4 Things You Need to Know about Property Rights in the Metaverse

12 · 07 · 22
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4 Things You Need to Know about Property Rights in the Metaverse

 

There seems to be a lot of confusion about the rights people have when purchasing an NFT 

(Non-Fungible Token). There is no doubt that copyright law governs the rights related to NFTs, but copyright law varies enough from place to place that the rules are often unclear. Many people in the metaverse want to believe that they own all the rights related to whichever creative work they purchase and are spending a great deal of money and effort to build entire businesses around their NFTs.  Unfortunately,  NFTs are like any other piece of intellectual property and the purchase of a work of art does not necessarily mean that you have any rights related to the artwork except the right to display it.

Imagine if you purchased a painting from your favourite artist. You then make copies of the painting and sell copies. Next you make a digital image and use it to produce t-shirts, toys and other merchandise, which you then sell.  The original artist would have every right to sue you for infringement of her copyrights and the suit would no doubt wind up with you paying considerable penalties to the artist, not to mention a court order prohibiting you from any further shenanigans. 

Most people are aware that when you purchase a piece of art, or any other creative work for that matter, the artist keeps the copyrights related to the art.[1] All you get is the right to display that artwork or resell it.  Unfortunately, most people are unaware that the same laws apply to intellectual property in the metaverse.  Unless you get a written transfer of rights from the original artist, you are violating their copyrights and exposing yourself to potential lawsuits and the loss of any business you build based on the NFT you purchased. 

 

One point of clarification needs to be made before netizens can fully understand their rights in the metaverse. An NFT is simply a piece of code generated by a blockchain which shows ownership of a particular digital asset. But  the term NFT  is commonly used to refer to the underlying asset. The creative work being purchased and the term NFT get conflated. Technically, the term NFT should refer to the token itself,  which in turn will have a piece of code which points to a digital asset stored somewhere on a server.  However,  the conflated usage for the term NFT  has become so commonplace that everyone understands it to refer to both the token and the digital asset.  Therefore, when we use the term NFT in this article, it will refer to both.

 

In order to clarify and explain the rights surrounding in NFTs, imagine a hypothetical involving a typical scenario for the production and sale of NFTs.  In our hypothetical, “NFTs R Us” is a US-based company in the business of producing and selling NFTs.  However, outsourcing is common in the IT industry in the US and much of the actual production is outsourced to other countries.  In our hypothetical, NFTs R Us produces their NFTs as a work for hire (to be explained later) and sells them as commercial works. NFTs R Us  hires several programmers and artists in Bulgaria, who do the actual work of designing the NFTs. In this case, one of the the NFTs is sold to Edward,  who lives in Thailand  and is actively building a profitable business in the metaverse based on the NFTs he has purchased.  Edward has several clever marketing strategies that are quickly successful, so he hires employees in Thailand who help to produce derivative works based on the NFTs- t-shirts, toys and snacks.  These derivative products are then sold throughout Southeast Asia. 

Now let‘s analyse  how copyright law would apply to these facts and what the most likely dangers would be for Edward and his efforts in the Metaverse.

 

Danger Number One- Moral Rights

 

If you’ve ever read The Fountainhead, by Ayn Rand, you may remember that the protagonist, Howard Roark, is an architect who is so talented and passionate about his creations that he wants to have control over what his clients do with them. He ultimately designs a glorious project that will provide inexpensive but quality housing for the poor, only to see it butchered by the builder who wants to cut costs even more. Roark then blows up the building before it can be occupied. In the US, Roark is a lunatic figure with crazy demands and the book is considered highly controversial. As it turns out, the only thing shocking about the book is that the US did NOT give such rights (called Moral Rights) to artists. In the rest of the world, countries routinely give those rights to artists and now even the US has finally given Moral Rights to artists, though in a very limited fashion.[2]

In the case of Von Gerkan vs. Deutsche Bahn, [3] Von Gerkan was the architect hired by Deutsche Bahn to design a new train station for the city of Berlin. After completion of the plans and during construction, Deutsche Bahn made changes to the roof of the structure in order to cut costs. Von Gerkan did not like the changes and sued, claiming he did not give permission to alter the plans. The court ruled in favor of Von Gerkan and Deutsche Bahn had to rebuild the roof, at an estimated cost of forty million euros.

Moral rights are powerful. They allow an artist to control how a work is used, long after it has been sold. And to make matters even more complex, moral rights in most jurisdictions can never be sold, waived or transferred, even if the sale contract purports to do so! 181 countries have signed the Berne Convention [4] and Article 6 bis of that treaty makes it clear that moral rights cannot be transferred or waived. They remain with the author even after any transfer of rights.

If the work was created in a manner whereby moral rights attached to the work, the creator has powerful rights which will last until the expiration of the copyright. This means that the artist who created the NFT in our scenario will be able to stop Edward from making any derivatives he doesn’t like, or from using the NFT in any manner he finds unpleasant or offensive, even if it means that Edward loses all of the investment he has made in developing his Metaverse business based on the NFT.

According to Professor William Fisher, the Wilmer Hale Professor of Intellectual Property Law at Harvard Law School[5], moral rights consist of a basket of the following six rights:

  1. Right of Attribution (to be credited as author)
  2. Right of Integrity (to protect works from mutilation and misuse)
  3. Right of Disclosure (to decide when a work is released to the public)
  4. 4. Right of Withdrawal (to demand that an already released work be returned)
  5. 5. Right against Excessive Criticism (to recover damages for abusive criticism)
  6. Right of Droit de Suite (to receive an additional fee when a work is resold)

 

Article 6bis covers only the first two, and most jurisdictions do not give all six rights to artists. In our hypothetical scenario, the US gives the most limited version of moral rights, and those rights may be waived but not transferred. Thailand gives the moral rights mentioned in Article 6bis.  Bulgaria, where the work was likely created, gives all of the moral rights, except Droit de Suite, to authors and some of those rights are not waivable or transferable under Bulgarian law.[6]

 

In order to know whether the creator of your NFT has moral rights over your work, you must determine the moral rights given in the country where it was created.

 

Fortunately for NFT purchasers, moral rights in the US are quite limited and do not attach at all to commercial works, known as “works for hire”. However, the laws surrounding works for hire are complex, and are often handled in a manner which invalidates the work for hire status, which leads us to the second danger.

 

Danger Number Two – Works for Hire

 

When people commission an artist to create a work, they usually assume the work belongs to the person paying for it, together with all the commensurate rights. However, there is no truth to this assumption and it is one of the most litigated areas of copyright law. Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989) is a perfect illustration of the problems that can arise when trying to create a work for hire.

The Community for Creative Non-Violence (CCNV) hired sculptor James Earl Reid to create a modern version of a nativity scene. Earl did so and delivered the sculpture to CCNV. After delivery, CCNV wanted to frequently move the statue in order to exhibit it in different locations. Reid objected because the statue was not made to be transported frequently and such use would have destroyed it. CCNV argued that the statue was a work made for hire and, therefore, the copyright belonged to CCNV.

As the court pointed out, there are only two ways whereby a creative work can become a work for hire. [7] Either it must be 1) made by an employee within the scope of his or her employment, or 2) it must be made by an independent contractor, pursuant to a written agreement specifying that the work shall be a work for hire and be within one of the following nine categories of creative works:

  1. Contribution to a collective work
  2. Part of a motion picture or other audiovisual work
  3. Translation
  4. Supplementary work
  5. Compilation
  6. Instructional text
  7. Test
  8. Answer to a test
  9. Atlas

Only these nine categories can become a work for hire. For any other subject matter, any agreement to create a work for hire is invalid and the creator will retain the copyright.

Since the sculpture in CCNV was not within one of those categories, the only way it could have been a work for hire is if Reid was considered an employee of CCNV. The court considered that issue, articulated the criteria according to which a party would be considered an employee and decided that Reid was clearly an independent contractor. Reid did not work at the employer’s location, used his own equipment, controlled his own hours, and CCNV did not maintain a high degree of control over Reid’s activities. In fact, most of the criteria which prevented Reid from being considered an employee would be identical in our scenario, and in almost every case where IT work is outsourced to another country.

To summarize, the moment NFTs R Us outsourced work to Bulgaria, any work for hire agreement would have been invalidated, if such an agreement even existed. This means that the Bulgarian programmers would have created the work as individuals, would own the copyright and have strong moral rights which could not be transferred.

To make it even more complicated, we should point out some peculiarities according to the Bulgarian copyright law regarding works for hire and the copyright over software. The general rule in Bulgaria regarding works for hire states that the copyright over those creations belongs to the authors unless something else has been explicitly stipulated in the contract for hire[8]. However, there is one exception regarding software.[9] According to this exception, software belongs by default to the employer unless the parties agreed upon something else. This might seem like a beacon of light for NFTs R Us, in our case, but actually it is not. First of all being recognized as an employer according to the Bulgarian law would not be an easy task[10]. Secondly, convincing the court the NFTs are to be considered as software is another obstacle.

Even if an artist is an employee, that does not mean the troubles are over. A work still must be created within the course and scope of employment and that is not always an easy analysis. Avtec Systems vs. Peiffer, 805 F. Supp. 1312 (E.D. Va. 1992) illustrates the difficulties work for hire agreements encounter, even with employees. In that case, Peiffer worked as a programmer for Avtec, who provided software applications to the US government. Peiffer made one particular program with significant value. However, he badly botched the presentation regarding the software and it was rejected by the government purchasers. Peiffer then sold the program to another firm, with the agreement that Peiffer would receive half of the firm’s sales. When Avtec discovered this, they sued Peiffer, claiming that the copyright belonged to Avtec.

Peiffer argued that he had often worked from home, on his own computer, and after normal work hours. The court ruled that this was enough to mean that the software had been made outside the scope of employment and the copyright, therefore, belonged to Peiffer. In a post- pandemic world, when so many programmers work from home and own their own equipment, what effect would this have on a “course and scope of employment” analysis? In addition, many software firms offer flexible work hours to their programmers as an incentive. As can be seen from the Avtec case, creation of a work by an employee does not automatically mean that the copyright issue is settled.

In addition, the law in Thailand related to employees differs from the US. In the US, a work created by an employee belongs, by default, to the employer. In the absence of a written agreement to the contrary, all copyrights belong to the employer, as long as the work is made within the course and scope of employment. In Thailand the situation is the opposite. [11] The copyright goes to the employee, unless there is a written agreement to the contrary. Unless, Edward is aware of this and had his Thai employees sign an agreement, the copyright for all of the derivative works they are producing will belong to the employees, which illustrates the third danger in our analysis.

 

Danger Number Three – Lack of Standardization

 

The Berne Convention and the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) have helped to harmonize copyright laws around the world. However, that doesn’t mean there aren’t significant differences from country to country. And those differences can mean you completely lose the rights to your NFT.

We’ve already mentioned that copyrights, by default, go to the employee in Thailand, whereas it’s the opposite in the US. But the same problem happens with independent contractors. In Thailand, the copyright goes to the person paying the commission instead of the independent contractor, unless there’s a written agreement to the contrary.[12] In the US and Bulgaria, the opposite is true. By default, the copyright goes to the artist.

And the situation with transfers is even worse. In the US, a copyright owner can transfer her economic rights to someone else, but has the right to take work back after 35 years, although that right doesn’t apply to works for hire.[13] In Bulgaria, no transfer of copyrights over ten years is valid. If the contract specifies a longer term, that section is invalid and the term becomes ten years.[14] In Thailand, the term for transfers is, by default, ten years, unless there is a written contract which specifies a longer term.[15]

As should be clear from these examples, the difference in copyrights between jurisdictions would wreak havoc on Edward’s businesses. In our hypothetical, the NFT produced by the artist in Bulgaria was not a work for hire. Therefore, not only would the artist have non-transferable moral rights, but she would have the right to demand that Edward stop using the work for commercial purposes after ten years. Imagine the unpleasant surprise for Edward upon receipt of that letter from the Bulgarian artist’s attorney. The business he developed in the Metaverse would now be based on an NFT owned by someone else. But at least Edward would be able to keep the derivative works he produced, since those were made with permission during the term of the assignment/ transfer. Unfortunately, the copyrights for those works most likely belong to the Thai employees who produced them, unless Edward had the appropriate contracts signed by those employees.

All of this assumes that Edward acquired copyrights over his NFT in the first place. As mentioned above, the purchase of a creative work does not necessarily mean that the buyer acquires any copyrights at all, and this is probably the greatest risk for Edward’s new business.

 

Danger Number 4 – Buying Artwork Does Not Mean You Get the Copyright

 

What rights an NFT purchaser acquires is governed by the purchase agreement. Unless that contract very clearly states that a transfer of rights is taking place, the buyer only acquires the artwork itself. He would have the right to resell it, or to display it, but any activities which would produce a profit would violate the artist’s copyright.

Edward would need to read his contract carefully, probably with the help of an intellectual property lawyer, in order to be sure that his new business ventures are authorized by the original creator of the NFT.

There is a movement to standardize transfer agreements for NFTs and a typical agreement can be seen at https://www.nftlicense.org. That agreement makes it clear that the buyer is purchasing an NFT and, therefore, owns the underlying digital asset, but the agreement does not authorize a transfer of the copyright. It merely licenses the buyer to perform some activities with the artwork, such as:

  1. “Use the Kitty art for your own personal, non-commercial use;” or
  2. “Use the Kitty art to commercialize your own merchandise, provided that you aren’t earning more than $100,000 in revenue each year from doing so.”

And there are several activities which the buyer is prohibited from engaging in. Such standardization is much needed in the NFT marketplace and if such agreements become commonplace, it will go a long way toward educating NFT buyers about their rights.

Unfortunately, at this point in the industry, most NFT purchasers are unfamiliar with copyright law and are building brands in the Metaverse as if they fully owned the copyright to the digital asset.

 

In Summary

In our hypothetical, NFTs R Us attempted to make a work for hire under US law, which would have made their NFTs fully transferable, without restrictions or moral rights. Unfortunately, since software is not one of the categories which can become a work for hire (with independent contractors) in the US, the agreement would have been invalid. The status might be saved if they exercised enough control over the programmers for them to be considered employees, but this is highly unlikely since they are in another country.

As a result, the Bulgarian programmers would probably own the copyrights to the NFTs and have extensive rights over them. If Edward is successful in his business ventures, they would make the NFTs significantly more valuable, which would make it likely that the copyright owner would stop any commercial use of the artwork, or at least ask for additional compensation. In essence, the producers of the NFTs would become partners in Edward’s businesses, whether he liked it or not. Without a better understanding of the rights which accompany the purchase of an NFT, entrepreneurs in the Metaverse are in for some very unpleasant surprises.

 

[1] Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989)

[2] Visual Artist Rights Act, 17 U.S. Code § 106A

[3] https://www.juve.de/verfahren/gerkan-unterliegt-in-presserechtlichem-streit/

 

[4] https://www.wipo.int/treaties/en/ip/berne/

[5] https://www.youtube.com/watch?v=hsAcrcveg6k&ab_channel=TheBerkmanKleinCenterforInternet%26Society

[6] Visual Artist Rights Act, 17 U.S. Code § 106A, (USA) Thailand COPYRIGHT ACT B.E. 2537, §18, Bulgarian Copyright and Neighboring Rights Act, §§ 15-16

[7] 17 U.S.C. § 101 

[8] Bulgarian Copyright and Neighboring Rights Act, §42

[9] Bulgarian Copyright and Neighboring Rights Act, §14

[10] Supreme Court of Cassation, Ruling No. 186 of 13.04.2018 , Case No. 2650/2017,

Court of Appeal – Sofia, Decision No. 1651 of 1.07.2017, Case No. 1950/2017 (Bulgaria).

[11] Thailand COPYRIGHT ACT B.E. 2537, §9

[12] Thailand COPYRIGHT ACT B.E. 2537, §10

[13] 17 U.S.C. §203

[14]Bulgarian Copyright and Neighboring Rights Act, §37

 

[15] Thailand COPYRIGHT ACT B.E. 2537, §17

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