An artist resale royalty, or droit de suite as it is often called in Europe, provides artists with an opportunity to benefit from the increased value of their works over time by granting them a percentage of the proceeds from the resale of their original works of art. The royalty originated in France in the 1920s and is in general practice throughout Europe, but is not part of United States copyright law. Instead, under the first sale doctrine, the lawful owner of a copyrighted work may “sell or otherwise dispose of the possession of that copy” and “display that copy publicly” all without the author’s permission. Thus, a purchased painting, sculpture, or another piece of art may be treated like a house, car, or any other possession.

Much of the value of non-fungible tokens (“NFTs”) tied to art for minters and artists who digitize and list their works lies in proceeds from resales of those NFTs as values rise. Determining whether the resale right, the first sale doctrine, a combination of the two, or some other legal concept should apply when it comes to NFTs will have a significant effect on the industry’s economic vitality. 

A Deeper Dive into Resale Rights and NFTs

The resale right affords artists protection against their works being sold too cheaply. It works by giving the creator a slice of the proceeds each time the work is resold and allowing them to participate along with collectors and speculators in the items’ appreciation. The right of resale originated during the explosion of cultural creativity known as the années folles (crazy times) that engulfed France in the 1920s, and it is established policy throughout Europe. Current U.S. copyright law, however, does not recognize the resale right – although numerous attempts have been made to incorporate it into federal legislation. When artists sell NFTs of their work, a typical sales agreement would include a mechanism that allows them to receive royalties not only on the original sale but also on subsequent resales thereafter. Blockchain smart contracts track payment transactions and automatically distribute royalties to the artists. 

The resale right comes into play for video game companies, for example, because NFTs are increasingly used as in-game assets that players can earn through gameplay, trades, and/or third-party sales. Common practice is for game companies to create NFT assets as work-for-hire or work products and retain the resale rights for themselves, earning ongoing revenues for rare and high-utility items. However, game companies that purchase rights to creative assets can arrange for the artists to receive passive income as players sell the related skins, in-game accessories, virtual real estate, and collector’s cards over the course of gameplay or trade on secondary markets. But since the U.S. copyright law does not recognize resale rights, it is unclear whether any provision regarding royalties under NFTs’ smart contracts would apply to video game companies operating in the U.S.

A Second Look at First Sale

U.S. copyright law does not recognize resale rights but instead stipulates that once an original copyright-protected work of authorship is sold, the buyer and all subsequent purchasers are free to resell that work without compensating the original artist or author. This first sale principle is the exact opposite of the resale right. 

However, successive judicial decisions have held that the first sale doctrine does not apply to digital works. For example, in Capitol Records LLC v.  ReDigi Inc., the U.S. Court of Appeals for the Second Circuit held that the first sale doctrine does not apply to digital music files because the resale would require making an unauthorized copy of the digital music file that would infringe upon the copyright owner’s reproduction right. Similarly, in Disney Enterprises Inc. v. Redbox Automated Retail LLC, the U.S. District Court for Central California held that the first sale doctrine did not apply to digital download codes because the sale of movie download codes essentially granted the ability to create physical copies at some point in the future rather than a particular, fixed copy of a copyrighted work.

Based on the existing precedent, it would seem that the first sale doctrine does not apply to NFTs that are tied to digital objects, such as audio files and digital images. In other words, the right to sell or distribute the digital version of a work, be it a drawing, digital music file, or photograph, belongs exclusively to the copyright owner. However, it is generally in the copyright owner’s interest to allow the resale because a limited form of contracting might be possible: while US copyright law does not recognize the resale right, the NFT sales agreement can be written such that the seller is obligated to pay royalties to the copyright owner if the in-game asset is sold to a third party. Moreover, these provisions can be executed by smart contracts to ensure they are accurately and consistently applied every time that a real occurs. In these cases, it is in the copyright owners’ interest to allow resales, as they will receive resale royalties under the terms of NFTs’ sales agreements. 

Further, it is unlikely that the first sale doctrine will apply to cases where a lawful digital artwork owner attempts the unauthorized minting of an in-game digital asset or NFT. Since “ownership” of digital artwork is more akin to possessing a license to access the work than actual ownership of a particular copy, the right to convert the artwork into an NFT resides solely with the copyright owner. In cases where the lawful owner of a physical artwork attempts to mint an NFT without the consent of the copyright owner, the outcome will likely be the same.

The surge in popularity and usage of digital assets, such as NFTs, and the murkiness surrounding the application of the first sale doctrine may force courts to draft a first sale doctrine that specifically addresses these use cases. In the meantime, the first sale doctrine is unlikely to be applicable to the sale of NFTs. This is because when a buyer purchases an in-game NFT, they would acquire a link to a digital version of the asset the NFT represents. This acts as an option to create a copy of the digital work, and U.S. courts currently do not acknowledge a first sale doctrine for digital works. Nevertheless, a limited form of contracting of royalty provisions in the NFT sales agreement might be possible. It is best to consult an attorney specializing in copyright, contracts, and NFTs for guidance on this complex issue.

David B. Hoppe is the founder and managing partner of Gamma Law, and a recognized authority on emerging legal issues in high-growth media/technology sectors, including video games and esports, blockchain and digital assets,VR/AR/XR, and digital media/entertainment.

The value of the global metaverse is expected to reach almost $800 billion by 2024, according to Bloomberg projections. This represents more than 16-fold growth over the nearly $48 billion generated in this burgeoning space in 2020. The quickly-developing metaverse brings with it a host of legal challenges and opportunities, including on the trademark enforcement and branding front, by way of marketing deals, and content partnerships and collaborations, as well as market development and customer diversification. Companies – both established players and start-up brands, alike – that are intent on operating in the virtual world writ large or by building their own metaverse platform should be aware of several brand-use and trademark issues that can arise.

The Metaverse Is Built on Brands & Trademarks

Companies seeking to establish a foothold in the metaverse must be well acquainted with trademark rights, as many brand owners are looking to leverage their existing intellectual property in this new digital environment. Many brands optimistically view the metaverse as a limitless market for promoting their products and services, and are looking for ways to engage in this budding space as a result. In this vein (and potentially shedding light on future efforts in the metaverse), early-moving brand owners are taking steps to register their logos and trademarks for goods and services that are accessible exclusively in the metaverse, including downloadable virtual goods for virtual online worlds, retail stores that carry virtual goods, digital collections services, and others. 

For example, Nike filed an array of trademark applications with the U.S. Patent and Trademark Office (“USPTO”) last year, indicating the brand’s intention to sell virtual shoes and apparel in the metaverse, which it has since confirmed by way of its Nikeland venture on Roblox and acquisition of RTFKT. Those trademark applications include those for Nike’s swoosh logo, “Just Do It” slogan, and Air Jordan designs, among others. Further, luxury brands, such as Balenciaga and Gucci, are actively testing how they can use the metaverse to connect with “real-world” consumers and generate additional revenue.

The diverse commercial implications of the metaverse may prove difficult to regulate, and potential metaverse participants may have difficulty discerning which rights belong to which stakeholders. The potential issues and ambiguities that arise from the proliferation of digital brands and their intersection with the metaverse emphasize the need for companies operating in the video game, digital media, AR/VR, crypto, and other emerging tech spaces to develop comprehensive plans for protecting their assets and intellectual property while avoiding infringing upon the rights of others. 

Legal Considerations 

With the foregoing in mind, gaming, digital media, crypto/blockchain, and other tech organizations should pay particular attention to a few pertinent legal areas … 

Trademark Search and Registration – Technology and digital media companies whose primary focus until now likely has centered on Web 2.0, now may want to consider taking a page from Mark Zuckerberg’s Facebook and rebranding themselves as metaverse-first organizations. However, it is worth noting that rebranding a company to reflect this new focus may stir up a host of issues. For instance, a company seeking to capitalize on the popularity of words such as “meta” and “metaverse” by promoting sports brands in their gaming metaverse, could face stiff competition and/or infringe upon already-filed trademarks and copyrights. More than 800 marks already make use of “meta” as a word or prefix, and over 100 more applications for registration were filed in 2021 for similar marks. 

Furthermore, the USPTO might consider trademark applications – such as “BRANDS IN THE METAVERSE” or “SPORTS IN THE METAVERSE” – to be too generic or descriptive to be valid. 

Branding – Use and the misuse of brand names is likely to become even more rampant in the metaverse than in the physical world, which is a primary driver behind world-famous brands filing trademarks applications for virtual goods to coincide with existing registrations for their physical consumer product lines. Technology companies aiming to build out their own metaverse platforms should be aware that effective mechanisms exist for brand owners to enforce their rights. As a result, metaverse providers may find it necessary to engage dedicated staff to monitor user-generated content, investigate suspected violations, respond to cease-and-desist notices filed by legitimate trademark holders, and remove offers for counterfeit or infringing goods. At least some platforms are taking a proactive approach and providing a dedicated mechanism for brands to file notices and lodge complaints if they find instances of their trademarks being violated.

Obtaining the advice of an experienced intellectual property attorney can help these companies understand their responsibilities for policing infringements and ways they can protect themselves from becoming a party to them. A comprehensive, nuanced intellectual property policy is also extremely important for mitigating secondary liability. Specifically, a metaverse service provider that fails to incorporate a sound enforcement policy might be deemed liable for trademark infringement that takes place in its corner of the metaverse.

Licensing – Many brands and trademark owners are experimenting with ways to profit from the metaverse. Some hope to promote their goods and services, while others look to leverage the drawing power of other brands and trademarks. Whatever the business model, commercial metaverse participants and providers must be able to negotiate and document appropriate trademark licensing arrangements. For example, metaverse users can create avatars by using a variety of digital products (including branded ones), a functionality that can empower users to assume identities as realistic fictional characters in the virtual world. Absent appropriate trademark licenses, metaverse platform operators may find themselves at risk of being accused of trademark infringement as a result of user activity. 

It is critical that providers: (i) understand the scope of rights, duration, territory, exclusivity, sub-licensing, royalty rates, and other provisions of any licensing agreement they enter; and (ii) implement calendars and related procedures to ensure that applicable provisions are complied with and deadlines are met.

The metaverse provides both opportunities and challenges for providers, marketers, and brand owners seeking to engage with new audiences and increase brand loyalty via virtual goods and services. As more brands move forward with metaverse marketing strategies, developing a sound trademark strategy will ensure maximum protection and flexibility for all stakeholders. A strong trademark strategy can also help emerging technology companies monetize their existing intellectual property in the metaverse. 

David B. Hoppe is the founder and managing partner of Gamma Law, and a recognized authority on emerging legal issues in high-growth media/technology sectors, including video games and esports, blockchain and digital assets,VR/AR/XR, and digital media/entertainment.