Copyright Issues Surrounding Your NFTs



Introduction


NFTs are one of the hottest topics in the music industry, and understandably so. In just the first few months of 2021, NFTs generated over $60 million for the music industry. For a brand-new revenue stream that barely existed a year ago, that is extremely exciting! While I encourage every music creator and music business to dip their toe into the NFT waters, it’s important to start taking some legal considerations into account before your next big NFT drop.


NOTE – If you are still figuring out what an NFT is, here is a helpful YouTube video that helps explain how NFTs work. Check it out and come back to learn the law.


In this article, I will highlight some copyright pitfalls in your NFT releases. Be aware that there are many other legal considerations surrounding NFTs, and I discuss them here. Here’s a quick look at what I will be tackling in this article:

  • What is being sold?

  • Is the transfer valid?

  • Can you sell what you are selling?

  • What agreements are required?

Why am I Doing This?


Before diving into the nuts and bolts of the legal issues, I want to touch on why I am writing this article (and these other NFT articles). There are three main reasons these articles are necessary:

  • First, as I explained earlier, the revenue generated in the early stages of NFTs is already significant. As the technology continues to improve, platforms become more efficient and creators get more…creative, the revenue potential in the NFT market is endless. It is important to start looking seriously at NFTs both from a creative standpoint, a business standpoint, and a legal standpoint.

  • Second, NFTs already touch every facet of the music industry. Run a quick Google search for NFT examples in music and you’ll come up with album sales, songwriters selling their publishing, ticketing/touring, merchandising and more. If you don’t think NFTs affect your role in the industry, you’re wrong.

  • Third, the potential exists for layers of legal complexities wrapped around the sale of just one NFT. I want those who are selling NFTs to know with certainty (a) what they are selling and (b) that they have the legal right to sell it.

Now let’s get into it.


What are you selling?


It sounds like a simple question, but it can be very complicated. What exactly is being sold? In fact, even Jay Z and his former partner are in a legal dispute over an NFT sale because it was unclear what his partner was selling in relation to Jay Z’s first album Reasonable Doubt. An NFT that significant, and what exactly was being sold was still unclear!


Consider this. If you peruse any NFT exchange for music-related NFTs you’ll find what I’m going to call your “Typical NFT.” It is digital art in the form of a video, along with a sound recording and a poor description of what the purchaser is going to own when he/she purchases this Typical NFT.


Now ask yourself, “If I purchase this Typical NFT, what am I owning?” When it comes to the music, some folks will sell you actual ownership (i.e. you own the master) while others are selling you only a copy (like purchasing a CD in a store). In addition to the music, what do I own when it comes to the artwork? Do I own the original file and all the rights that come with it (e.g. the right to reproduce it and sell it to others for revenue), or only a copy of the artwork (like buying a copy of the Mona Lisa at a store)?


As you can see, it’s not always clear what exactly is being sold/purchased on these NFT exchanges.


Is the transfer valid?


Suppose in my Typical NFT scenario the purchaser does take over actual ownership of both the music and the artwork. Is the sale on the NFT exchange enough to transfer ownership? Not quite.


When an NFT is sold, the transaction (and ownership) is permanently recorded on the blockchain. However, transfer of actual ownership of a copyright is not valid without a signed writing, per the U.S. Copyright Act. Therefore, an extra step must be taken to validate the transfer of ownership, i.e. a signed writing.


Can you sell what you are selling?


Once you know what you are selling, another question that seems simple is, can you sell it? Another way of asking this is, do you have the rights in all of the intellectual property that you are selling?


Let’s go back to the Typical NFT. Again, the NFT is a sound recording being played over a short video. There are (a minimum) of three copyrights contained in that Typical NFT: (1) the sound recording, (2) the composition and (3) the digital video. The seller may very well own all three of the compositions entirely. Still, if he only owns the sound recording, he must obtain a synchronization license to have the right to “sync” the composition to the video. Even if he owns both the sound recording and the composition, he will need a license from the owner of the video to sell the music along with the video.


One must ensure he has the rights in all intellectual property being sold in an NFT, and if not, then the seller must get an agreement with the rightsholder (see below).


Agreements with Third Parties


I go into much more detail about structuring agreements with third parties in a separate article, which you can find here, but I do want to touch on the subject here.


Going back one more time to our Typical NFT. What if the seller does own the sound recording, but had to obtain sample clearance (or other clearances) for the sound recordings in the past? Does the clearance cover the sale of the sample as an NFT?


One must start considering all third parties that may be affected by the sale of the NFT, and whether any existing (or prior) agreements govern the sale. What if the sound recording was recorded under a label deal that was entered into while the artist had a management agreement? The seller must review both the recording contract and the management agreement.


These are only a few examples of items that need to be considered before selling your NFTs to ensure legal issues will not arise with third parties in the future.


Conclusion


Intellectual property, particularly copyrights, are often confusing and difficult to understand. Adding a new layer of technology onto this difficult subject only makes it more complex. These articles are meant to shine a light on some of the legal pitfalls you should try to avoid when selling your NFTs and working with third parties.


About Colin


Colin is the founder of Whiskey Ghost Entertainment Law based in Nashville, TN. Colin has represented independent musicians, record labels and publishers with a wide array of representation including the drafting, review and negotiation of record/publishing deals, distribution and band agreements. He has also assisted in the formation of LLC’s, trademark registration and much more. If you have a legal question, please don’t hesitate to email Colin at cmaher@whiskeyghost.com or call him at 615-721-2233.

This article does not create an attorney-client relationship between you and me. Your use of this website is intended for general information purposes only and is not legal advice or a substitute for legal counsel. You should not act upon any information contained on this website without seeking professional counsel, licensed to practice in your jurisdiction for a particular problem.

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