Does the first-sale doctrine apply to NFTs?
Thanks to the first-sale doctrine, businesses and individuals can re-sell a lawfully purchased copy of copyrighted content without fear of facing allegations of infringement from the owner of the intellectual property. The doctrine is critical for businesses and individuals engaged in the reselling of products, such as used books. At bottom, it acts as a defence to allegations of copyright infringement. Traditionally, however, courts have only applied the first-sale doctrine for copyright law to physical, tangible goods; they have been reluctant to extend it to digital works of art, such as MP3 files, rejecting a “digital first sale” doctrine (Capitol Records LLC v ReDigi Inc, 910 F.3d 649, 657 (2nd Circuit 2018)). Courts have likewise rejected applying the first-sale doctrine to digital download codes (Redbox Automated Retail LLC v Buena Vista Home Entertainment Inc, 399 Federal Supplement 3d 1018, 1032-33 (Central District California 2019)).
But what happens if someone sells a non-fungible token (NFT), and the underlying asset is protected by a copyright? Can the original owner prevent downstream sales of the NFT, or would it be precluded from doing so under the first-sale doctrine? NFTs are digital works of art that often come with a link to a copy, but because NFT transactions are recorded on the blockchain, one could argue they act more like physical, tangible works of art. This begs the question: does the first-sale doctrine apply to NFTs?
The first-sale doctrine for copyright law
Under the first-sale doctrine of copyright law, which is codified under Chapter 17 of the US Code, Section 109, a person who buys a copy of a copyrighted work from the owner of the copyright has the right to display, sell or otherwise dispose of that purchased copy. Critically, however, the first-sale doctrine does not apply to licensed goods. See Chapter 17 US Code Section 109(d) (providing that the right does not extend to “any person who has acquired possession of the copy or phonorecord from the copyright owner, by rental, lease, loan or otherwise, without acquiring ownership of it”. This exception to the first-sale doctrine arises frequently in the context of computer software, which is often licensed to users rather than sold.
As applied to NFTs
One of the attractive features of an NFT is the ability to track ownership of a digital asset through a token secured by the blockchain. In other words, although intangible, NFTs are supposed to act more like a physical, tangible object, like the Mona Lisa, giving the owner the feeling of owning the original, unique version. Another attractive feature is the ability to resell the NFT for profit. Like a physical piece of art, then, the first-sale doctrine should apply to the sale of an NFT. An NFT, however, is merely digital code, suggesting that, like an MP3 file or download codes, it should not be subject to the doctrine.
Practically speaking, though, NFT sellers have written into the terms and conditions the express right for the buyer to resell the NFT. And for good reason; typically, NFT creators use ‘smart contracts’ to ensure that they get a cut of downstream sales. For instance, the author of this article owns an NFT, but if the author sells that NFT on OpenSea, 10% of that sale goes to the creator. It is therefore in the best interest of the NFT creator to allow downstream sales. Nevertheless, US courts should be prepared to resolve the issue of the first-sale doctrine in the context of NFTs and copyright law. Purchasers of NFTs should carefully review the terms and conditions to understand what rights, if any, come with their purchase.
This is an Insight article, written by a selected partner as part of WTR's co-published content. Read more on Insight
Copyright © Law Business ResearchCompany Number: 03281866 VAT: GB 160 7529 10