example, in Capitol Records LLC v. ReDigi Inc. (2d Cir. 2018), the Second Circuit refused to apply the first sale doctrine to the resale of an MP3 file because the resale would require making an unauthorized reproduction of the original MP3 file.

In effect, the MP3 resold was not technically the MP3 first sold. It was a new copy, even if the old one was destroyed after copying. However, the court acknowledged that “other technology may exist or be developed that could lawfully effectuate a digital first sale.”

First Sale Doctrine and Copies

NFTs may offer such a technology. NFTs by their very nature are unique and non-fungible—when one purchases an NFT, they do not buy the file containing the digital artwork tied to the NFT, but rather the token itself. In theory, the NFT owner can resell what was first sold—the NFT—without having to make any unauthorized reproductions. This analysis, however, is not clear cut.

For one, the first sale doctrine applies to “copies,” which the Copyright Act defines as “material objects . . . in which a work is fixed by any method now known or later developed.” NFTs are intangible and thus may not be deemed by courts to be material objects.

In Disney Enterprises Inc. v. Redbox Automated Retail LLC (C.D. Cal. Feb. 20, 2018), a federal court in California held that the first sale doctrine did not apply to digital download codes because their sale did not involve the sale of a “particular, fixed copy of a copyrighted work” but rather “an option to create a physical copy at some point in the future.”

Arguably, NFTs perform a similar function. Like the download codes in Redbox, which gave owners the ability to access and download a copyright-protected movie, NFTs give owners the ability to access and download a copyright-protected digital artwork.

On the one hand, the transfer of an NFT associated with a work of art or other copyright-protected work would not itself involve the reproduction or distribution of a protected work, consistent with the first sale doctrine. But, if the new owner of the NFT accesses the underlying work, and this access involves the creation of a new copy of the work or distribution of it, then the transfer of the NFT may potentially fall outside the scope of the first sale doctrine and create potential copyright liability.

Despite this doctrinal murkiness, many NFT sales agreements appear to skirt the first sale issue by explicitly providing that NFT buyers have the right to resell the NFT. Some sales agreements go further and provide that the artist is to receive a set percentage of resale royalties. If NFTs remain a fixture of the art market, courts may be forced to decide whether to fashion a digital first sale doctrine that is responsive to new technological developments, including the rise of NFTs.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Simon J. Frankel is a partner with Covington & Burling LLP in San Francisco and co-chair of the firm’s Copyright & Trademark practice group.

Billie Mandelbaum is a summer associate at Covington and a rising third-year student at the University of California, Berkeley, School of Law.