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.
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