Does the First Sale Doctrine Apply to NFTs?

An NFT is a non-fungible token that represents a particular copy of digital work.[1] It is a digital certificate of ownership that is secured on the blockchain, effectively creating a traceable record of every time the NFT changes hands.[2] Since digital files can be easily duplicated, NFTs create value for digital artists who otherwise would have difficulty profiting on their work.[3]

Further, when artists sell an NFT of their work, a typical sales agreement would include a mechanism that allows each artist to receive royalties not only on the original sale but also on secondary resales.[4] This is done through the means of a “smart contract,” a method of sending a portion of the resale proceeds to the original creator that is built into the code on the blockchain.[5]

In purchasing an NFT, the buyer acquires a link to access a file that contains the digital work that the NFT represents, or a digital version of the physical object.[6] Unless the sales agreement specifies otherwise, the buyer does not acquire any copyright in the digital work nor ownership of the work itself.[7]

The value in an NFT lies in its ability to be resold.[8] As a result, the applicability of the first sale doctrine is an essential element to the vitality of the NFT industry.

Discussion

The first sale doctrine is a longstanding principle of copyright law that allows the owner of a copyrighted work to sell, distribute, or transfer the work.[9] For example, a purchaser of a physical oil painting would be able to resell the painting without the permission of the copyright owner. The first sale doctrine is the principle that allows used book stores to exist.[10] On the other hand, the first sale doctrine historically has not applied to digital works.[11] The first sale doctrine applies only to particular copies, and because the transfer of digital works requires a copy to be made, the sale of digital work acts more like a license to access the work.[12] For example, in Capitol Records LLLC v. ReDiji Inc., ReDigi Inc. created a website that allows users to resell their digital music files to other users after ensuring that the music files had been lawfully purchased by the seller.[13] Once sold, the seller would no longer have access to the file. Capitol Records sued ReDiji alleging that the program violated Capitol Record’s reproduction rights.[14] The Second Circuit ruled in favor of Capital Records.[15] The court stated that the first sale doctrine does not apply because the resale would require making an unauthorized copy of the digital music file, which would infringe upon the copyright owner’s reproduction right.[16]

An NFT is non-fungible and represents a unique copy of a work, as opposed to a license to access the work.[17] However, when purchasing an NFT, the buyer often acquires a link to access a copy of the digital work.[18] An NFT effectively acts as an option to create a copy. Some courts have analyzed the question of whether the first sale doctrine applies to this function. For example, in Disney Enterprises Inc. v. Redbox Automated Retail LLC, the court held that the first sale doctrine did not apply to digital download codes because the sale of the codes essentially sold “an option to create a physical copy at some point in the future,” not a “particular, fixed copy of a copyrighted work.”[19]

In cases where an NFT is tied to a physical object, rather than a digital object, a digital version of the physical object is linked.[20] In these cases, the outcome will likely be the same. The right to sell or distribute the digital version, whether a scan or a photograph of the copyrighted work, belongs exclusively the copyright owner.[21]

When an NFT is resold, the seller is not protected by the first sale doctrine. However, it is in the copyright owner’s interest to allow the resale because the minter generally receives royalties on each subsequent sale.[22] Additionally, many NFT sales agreements include a provision that buyers have the right to resell.[23]

The first sale doctrine also will not likely apply to cases where a lawful owner of a digital artwork attempts to mint an unauthorized NFT. Since “ownership” of a digital artwork is more like a license to access the work than actual ownership of a particular copy, the right to distribute the artwork by means of an NFT resides solely in the copyright owner.[24] In cases where a lawful owner of a physical artwork attempts to mint an NFT without the consent of the copyright owner, the outcome will likely be the same because the creation of a digital version of the work to be linked to the NFT would consist of a significantly altered work.[25]

Conclusion

The first sale doctrine will likely not be applicable to the resale of NFTs because, when purchasing an NFT, the buyer often would acquire a link to a digital version of the asset the NFT represents.[26] This acts as an option to create a copy of the digital work, and courts have refused to acknowledge a digital first-sale doctrine.[27] While the first sale doctrine would not protect resellers, however, NFT sales agreements can contract around the issue by providing NFT minters with royalties upon each resale.[28]

ENDNOTES

[1] Robyn Conti & John Schmidt, What You Need to Know About Non-Fungible Tokens (NFTs), Forbes (May 14, 2021), https://www.forbes.com/advisor/investing/nft-non-fungible-token/.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Simon J. Frankel, What Copyright Lawyers Need To Know About NFTs, Bloomberg Law (July 16, 2021), https://news.bloomberglaw.com/ip-law/what-copyright-lawyers-need-to-know-about-nfts.

[7] Id.

[8] Dragan Boscovic, How Nonfungible Tokens Work and Where They Get Their Value – a Cryptocurrency Expert Explains NFTs, The Conversation (March 31, 2021), https://theconversation.com/how-nonfungible-tokens-work-and-where-they-get-their-value-a-cryptocurrency-expert-explains-nfts-157489.

[9] See 17 U.S.C. § 109

[10] Robert Rotstein, The First Sale Doctrine in the Digital Age, Intellectual Property And Technology Law Journal (March 2010), https://www.msk.com/newsroom-publications-1114.

[11] Sarah Reis, Toward a “Digital Transfer Doctrine”? The First Sale Doctrine in the Digital Era, Nw. U. L. Rev. 173, 182-184 (2015).

[12] Id.

[13] Capitol Records., LLC v. ReDiji Inc., 910 F.3d 649, 653 (2nd Cir. 2018).

[14] Id.

[15] Id. at 664.

[16] Id.

[17] Supra note 1.

[18] Supra note 6.

[19] Disney Enterprises Inc. v. Redbox Automated Retail LLC, 336 F. Supp. 3d 1146, 1149 (C.D. Cal. 2018).

[20] Jennifer English, Toby Futter, David Grable, Emily Kapur, Luke Nikas, Robert Schwartz, NFTs: Legal Risks from “Minting” Art and Collectibles on Blockchain, JD Supra (March 25, 2021), https://www.jdsupra.com/legalnews/nfts-legal-risks-from-minting-art-and-4997056/.

[21] 17 U.S.C. § 109.

[22] Supra note 4.

[23] Supra note 6.

[24] Supra note 21.

[25] See Rosebud Entertainment v. Professional Laminating, 958 F. Supp. 2d 600, 602 (D. Md. 2013) where the First sale doctrine did not apply when a seller of customized commemorative laminated plaques containing copyrighted magazine covers since creating the plagues constituted significantly altered works.

[26] Supra note 6.

[27] Supra note 19.

[28] Supra note 4.

This post comes to us from Desiree Moshayedi, a second year student at Columbia Law School and a staff member of the Columbia Business Law Review.

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