Intellectual Property’s NFT Gap: Twentieth-Century Copyright Law Could Limit Viable Uses of Blockchain

Although the world’s attention has shifted to generative artificial intelligence, two years ago, the technology du jour was non-fungible tokens (“NFTs”). NFTs are non-interchangeable tokens stored on the blockchain that are usually associated with some asset, most commonly digital art. In 2021, NFT trades were worth $25 billion, with prominent works such as Beeple’s Everydays: The First 5000 Days selling for $69.3 million.

In response to this explosive interest, the US Senate Subcommittee on Intellectual Property requested that the US Patent and Trademark Office (“USPTO”) and the US Copyright Office prepare a report examining the intersection between NFTs and intellectual property. Earlier this year, on March 12, 2024, the USPTO and Copyright Office submitted their report to the Subcommittee. The report was lackluster: it concluded that current IP laws are sufficient for addressing NFTs and that any changes to IP law may stifle developments in NFTs, given the technology’s evolving nature. In short, the USPTO and Copyright Office determined that no new aspects of NFTs substantially challenged the existing bounds of IP law.

This is not to say there has been no copyright and trademark-related litigation involving NFTs. Early litigation included Quentin Tarantino’s NFT of a few original script pages from Pulp Fiction, a planned NFT of Indian artist Maqbool Fida Husain’s 12-panel Cubist mural Lightning, and Ryder Ripps’ copycat set of Bored Ape Yacht Club NFTs.

Some lawsuits are still ongoing. Perhaps most famously, Hermès sued artist Mason Rothschild, alleging that his collection of MetaBirkin NFTs infringed Hermès’ “Birkin” trademarks. A jury—and a district court judge—agreed with Hermès, but Rothschild has appealed to the Second Circuit. In addition, Nike’s trademark infringement dispute with StockX over its use of images of Nike sneakers in “claim ticket” NFTs for real sneakers inches toward trial. But, as the USPTO and Copyright Office concluded, courts can resolve these disputes through existing IP law.

Blockchain’s Secondary Liability Problem

However, an underexplored subset of potential NFT litigation could pose novel—and consequential—questions that extant IP law may not be able to answer. When a platform hosts an (immutable–i.e., non-changeable and non-deletable) NFT that infringes on someone else’s copyright, when should it be held liable? The answer could have consequences for future innovations with not just NFTs, but blockchain more generally.

There are already clear rules for standard (mutable) user-generated content on the Internet. The Digital Millennium Copyright Act (“DMCA”) addresses copyright infringement by providing a safe harbor for online platforms that host infringing user-generated content so long as they meet a series of requirements. The heart of these requirements is a notice and takedown regime. Once a platform learns of a specific infringement—whether through notice from the rights owner or otherwise—it must remove it or risk losing its safe harbor.

If the safe harbor does not apply, the platform may then be subject to what is called secondary liability or liability for the infringements of its users (i.e., the direct infringers). There are two types of secondary liability: vicarious and contributory. Vicarious liability is where the defendant has the right and ability to control an infringement and obtains a direct financial benefit from it. Contributory liability is where the defendant knows of the specific infringement and materially contributes to it. Like the DMCA safe harbor, contributory liability is often tied to notice and takedown obligations. These safe harbor and secondary liability provisions are well and good in Web 2.0, where Facebook removes posts or Amazon moderates listings to comply with the law.

However, NFTs and blockchain introduce a new feature that complicates this structure: immutability. One of the key features of blockchain technology is that it is immutable or cannot be changed or deleted. While some commentators and the public have—mostly incorrectly—referred to NFTs as digital art, NFTs are just tokens stored on a blockchain. NFTs are unique, non-interchangeable units of data that are created, or “minted,” on a blockchain and can represent possession or other rights in associated assets, be they art, music, electronic files, or anything else. An NFT is somewhat akin to an original piece of art or a signed baseball—objects for which there is no true replacement—than US dollars or apples, for which any dollar or apple would do. This property is unlike cryptocurrency, which is fungible because each individual bitcoin, for example, has the same value as all others. Because NFTs are tokens stored on the blockchain, they are also immutable.

In their report, the USPTO and Copyright Office skim over this important issue and its potential impact on liability. They acknowledge that “some commenters were doubtful that the deletion or ‘takedown’ of the infringing asset is possible . . . because . . . blockchains are designed to be immutable.” But, the report does not address the concerns. Instead, it discusses how the separate problems of decentralized storage and pseudonymity are not unique to NFTs.

Although unanswered in the report, the question of immutability and secondary liability remains a consequential gap between NFTs and IP law. Notice and takedown, the heart of secondary copyright infringement doctrine, is a poor fit for immutable NFTs. Take, for example, the popular NFT marketplace OpenSea. Like many other online platforms, OpenSea attempts to comply with the DMCA and offers a copyright takedown request process. Once it receives an infringement notification, OpenSea will delist that collection or item, removing the NFT listing from its marketplace.

However, as OpenSea rightly acknowledges, “[t]he item or collection will still exist on the blockchain (we don’t have the power to change that!).” This is because the blockchain, and by extension, the NFT stored on it, are immutable. Therefore, although the practical risk of liability is lowered by removing the display of the NFT in the OpenSea marketplace, the NFT itself still exists and could trigger liability for the host of the blockchain. In the aggregate, the risk of secondary liability for users’ infringements could be staggering—especially when copyright infringement can result in up to $150,000 per infringement in damages.

The secondary liability risk varies depending on whether the NFT is off-chain or on-chain. The underlying content in an off-chain NFT is stored outside the blockchain, but the NFT links to it. Therefore, the link is immutable, but the content is not. If the same individual controls the NFT and the content, the solution is fairly simple: they can delete the (infringing) content, rendering the NFT a (non-infringing) dead link. If the NFT host does not control the content, it may be incapable of remedying the infringement because the NFT will continue to direct viewers to the infringing content. In practice, relationships may develop where the host forwards notice of infringement to the platform hosting the content. This notification would obligate the platform to delete the content if it wishes to meet the requirements of the DMCA safe harbor and avoid being held secondarily liable.

A more complicated—and growing—problem is on-chain NFTs. Unlike off-chain NFTs, the content is directly uploaded to an on-chain NFT (i.e., the content is on the blockchain). Until recently, on-chain NFTs were fairly rare, as they were prohibitively expensive. But, technological advances have improved their viability and raised interest in them. For example, Bitcoin introduced on-chain NFTs called Ordinals in 2023. Major NFT collections such as CryptoPunks are now on-chain, too. When the infringing content is on the blockchain itself, it generally cannot be deleted, creating the greatest risk of being held secondarily liable for hosting the infringing NFT.

Unforeseen Challenges for Innovation and the Need to Refine Copyright Law

The potentially significant financial liability for hosting blockchain containing infringing content could discourage existing uses, such as NFTs, as well as future research and innovation with blockchain. Promising uses of blockchain rely on its ability to link to or contain content in an immutable fashion. Such uses—current and prospective—include financial applications, business optimization, voting, educational tools, health care management, government transparency, security, Internet of Things devices, and cloud computing. For example, blockchain can support more secure medical records that would support patient treatment. It could also be used to verify the authenticity of vaccines and medicines. Scientists can store data sets, research papers, and images from experiments on blockchain to better preserve them.

Yet the same novel immutability feature facilitating these advances could unintentionally bring infringement liability. Datasets or microscope photos, for example, could be copyrightable. The risks are especially pronounced with uses involving creative content, such as NFTs containing art and music. Even for noncopyrightable content, such as a vaccine’s authenticity information, the risks of hosting content that could be infringing might disincentivize platforms from hosting user content on the blockchain. Furthermore, liability concerns could harm researchers’ ability to conduct projects using blockchain, even if the resulting finding or innovation does not incorporate blockchain.

While these unexamined risks are concerning, the US can modernize copyright law to accommodate NFTs’ immutability. In a forthcoming academic article, I propose how copyright law should adapt to these NFT and blockchain secondary liability risks by looking at the history of new technologies. In the past, courts and Congress have, on many occasions, adapted secondary liability doctrine to permit new technologies to flourish despite novel aspects that copyright law had not previously considered.

A major consideration for those refinements to copyright law—from the Betamax videocassette player to the Internet—was intent, or one’s action or inaction, once aware of a particular infringement, that was substantially certain to facilitate or further the infringement. While the notice and takedown regime under the DMCA cannot account for immutability unless Congress revises it, contributory liability is more flexible. Indeed, courts have interpreted the material contribution requirement in different ways. Some have referred to a “site and facilities” test, others to notice and takedown, and others to a “simple measures” test. We can use intent as a polestar for refining this material contribution requirement to permit NFTs.

Notice and takedown and the “site and facilities” test are too static and cannot keep up with rapid advances in technology. Endorsing the “simple measures” test, however, is more promising. It would require platforms to undertake what “simple” actions they can take to limit specific infringements once they are aware of them. Although takedowns may not be possible, the simple measures test may require hosting platforms to remove any displays of the infringing content or even burn the NFT by sending it to a null address. This approach would avoid the problems of notice and takedown, which would hold platforms liable for the innate traits of NFTs. Instead, it would strike a balance between copyright owners and NFT platforms by requiring platforms to do what they can rather than punish them for what they cannot.