NFTs are unique, effectively non-destructible tokens stored in the blockchain – a decentralized ledger system that uses computing resources to validate the holder of cryptographically unique data without reliance on a single source of truth such as a bank or government [further reading]. The NFT references a link to a resource – typically on the internet or in a game – where some content is available. An NFT has a single owner (which can be an entity), and generally NFT’s cannot be subdivided once they are created, though they can be transferred.
An NFT can represent anything – digital art, a book, a page from a movie script, a signature, a title document to a car or house or real estate, an in game “skin” or custom article, a representation of something in a virtual reality construct (currently being referred to as the metaverse), like clothing, shoes and so on. It can also link to something that is itself a representation of something tangible – for example, an NFT can link to a digital object that might be used in a game, as an avatar or in the metaverse, but that also is created tangibly (for example, this shoe created using artificial intelligence), or it can be an electronic representation of part of the notes to a very famous song. A decent list of many potential uses of NFTs is set out in this article 15 NFT Use Cases That Could Go Mainstream.
NFTs were originally born from a desire to find a way to establish the “provenance” (title) to digital art. See NFTs Weren’t Supposed to End Like This. As pointed out in that article, the blockchain cannot actually store the thing it points to – for example, an image – there is not enough space. It only has the space to really hold a link to that image. As NFT use becomes both widespread and also, referencing property that the NFT holder might not own, many legal issues are now coming to light.
Who owns an NFT and exactly what do they own?
A case filed a few days ago on February 1st is challenging the sale of the “very first NFT” by Sotheby’s for 1.47 million dollars. Free Holdings Inc. v McCoy et al., case number 1:22-cv-00881 (S.D.N.Y). In that case the Plaintiff claims that the sale of the NFT, which is apparently a copy of the original token the founder of NFT’s created, violated its ownership rights to the actual NFT, which it claims to have in its wallet. The defendants have apparently asserted that the actual NFT (the digital token itself) was “removed” or “burned” from the Namecoin blockchain where it was created, and thus does not even exist. The plaintiff is claiming that the original owner allowed the token to “expire” and it somehow renewed that token and placed it in its wallet.
This case presents a novel issue . . . what does “title” to an NFT really mean? The NFT itself is represented solely electronically (a token stored in a blockchain), and only functions electronically – once retrieved, it points to a resource on the internet and identifies the person holding the token as the true owner of … what? That link? The actual resource that is at that link? Is a picture of the token framed as art actually the NFT (and who owns the token itself, the text string)? That token is publicly viewable by anyone – the blockchain just limits how it can be transferred, and identifies the NFT holder as at least someone who has digital rights to the link. Is the token itself a copyright? We may get some guidance in the Free Holdings case.
A person who purchases an NFT should be aware that they are only really purchasing a public and decentralized proof system that establishes that they are the owner of the token, because that token is in their wallet. The actual thing displayed at that resource location probably is under copyright protection, and the owner of the copyright is probably not transferring ALL of the rights to the copyright in whatever that resource depicts. However, there is probably at least an implied license to publicly display whatever the NFT points to on the internet (or in a game, or the metaverse, or wherever that content can be displayed). The result is very similar to the result when someone buys a physical painting or art object. While they have title to that thing (the tangible thing, the painting) – in the absence of a very specific agreement, they do not own the copyright represented by that thing.
What rights must a person who creates an NFT have to the underlying content or server?
Those are very good questions. Could I create an NFT to any URL on the internet (i.e. to any picture that is publicly viewable) and sell that? Do I have to be the “owner” of that image or have any license to it? Do I have to control the web server that serves that image upon a request? What disclosures do I have to make to a purchaser of the NFT as to what rights they are receiving, whether I am the copyright holder of the image, or that I control the server? Does the contract imply I will perpetually, until the end of time, maintain that server and that resource location? What happens if I go bankrupt, or the blockchain service I used goes bankrupt, or the server company? Can multiple NFTs be sold that point to the same resource? Does the NFT platform owe a duty of due diligence to verify rights in the underlying resource? There is nothing built into the NFT or blockchain system that requires unique resource links. Even if an NFT provider limited links to be unique, other NFT providers need not respect that prior link and can create NFTs in their blockchain, pointing to the same resource.
Most NFTs are sold using “smart contracts” – which are essentially a series of pre-made instructions in the blockchain that, when triggered, simply occur. See How smart contracts work. No human sees them, nor reviews them, approves them, or checks they were made or not made. The whole idea is that the blockchain system itself verifies the “transaction” occurred, without human involvement and without a centralized verification system (such as an intermediary bank, certificate signer, government title repository etc). They are not the proper place to agree to whatever license rights and obligations are connected to the underlying resource represented in an NFT. Even if they were, the smart contract process will not meet electronic signature requirements under UETA or ESIGN which are applicable in the US. Those terms would have to be in the underlying terms of service of the NFT provider and the NFT seller.
These issues will play out under traditional legal principles – in the author’s view predominantly under contract law (based on what the terms of service of the NFT provider and seller say), under advertising law – what disclosures must an NFT seller make to meet the requirements of advertising law – that the sale was induced by truthful, non-misleading and fair representations about the NFT?, under the law of publicity rights (use of a person’s likeness to sell a product or service), and of course finally under intellectual property law, principally copyright law.
On that last point, at least under US law, a question arises whether the Digital Millennium Copyright Act notice and take down provisions will apply to NFT transactions. For example, suppose person X sells an NFT to a linked resource at location Y, and was not the owner of the copyright of the image there. If the purchaser does nothing else (such as displaying that image embedded in a game or web page) – can the copyright owner force the NFT platform to take that down that link – assuming the copyright owner does not control that resource? Is that NFT itself a violation of 15 USC 1125(a), indicating a false association with the owner of the copyright (or perhaps implicitly stating the NFT owner owns the copyright?). Under certain cases in the US (e.g. Dastar), misrepresentation as to authorship is often not an actionable.
Are NFT providers liable for NFT sales that violate the rights of a third party?
Most third parties will not have agreed to the NFT provider’s terms of service, which undoubtedly will disclaim liability for any claims arising from acts of the NFT seller. If the third party’s rights are violated, can they sue the NFT provider? In the US, the NFT provider may have immunity under Section 230 of the Communications Decency Act if the NFT is “information provided by another information content provider”. But is it? The NFT provider actually creates the NFT and provides the functionality. However, the NFT owner is the person creating the information that is stored in the NFT.
Summary and some recommendations
There are more questions than answers today, however in any NFT sale transaction, at least the following should be closely reviewed:
- The terms of Service of the NFT Platform provider. A buyer will be agreeing to these terms. They are likely not favorable to the Buyer, and also likely not negotiable. As a result, the value of that NFT is highly dependent on the reputation and likelihood of that platform staying in business.
- The terms and conditions of the sale from the Seller. Does the Seller represent it has the IP rights to the resource? That they are unique? Will not be resold in a different NFT? Is their liability limited or remedy limited?
- Some diligence into the actual art/resource/item should be done – and this may be very difficult. There are no real regulations in this area (outside of general unfair and deceptive consumer protection laws) – so even finding the true author or owner of a work may be very difficult – even in the US where we sort of have a registration system. The less able a buyer is to verify the provenance of the underlying resource, the more strongly worded the representations, warranties and consequences of breach should be. In a worse case, an escrow should be set up so that some post transaction verification can occur before all, or at least some, of the actual transfer of the cryptocurrency occurs.
For more information, contact Mike Oliver or Kim Grimsley.
 – Etherscan defines a wallet as follows: “A wallet address is a publicly available address that allows its owner to receive funds from another party. To access the funds in an address, you must have its private key.” Link
Congress passed and the President signed H.R. 748 on March 27, 2020 in light of the recent Coronavirus / COVID outbreak. It contains the single largest government spending program ever enacted or implemented. Many clients are debating whether to make use of a portion of the act – specifically Div A, Title I, KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT. That Section allows the Small Business Administration to guarantee and in some cases pay off certain loans that would otherwise not be available to small businesses. The entire CARES Act can be viewed here https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.xml This post is an overview of that loan program and the ability to have some or all of the loan forgiven.
Before providing the overview, any client considering using this loan program should consider how likely the loan will be approved to be forgiven – and how much might not be forgiven. Even if a loan is not forgiven, there are valid reasons to consider using this loan program because the loan terms are generally very favorable as compared to regular SBA loans. Some businesses however, for example, businesses that have few or no employees, such as real estate holding companies – will not really benefit from this. However, their tenants might benefit from this because a covered cost includes rent. If their tenants are able to re-employ their workers in a fairly short time frame, the loan amount for those expenses might largely be forgiven.
- Eligibility: In general, any business, including non-profits, sole proprietorships, contractors etc are eligible – but they generally must have less than 500 employees and have been in business as of 2/15/2020.
- Amount: The maximum loan is 2.5 X the total payroll costs of the eligible business for the 1 year period prior to the date the loan is made, not to exceed $10,000,000. Businesses that have been in business for less time can still obtain a loan.
- Period: The loan must be made between February 15, 2020 and June 30, 2020.
- Interest rate: Interest cannot exceed 4%.
- Precondition: The eligible business must make certification that it has been impacted by COVID, however, the certification is very broad.
- Use of funds: Funds from the loan may only be used for eligible expenses which are: payroll costs; group health care beneﬁts; employee related insurance premiums employee salaries, commissions, or similar compensations, payments of interest on any mortgage obligation, rent, utilities; and interest on any other debt obligations that were incurred before the covered period started. Note that these types of expenses can extend past the “covered period” for loan forgiveness.
- Fees: All application fees are waived. All requirements for personal guarantees are also waived.
- Repayment deferral: Lenders MUST defer all payments (interest and principal) for at least 6 months, but not more than 1 year.
- Forgiveness: The eligible business may request that the loan be forgiven for covered costs incurred during the “covered period” which is the 8 week period commencing on the date of the loan origination.
- Covered costs are rent on leases entered into before February 15, 2020, payroll costs (during the covered period), payments of interest on any covered mortgage obligation, and payments on covered utility payments.
- The maximum forgiveness cannot exceed the covered loan amount.
- The amount to be forgiven is reduced on a formula of the average number of “full-time equivalent employees” per month employed by the eligible recipient during the covered period, as compared to the same number in either the period of January 1, 2020 and ending on February 29, 2020 or the period February 15, 2019 and ending on June 30, 2019 (at the election of the borrower), but . . .
- If the eligible business had reduced hours of full time equivalent employees in the period 2/15/2020 and ending on 4/27/2020, such reductions shall not be used in the above calculation as long as such reductions are reinstated not later than June 30, 2020.
More detailed provisions supporting the above summary
H.R. 748, Div A, Title I, KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT
Sec. 1102(a)(1)(A)(iii) – the term ‘covered period’ means the period beginning on February 15, 2020 and ending on June 30, 2020;
(viii) – “payroll costs” – generally, all costs, including retirement, PTO, tips, health insurance, but: capped at 100K over a year, does not include costs for employees whose principal residence is located outside of US, does not include employee tax withholdings, does not include payments under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127).
Sec. 1102(a)(1)(D) – must have
less than 500 employees (complex formulas and requirements as to how to count
them, and for multi-location businesses)
Sec. 1102(a)(1)(E) – maximum loan is generally 2.5 X the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made, capped at $10,000,000. Formula is different if business was started after 2/15/19.
Sec. 1102(a)(1)(F) ALLOWABLE USES OF COVERED LOANS.—
“(i) IN GENERAL.—During the
covered period, an eligible recipient may, in addition to the allowable uses of
a loan made under this subsection, use the proceeds of the covered loan for—
“(I) payroll costs;
“(II) costs related to the continuation of
group health care beneﬁts during periods of paid sick, medical, or family
leave, and insurance premiums;
“(III) employee salaries, commissions, or
“(IV) payments of interest on any mortgage
obligation (which shall not include any prepayment of or payment of principal
on a mortgage obligation);
“(V) rent (including rent under a lease
“(VI) utilities; and
“(VII) interest on any other debt obligations
that were incurred before the covered period.
Sec. 1102(a)(1)(F)(ii)(II) A
lender must consider the age of the business, especially if it either was not
in operation as of 2/15/2020, or had no employees or contractors.
Sec. 1102(a)(1)(G) BORROWER REQUIREMENTS.—
in general the borrower has to certify that
“(I) that the uncertainty of
current economic conditions makes necessary the loan request to support the
ongoing operations of the eligible recipient;
“(II) acknowledging that funds
will be used to retain workers and maintain payroll or make mortgage payments,
lease payments, and utility payments;
“(III) that the eligible
recipient does not have an application pending for a loan under this subsection
for the same purpose and duplicative of amounts applied for or received under a
covered loan; and
“(IV) during the period beginning
on February 15, 2020 and ending on December 31, 2020, that the eligible
recipient has not received amounts under this subsection for the same purpose
and duplicative of amounts applied for or received under a covered loan.
All application fees are waived,
and there is no personal guaranty requirement.
Loans cannot exceed 4% interest
All payments on loans must be
deferred at least 6 months, and not more than 1 year.
Loan Forgiveness, Sec. 1106.
“covered period” means the 8-week
period beginning on the date of the origination of a covered loan;
“covered rent obligation” means
rent obligated under a leasing agreement in force before February 15, 2020;
“expected forgiveness amount”
means the amount of principal that a lender reasonably expects a borrower to
expend during the covered period on the sum of any—
(A) payroll costs;
payments of interest on any covered mortgage obligation (which shall not
include any prepayment of or payment of principal on a covered mortgage
payments on any covered rent obligation; and
covered utility payments;…
Limits on forgiveness: “The amount of loan forgiveness under this
section shall not exceed the principal amount of the financing made available
under the applicable covered loan.” § 1106(d)
Amount is reduced by a formula:
(the average number of full-time equivalent employees per month employed by the eligible recipient during the covered period)
(the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019)
(the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020)
In addition, “The amount of loan
forgiveness under this section shall be reduced by the amount of any reduction
in total salary or wages [of any employee making less than 100K] … during the
covered period that is in excess of 25 percent of the total salary or wages of
the employee during the most recent full quarter during which the employee was
employed before the covered period.”
Finally, “the amount of loan forgiveness under this section shall be determined without regard to a reduction in the number of full-time equivalent employees of an eligible recipient or a reduction in the salary of 1 or more employees of the eligible recipient, as applicable, during the period beginning on February 15, 2020 and ending on [April 27, 2020]” if
EITHER OR BOTH OF THE FOLLOWING
“(I) during the period beginning on February 15, 2020 and ending on [April 27, 2020], there is a reduction, as compared to February 15, 2020, in the number of full-time equivalent employees of an eligible recipient; and (II) not later than June 30, 2020, the eligible employer has eliminated the reduction in the number of full-time equivalent employees;
(I) during the period beginning
on February 15, 2020 and ending on [April 27, 2020], there is a reduction, as
compared to February 15, 2020, in the salary or wages of 1 or more employees of
the eligible recipient; and (II) not later than June 30, 2020, the eligible employer has eliminated the
reduction in the salary or wages of such employees
 A business formed or started after this date might be eligible, it is a factor in the loan underwriting. Multi-location businesses with more than 500 employees might also be eligible.
 Note that there are no exclusions for payroll paid to
owners, so long as the owner is not making more than 100K.
 It is not clear if they intended this to mean “plus
 Note therefore that part time employees are covered
but are calculated on a “full time equivalent” basis.
Chilly weather has been plaguing us for longer than usual this spring, but we’re seeing a seasonal shift! The folks of Bloomery Plantation Distillery have coaxed in the warmer weather with a newly launched product that joins the trademark-branded Sweetshine ® ranks of its internationally acclaimed flavored spirits!
Making its official debut, Saffron Rose Sweetshine ® tastes of rose, orange, and hints of saffron, and exhibits the champion-style quality of its family spirits, having been honored with the Silver Medal in the 2018 San Francisco World Spirits Competition. In addition, the creative artwork of the lovely lady, Miss Rose, adorning the Sweetshine ® label, is indicative of the signature trade dress featured on all Sweetshine ® products and is complimentary to the portfolio of award-winning label illustrations.
Together with having a quality product, Bloomery Plantation’s successful brand foundation is based on its intellectual property, which is built upon its registered trademarks, and distinguishable trade dress creating an iconic look and feel of its products. Through these efforts, Bloomery Plantation has set its business and products apart from other distilleries and products in the industry.
A protectable trademark and brand are essential components of a prosperous business foundation, directly impacting business viability and valuation. Bloomery Plantation has taken its business to a new level by using its intellectual property, registered trademarks and creative trade dress, to visually distinguish its product, increase brand recognition among consumers, and increase product visibility and placement on retail store shelves. Together with a number of factors, including hard work and a quality product, Bloomery Plantation’s new trademark and branding campaign has increased valuation for the Bloomery Sweetshine ® business, along with also playing a part in the business’ increased sales revenue. Our law firm was instrumental in helping Bloomery Plantation secure its intellectual property in its new branding efforts. We advise clients during the product naming process, perform trademark investigative clearance searches, draft and file trademark and copyright applications with governments, both U.S. and abroad, and handle applications throughout the entire government examination process. In addition, our firm also assists with maintaining protection and enforcing intellectual property against unauthorized third-party users.
We wish our client, Bloomery Plantation, the very best on its new product release! See more about Bloomery Plantation and its award-winning and creatively flavored liqueurs, here.
For more information on creating, securing, and protecting your Product, Trademark, and Brand, please contact Pamela K. Riewerts, Esq., Partner and Intellectual Property Attorney at Oliver & Grimsley, LLC. Pamela may be reached via email at: firstname.lastname@example.org
FAIR USE FIASCO – BE CAREFUL USING *ANY* IMAGE ONLINE by Mike Oliver
The internet is littered with millions of images – taken by professional and amateur photographers alike, that contain NO identification of the author of the image. In part, this may be because it is not known, and in part it could be that the “meta data” in the image – which if done professionally will typically have the author’s name and the claim of copyright embedded as text inside the file (known as EXIF data) – is stripped off.
A recent decision in the 3rd Circuit (Pennsylvania, New Jersey, Delaware, and the Virgin Islands), Murphy v. Millennium Radio Group, LLC, [https://www.ca3.uscourts.gov/opinarch/102163p.pdf] demonstrates how dangerous it is to post on your website an image that does not contain this “copyright management information.”
In Murphy, a professional photographer took a picture of two radio show shock jocks, partially nude, for a print publication. The photographer maintained copyright. A radio station employee scans the image, posts it on the radio station website, and invites people to “photoshop” the image in a contest. No attribution identifying the photographer is given.
The photographer sues and loses in the trial court – essentially because that court believed the use was a fair use or licensed. The appellate court, however, reverses. It holds that under the Digital Millennium Copyright Act, the “copyright management information” includes identification of the author of the image. Of important note – the DMCA for the purposes of this provisions, has no “fair use” defense – in other words, the copyright management information must always be included.
The take away here is that if you are electronically displaying images in which you are not the author, the EXIF file data – the data that is embedded in the image and can be read by software to see the copyright management information – cannot be stripped off the file. In addition, if you are using stock photography, or manage a stock photo site, the EXIF data must be retained in the image.
For more information, please contact Mike Oliver.