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self-study / Intellectual Property

Feb. 23, 2022

NFTs and meta lawsuits: Boldly go where none have gone before

Alexandra Darraby

Founder, The Art Law Firm

Email: darrabya@artlawfirm.com

Alexandra is author of "Darraby on Art Law" (25th anniversary ed. 2021). She lectures on NFTs and metaverses for Federal Bar, California lawyers, the ABA, and museums, and authored a new book on technology and the arts. Alexandra was the LADJ's practitioner columnist for art law.

Lil Yachty performs in Atlanta, January 31, 2019. (Shutterstock)

Quentin Tarantino, Lil Yachty, Nike, Hermes and Tom Brady are immersed in the virtual worlds of crypto, blockchains, NFTs and metaverses, some willingly minting and mining, and others mired in real-world litigation. NFTs are the currency courante of celebrities, sports franchises, artists, designer bags and watches, tacos and toilet tissue. Even Captain Kirk trekked into the cryptoverse.

The NFT-meta frontier is unbordered, uncharted and limitless. Anything and everything can be tokenized -- tweets, sex tapes, snippets, games, pizza, potato chips, finger paintings, medical records, even the defecatory flatulence and toilet wipes. The U.S. Patent and Trademark Office has already registered metas and NFTs, including Nike's digital sneakers (patent) and Facebook's about-face new name META (trademark). But are trademark laws from the 1940s and copyright laws from the 1970s -- informed by mid-20th-century policies -- adequate to address challenges of categorizing meta-property interests and NFT ownership rights in the virtual ether?

The NFT is a cryptoasset that purports to convey ownership in an associated digital file or property item, but does the tokenizer actually have rights to do so? With homage to "Hamlet," that is the crypto-cryptic question.

For those who have been on Mars for the last year, an NFT is a nonfungible token -- lines of alphanumeric script that record a sale of cryptocurrency on a blockchain. A focus on Mars is understandable, however, as this month celebrates the one-year anniversary of Percival landing on the Red Planet, an amazing technological feat only imagined in science fiction. America's crater-mapping rover marked milestone achievements for homo sapiens only to be eclipsed weeks later by a $69 million NFT sale at an online art auction.

The NFT is a technocrym that describes a sale of cryptocurrency by recording it on a blockchain described as an immutable digital ledger. To the extent the blockchain ledger records price points without actually depicting product, it functions in similar ways to 19th-century ledgers from Charles Dickens' era. The recordation of the NFT on the blockchain should not be confused with any digital file or item -- virtual or otherwise -- to which the token purports to relate. Regardless of what the token points to, or counterpart descriptions in smart contracts or terms of service that purport to convey the sale, the NFT itself is not an object, an artwork, or even a file extension. The "ownership" item related to the NFT is not depicted on the blockchain (a misapprehension appearing in early media blitzes that persists).

The concept of digitizing sales of nonobjective uses is not new and has been available to commuters for decades. Nonetheless, digital artist Beeple's $69 million sale in March 2021 of a digital file without materiality captured the imagination of a pandemic public. Tokenmania followed.

Tokenmania is 21st-century echo of 17th-century tulipmania. At the height of tulipmania, there were an estimated 50 bulb varieties. But NFTs are endless, infinite and growing. Captain Kirk of "Star Trek," aka William Shatner, tokenized his dental X-rays. Jack Dorsey, former Twitter CEO, tokenized a tweet for $2.9 million. Pizza Hut tokenized the "world's first non-fungible pizza." Charmin tokenized toilet paper "so people can hang their NFT(P) alongside real rolls, ... a better ... experience ... beyond the seat." Tom Brady has taken tokenizing literally to a new platform by founding Autograph, where fans can buy NFT signatures of sports icons in what the promoters call Web3, a next generation internet-web-metaverse community space so overwhelming defining it eludes experts.

Whose Token Is It, Anyway?

NFT lawsuits are proliferating across the country as fast as metastasizing metaverses. A key issue is differentiating who owns the rights to tokenize and who owns what the token ostensibly purchased. This critical distinction, which is not always made clear in the complaints, is particularly important where the what is creative content resonant with First Amendment implications. Jurisprudence has extended First Amendment protection not only to expressive content but to its sale and promotion. Promotion is integral to tokenizing because its public-facing drama is the crypto-price and bidding war. The NFT winner has no trophy to hoist at end of day or blockchain closure.

Miramax v. Tarantino

"Pulp Fiction" (1994), starring John Travolta, Samuel L. Jackson and Uma Thurman, won more than 70 awards, the Palme d'Or at Cannes and an Oscar for best screenplay by Quentin Tarantino. The film was a theatrical and critical success. In 2021, Tarantino announced he would "auction off 7 uncut Pulp Fiction Scenes as Secret NFTs," the subject of Miramax v. Tarantino, 21-08979 (C.D. Cal., filed Nov. 16, 2021), a copyright, trademark infringement and unfair competition case filed in federal court in Los Angeles. The tokenized items include "scans of some pages of the Pulp Fiction script," some props, content never before made public, and promotional "unauthorized images and graphics from or relating to Pulp Fiction." They were promoted and sold as "Tarantino NFTs."

Miramax, claiming trade rights to "Pulp Fiction" under copyright agreements, registered and unregistered marks, and decades of merchandising related marked goods, demanded Tarantino cease and desist. Tarantino continued to promote the NFTs on social media and sold them along with smart contracts in December. "Royale with Cheese" sold for $1.1 million on the Tarantino NFT website.

In Miramax, both sides agree that the applicable contracts are a 1993 Original Rights Agreement, Tarantino's Reserved Rights Agreement and some related assignments. But neither agrees on how to interpret rights recited therein to NFT sales. Miramax alleges the original agreement's "all rights [in the film] ... now or hereafter known ... in all media now or hereafter known," means they envisioned and own virtual rights, derivatives, marks and otherwise. In other words, in the paradigm posited above, only Miramax would be authorized to tokenize the film and promote NFT sales as well as owning the content signified by the token. The reservation agreement is described as a "static exception to Miramax's broad, catch-all rights."

Tarantino's answer claims he "has every right to publish portions of his original handwritten screenplay for Pulp Fiction, a personal creative treasure that he has kept private for decades." The parties agree that Tarantino reserved "soundtrack album, music publishing, live performance, print publication (including without limitation screenplay publication, 'making of' books, comic books and novelization, in audio and electronic formats as well, as applicable), interactive media, theatrical and television sequel and remake rights, and television series and spinoff rights," a parenthetical "screenplay publication" rife with interpretation. The answer positions the reservation agreement as granting original screenplay rights of use without copyright infringement, whereby tokenizing would implicitly be one such reserved use, supported by an affirmative first amendment defense.

Interestingly, although the worldwide web was already providing internet access to the public, the contractual provisions do not even hint at virtual potential. Instead, "home video" is identified, a recording system streaming has replaced. The legal language reveals how quickly advances in technology have reenvisioned today's world, and not just in entertainment. In certain ways we are now closer to Mars and Percy's "Selfies" than to life on earth in the 1990s.

McCollum v. Opulous

Where there are things to be sold, there are celebrities whose fame and auras give credence, and no less when the thing is an NFT. In Miles Parks McCollum v. Opulous, 22-00587 (C.D. Cal., filed Jan. 27, 2022), Lil Yachty, plaintiff's professional name and a registered trademark, filed a complaint in Los Angeles federal court claiming launch of a major NFT campaign by Opulous, a Singapore-based company, violated his rights under California Civil Code Section 3344 and Section 17200 of the Business and Professions Code, as well as infringing his marks. Lil Yachty is a brand unto himself, as well as ambassador for others, with a billion songs streamed and video views just under a billion. Nor is he new to NFTs, issuing $Yachty cryptocurrency in 2017 that reportedly sold out in 21 minutes.

Opulous is allegedly selling ownership to "a musician's copyrighted work to the public at large" using NFTs to tokenize transfers of ownership and advertised "a series of unmissable NFT drops led by world-famous artists, including Lil Yachty," who is touted as the "flagship artist partnership" in a capital campaign that raised defendants more than $6.5 million, none of which went to the falsely advertised "flagship partner." McCollum claims he had no deal, and that his name, likeness, image, persona, photograph and more were used without authorization.

The McCollum issues conform more closely to classic legal claims of unauthorized commercial misuse of names and marks and false affiliations even though presented on an NFT platform. The case may not introduce new law but it raises cautionary flags for celebrity control of image in the digital and meta-frontier, which is largely unguarded and appropriation is unchecked.

"Diamonds Are Forever," but Are NFTs?

Unlike diamonds, NFTs are not forever. The digital token touted as "immutable" on an impregnable decentralized blockchain certifying ownership in perpetuity may not be so secure. The U.S.-based platform Cent that sold Dorsey's $2.9 million tweet suspended operations earlier this month, overwhelmed by fakes, phony owners, and tokenizers selling rights they did not own. NFT ownership defects limn the lawsuits. Contrary to assertions that transparency is the feature of NFTs, the glass pane is lacking in such commerce. Like the real world, the virtual world is susceptible to impermanence, fraud and failure.

Hermes v. Rothschild

Fashion marks the convergence of NFTs and metaverse in Hermes v. Mason Richtschild, 22-00384 (S.D.N.Y., filed Jan. 14, 2022). Hermes, the luxury brand established in 1837, owns worldwide marks to Birkin, a handmade leather bag eponymously named for actress Jane Birkin, artisanally crafted for the rich and famous, at price tags from $10,000s to $100,000. The complaint cites a 17% rate of return, long waiting list and demand unsquelched by the pandemic.

Rothschild, the defendant-artist, launched and sold MetaBirkin NFTs using Hermes' Birkin mark preceded by "Meta" by digitally creating fur-covered Birkins and selling them amid the art corridors of Art Basel Miami 2021 and on OpenSea. The furry MetaBirkins are so successful defendant used the name for his different digital editions tied to the Birkin mark. Defendant launched an entrepreneurial blitz saturating a MetaBirkin "brand" across media and platforms, channeling artistic trends of appropriation: (1) URL; (2) domain name; (3) e-commerce stores; (4) Twitter handle; (5) Instagram account name; (6) Discord channel (an app chat site); (7) website; and (8), social media hashtags. MetaBirkin NFTs are still flourishing as this is written. A new post lists a $10,500 sale and a Google search produces MetaBirkin Twitter and media presence results.

The Hermes case raises the issue of whether "meta" is fair game prefix for any brand add-on adventurer, tokenizer or otherwise, and presents the First Amendment defense in sharper contrast. Will the courts view this case as an artist creating a new form of meta-speech deserving of expressive protection in a virtual world, or a trademark troll who devours carefully cultivated marks and brands? The U.S. Supreme Court's decision in Google v. Oracle, 141 S. Ct. 1183 (2021), considered the internet and coding so important fair use was expanded to cover alleged conduct that looked to some like process unprotected by copyright. The 9th U.S. Circuit Court of Appeals' "Server Test" for online display under copyright was reinforced last year in Bell v. Wilmot Storage, 12 F.4th 1065 (2021), which back-ended rights in a photograph to dormant data.

Recommendations: Strange New Worlds

NFTs, the metaverse and the virtual frontier present critical issues of law, culture, finance and economics. Consider the import of a judicial validation of rights of tokenizers or meta-riders on the intellectual property of others. Will a tokenized reordering of rights mean that brands lose traction in metaverse, Web3 or the next unknown iteration? Miramax claims NFT rights to its "deep film library." Substitute the words product line or service sector for film library, and the thought ought to auger fear for all types of companies (and shareholders) that have invested decades in developing, promoting and merchandising existing licenses and distribution agreements. Similarly, the meta prefix portends a loss of epic proportions among multiple vectors impacting business and nonprofits alike. These developments are not just about revenue or profit from a particular product or service. This is about public engagement with commerce, communication, quality controls, consumer confidence, rights exploitation and content ownership. The thought is an administrative nightmare for the distribution chain, now and in the future, from R&D, licencees and assignees, to heirs, successors and more.

Every transactional and corporate lawyer might be well advised to rethink and update draftsmanship and cast a cautionary review of past agreements, regardless of how cases are decided or settled. Every media lawyer might want to reevaluate market positioning beyond websites and social media. Exclusionary clauses for specifics like meta, Web3 or NFT do not protect against extracontractual use by strangers. Verbiage of "now or hereafter known" is no longer an adequate security net. In the opinion of this author, deals and drafting need to embrace fully existing content for uses unknown, a dynamic approach to the flux of uncharted technological frontiers. Now is the time "to boldly go where [none] has gone before."

Beam me up, Percy.

Part 2 follows next month. 

#1146

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