Remedy for Infringing NFTs on Immutable Blockchains
What are Non-Fungible Tokens?
NFT or Non-fungible tokens are all the craze nowadays. NFTs allow artists, musicians, and creatives to mint their digital works on a blockchain that provides a unique ID for each work minted. Even IBM is putting their patent on an NFT.
An NFT is a unique token that exists on a blockchain, that gives the holder “provenance” of ownership of the original piece of art. I like to use the “Starry Night” example to explain why NFTs are great. Think of it like this – there are plenty of copies of Van Gogh’s Starry Night out there, and it has been reprinted on canvasses, shirts, bags, just about everything. But there is only one original Starry Night.
Most tokens are built on top of the Ethereum blockchain, but now IP owners are creating NFTs on the Tezos blockchain while NBA Top Shop & Cryptokitty NFTs are built on the FLOW blockchain developed by Dapper Labs. Much more is coming because Ethereum gas prices are becoming a hindrance to the market for the lower-income creators. I am a fan of the Tezos’ Hic et Nunc because Tezos is much more environmentally friendly than Ethereum’s proof of work consensus protocol (at least until Ethereum moves to proof of stake).
So, why are NFTs so popular with creators now? Well, creators have the opportunity to remove the trusted third party out of the mix – a major feature of decentralization. Plus, the creators can collect a recurring royalty which is embedded in the smart contract so that any sale after the first sale provides is a royalty percentage (standard practice is 10-15%) that goes back to the “minter” of the NFT in perpetuity.
Perpetual Royalties Invite NFT Infringers
Royalties in perpetuity sounds great! But it does leave a window open for infringing opportunities. Bad actors could mint new NFT tokens of artworks, music, or other works which they have no ownership of the underlying intellectual property – the copyright, trademarks, patents, and even publicity rights (Check out my article on NFT Artworks: Tokenizing Art Collections which addresses some legal issues on minting NFTs).
One of the biggest and most touted advantages of blockchain is that the ledger is immutable. So, how does an intellectual property owner or a celebrity take down an NFT that infringes on their copyrights, trademarks, patents, and name & likeness rights?
Go through anything that can be collected and you will find hundreds, if not thousands of fakes for every genuine physical article. For every real Picasso; there’s a number of copies of fakes on their wall. For every genuine Lebron James autograph, there are tons of fakes. Chanel, Gucci, and other designer bags are infamously duplicated fakes. But in the physical world, these can be recaptured, prevented, and redressed. If someone creates a Lebron James caricature and mints it on an NFT, then how does Lebron take down an immutable NFT on the blockchain?
How do DMCA Take-downs work with NFT Platforms?
Most likely, they don’t! The difficulty in removing, recovering, or modifying NFTs on an immutable blockchain is, well, IMMUTABLE.
If someone is using your creative work, trademark, or name & likeness without permission – whether it be a blog post, song, podcast, or article – they are infringing on your rights. In the NFT world, to get the online infringer to stop and remove the infringing work online, you would normally consider sending a DMCA (Digital Millennium Copyright Act) takedown notice.
In situations involving copyrights of creative works, an effective DMCA takedown notice would:
- Record the violation by taking screenshots of the infringing work on the website;
- Locating the DMCA copyright agent to identify where to send the DMCA notice to by going to the Copyright.gov designated agent directory;
- Working with an internet attorney to draft the DMCA notice in compliance with Section 512(c) of the DMCA;
- Sending the DMCA takedown notice to the perpetrator or ISP hosting the infringing material.
Now, I am curious. Has Opensea, Rarible, SuperRare, Mintable, or any NFT platform actually remove an infringing NFT already minted and sold on the blockchain? There have been instances of the creator removing the NFT from the auction marketplace in fear of copyright litigation, but I have yet to hear of any platform actually removing an NFT after it has been sold and moved away from the minter’s wallet (See An NFT called “Copyright Infringement”). I fear that it is almost impossible and it smells like litigation with statutory damages all over.
DMCA Takedowns or Copyright Damages?
So what options does an IP owner or celebrity have? It is important for NFT minters to review the work to ensure it is their original content, or that they have permission from the author of the work with a license. Bad actor minters will get in trouble eventually. If an intellectual property owner wants to enforce or protect their rights, the owners will need to register with the USPTO. Without a registered patent, copyright, or trademark, the owner will not be able to initiate a lawsuit for statutory damages or actual damages.
Again, NFTs are not a replacement for registering the underlying intellectual property. NFTs provide a novel avenue for intellectual property owners to restrict their use and have more control of their IP in the digital marketplace. It is an additional avenue to monetise the aspects and create access to their works to the public.
Identifying the initial infringer is also a task in itself.
The Digital Millennium Copyright Act (“DMCA”) offers an economical means of identifying anonymous infringers. Section 512(h) of the DMCA grants copyright owners the power to subpoena an internet service provider like Opensea to obtain “information sufficient to identify” an anonymous infringer. Hopefully, this means the wallet address had completed Know Your Customer requirements.
The copyright owner needs to obtain a DMCA subpoena by filing a formal request with a District Court clerk that includes: (1) a proposed subpoena; (2) a copy of a DMCA takedown notification that is directed at the allegedly infringing content; and (3) a sworn declaration stating that the requested information will only be used for the purpose of protecting rights under U.S. copyright law.
Assuming the DMCA subpoena request contains these three items, the clerk is required to expeditiously issue the proposed subpoena. The DMCA subpoena offers a straightforward and low-cost means of identifying an anonymous infringer because no judge reviews a DMCA subpoena before it is issued and no formal litigation is initiated by filing a DMCA subpoena request.
Opensea Terms state “You agree that you will not violate any law, contract, intellectual property or other third party right, and that you are solely responsible for your conduct while accessing or using the Service or participating in the Auction.”
Maybe sending a DMCA notice is not the route IP owners will want to take because the NFT is immutable on the blockchain. However, once the infringer is identified through the subpoena process, a copyright litigation suit for damages is a viable option.
Statutory & Actual Damages
Once a DMCA subpoena is obtained to identify the minter on an NFT platform, a claim of copyright infringement that includes statutory damages (if your work was already registered) and actual damages is the best and only avenue. Why? These platforms won’t be able to find takedown immutable NFTs. Best to find out who sold, bought, and resold the infringing NFTs. Remember, to initiate a lawsuit a copyright registration must be in place first before filing with the courts.
If the NFT has been sold and resold by subsequent purchasers, a DMCA subpoena will be needed for each sale to identify who purchased and sold the infringing NFT. This will be expensive and time-consuming to discover the wallet addresses, and who owns those wallet addresses. It should be possible for the NFT platforms to identify the wallet addresses if the required “Know Your Customer” information has been provided under the Bank Secrecy Acts. The tough part – what if the infringer is not in the USA or VPN services were involved.
Once the infringer is discovered, statutory damages and actual damages are possible. Statutory damages in U.S. copyright law range from $750 to $150,000 per infringement plus treble damages if you can prove willful infringement. If actual damages are more, then go after actual damages especially if the work was sold for way more than $150K.
Diverting Perpetual Royalties in NFTs
Another avenue that would be interesting, if it is possible, is diverting the perpetual royalties intended for the minter to the proper IP owner.
A judge should order the NFT platform like Opensea or Rarible to divert the royalty funds to the copyright owner’s wallets (similar to what Youtube does with diverting Ad revenues). Otherwise, a judge should order the handing over of the wallet to the proper IP owner or sending the NFT to the IP owner’s wallet, if that is possible.
The Best (or worst) is yet to come.