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Non-Fungible Tokens (NFT) Newsroom

What exactly do you get when you buy an NFT? The Case of the Apes.

What exactly do you get when you buy an NFT?  The Case of the Apes.

2021 saw a surge in NFT trades, with sales volume reportedly reaching a whopping $23 billion. Many have jumped on the bandwagon to collect NFTs often at unthinkable prices, but what exactly do you get for what you pay? We’ve touched on this briefly before: a purchase of an NFT does not confer rights to the digital asset or its copyright unless the terms provide otherwise. Today’s post will offer a closer look at how to determine what rights you obtain when you buy an NFT by examining the terms of purchase of the uber-popular Bored Ape Yacht Club (“BAYC”) NFT. As with anything relating to NFTs, the answer seems to be—it’s not clear.

Preliminarily, one of the first places any potential NFT purchaser should look at is the terms and conditions of the marketplace where the purchase will be made. For example, the Terms of Service provided on popular NFT marketplace OpenSea provides that “NFTs may be subject to terms directly between buyers and sellers with respect to the use of the NFT content and benefits associated with a given NFT,” and places the onus on “[t]he buyer and seller . . for communicating, promulgating, agreeing to, and enforcing” the terms of sale, requiring the purchaser to be “solely responsible for reviewing” such terms.

BAYC, launched by Yuga Labs, is one of the most influential NFT projects to date. Consisting of images of various distinctive bored-looking apes, the NFTs have been made popular through association with celebrities, most recently by rapper Eminem who reportedly purchased an ape resembling himself for $462,000. BAYC’s Terms and Conditions provides that, “[w]hen you purchase an NFT, you own the underlying Bored Ape, the Art, completely.” Subject to compliance with the terms and conditions, Yuga Labs grants not just a “personal, non-commercial use” license, but “an unlimited, worldwide license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art (‘Commercial Use’)” such as “the use of the Art to produce and sell merchandise products (T-Shirts etc.) displaying copies of the Art,” and expressly permits “earning revenue from any” such activities.

While these Terms and Conditions start out by sounding like a transfer of copyright (“you own the underlying Bored Ape, the Art, completely”), the language that follows dictates that Yuga Labs is granting a “license.” Because the license is specific to the particular Ape being purchased, the license is not a “non-exclusive” license where multiple licensees are granted the same right. Is Yuga Labs then offering an “exclusive” license? Under US copyright law, an exclusive license “conveys an ownership interest” and the licensee stands to receive “the exclusive right—superior even to copyright owner’s rights—to use the copyrighted material in a manner as specified by the license agreement.” Davis v. Blige, 505 F.3d 90, 99, 101 (2d Cir. 2007). An exclusive licensee obtains the ability to sue for infringement and issue DMCA takedown requests. But there is no mention of the term “exclusive license” in the Terms and Conditions, nor does the language convey the impression that Yuga Labs is relinquishing any rights in the Apes. In fact, Yuga Labs appears to have retained their rights, as demonstrated by a deal they made with a “veteran music industry executive” to explore various other media opportunities using its Ape characters.

What legal rights are Yuga Labs granting to the purchaser then? Based on the totality of the circumstances, what seems likely here is that Yuga Labs is granting a “sole” license instead of an “exclusive” license. The two differ to the extent that a sole license grants rights only to that licensee, but not to the exclusion of the licensor. Yuga Labs is certainly granting commercial rights to the purchaser to make commercial use of “the Art” “for the purpose of creating derivative works based upon the Art” and to earn revenue from such endeavor. But at the same time, it is apparently not restricting itself from doing the same. If this license is indeed a sole license, does a Bored Ape purchaser have standing to sue for copyright infringement or issue a DMCA takedown request? Or will the Bored Ape purchaser be deemed to be an agent of Yuga Labs for purposes of issuing a DMCA takedown request? Or will NFTs pave the way for a separate category of protections given to their owners even if they technically do not own the copyright? For example, a DMCA takedown request by at least one CryptoPunk owner has previously been honored by OpenSea even though CryptoPunk owners do not own the copyright in their Punks because OpenSea has considered them to be “good-faith takedown requests.”

Another interesting question is, if what Yuga Labs is granting is an exclusive license, to be valid under US copyright laws there must be a “writing” that is “signed by the owner of the rights conveyed or such owner’s duly authorized agent.” 17 U.S.C. § 204(a). Putting aside the issue of whether the signing requirement can be met electronically (which it probably can), at what point is this signing by Yuga Labs occurring if the transaction is occurring on OpenSea?

These are some legal questions concerning the scope of rights obtained by NFT purchasers, which may eventually come to be answered through litigation given the enormous value these Bored Apes bring to the table. For now, however, Bored Ape purchasers are free to monetize their acquisitions without resistance from Yuga Labs, and some have already begun doing so. For example, music producer Timbaland and music label Universal Music Group separately launched virtual bands whose members consist of Bored Ape NFTs owned by Bored Ape owners.

As with any investment, and especially with a new intangible asset like an NFT, understanding what you own is crucial. Please contact the NFT Newsroom for questions relating to your next NFT transaction.