SMEs and IP: The Biggest Challenge For Many Small Businesses—Protecting their Intellectual Property

This year the theme for World Intellectual Property (IP)Day, April 26, is “SMEs and IP”. As the World Intellectual Property Organization (WIPO) points out, SMEs (Small and Medium Sized Enterprises) are the backbone of the economy; they constitute 90 percent of the world’s businesses and employ around 50 percent of the global workforce, generating up to 40 percent of national income in many developing economies. Many micro and small businesses depend on their creativity and innovation to establish a niche for themselves in a competitive marketplace. At the same time, they often face major challenges in protecting their unique creations because they generally lack the wherewithal—knowledge, time, money—necessary to protect their IP. This has been demonstrated time and time again and is an important factor that needs to be taken into account when discussing the importance of IP to small businesses. While many national and international IP authorities focus on the lack of capability to access and incorporate IP into product development–or to properly manage IP–as the major challenges faced by SMEs, their limited ability to protect the IP they already have is also an important issue of concern.

But first what is an SME? There are various definitions of an SME; the European Commission defines a Medium Sized Enterprise as a company having less than 250 employees and an annual turnover of 50 million Euros or less (about $60 million USD), a Small Sized Enterprise as having less than 50 employees and a turnover of less than 10 million Euros and a Micro Sized Enterprise as one having less than 10 employees and an annual revenue of less than 2 million Euros. Many of the companies in this sector are micro-enterprises with just one or two people working to generate income, and indeed, the new term of art incorporates micro enterprises into the acronym as MSMEs (Micro, Small and Medium Sized Enterprises). Many micro enterprises, estimated at about one-quarter of the total, are run by women entrepreneurs and are an important vehicle for social and economic development and greater gender equity.

A few years ago I wrote a blog posting about knitting, crocheting, publishing and copyright featuring Joanne Seiff, a Winnipeg-based author and knitwear designer who was, in effect, running her own MSME. Knitting is a hobby and an industry where most of the players are women, and it is an activity that is growing, spurred on in part by the lockdowns of COVID.  The Craft Yarn Council reports that over 50 million people in the US knit or crochet. Knitters are motivated by many things and come from all regions and all age groups. Even young children can be introduced to knitting through use of creative instructional techniques such as setting knitting rhythms to nursery rhymes. While most of the participants in knitting do it a hobby to make items for family, or to raise funds for charity or just to relax, there is a business—an IP related business— behind knitting and writing about knitting. There are some big players but many who earn revenue from knitting-related activities are micro businesses. And this is where protecting IP becomes a challenge.

Knitwear designs are creative works protected by copyright. Creating, editing, distributing and selling new designs is an essential part of the industry, just as important as selling wool, needles and the other accoutrements of the trade. Unfortunately, designs are often copied and distributed, sometimes unthinkingly, as a form of unauthorized “sharing”. When I wrote my first blog on this topic back in 2016, Joanne commented that, in her experience, copyright violation in knitting and crocheting is frequently disparaged as unimportant because it is a predominantly (but not exclusively) female industry. It is seen by some as a “cottage industry” with women earning “pin money” and therefore not taken seriously.

I recently reconnected with Joanne to see how things were going in the era of COVID. She said it is still a challenging business-albeit one that she seems to really enjoy. As with any business, there is upfront investment in the hopes of hitting the jackpot with a design that takes off. She pointed out that it is time intensive to develop and make the sample for each pattern (and have it photographed, written up, tech edited, uploaded online to various sites and then marketed), with each pattern that is downloaded yielding around $5 to $10. A pattern needs to sell a lot of copies over time to break even or make money—but if just one percent of Americans who knit bought a particular pattern once and paid $10 for it, that would amount to…..$5 million! Not too shabby.

While not every micro-business is a success, any more than every multi-national enterprise is successful, there are some encouraging examples. One of these is Kate Davies Designs, a Scottish enterprise founded by Kate Davies in 2010 that has now grown into a successful small business that was named UK Microbusiness of the Year in 2016.  KDD & Co. now encompasses many different aspects of publishing, design, and creative practice related to yarn and knitting. Another is Denise Bayron’s business, Bayron Handmade, in California. Yet another is Sarah Schira, of Imagined Landscapes, in Manitoba.

When it comes theft of IP, the problem is that the more successful a pattern, the more likely it will be infringed. In Joanne’s words, there are sites in Russia and elsewhere that steal the designer’s photos, buy or steal one pattern, perhaps translate it, and then sell it online. Then there are those such as the occasional knitter who feels that if she paid for that “cute bunny knitting pattern” once, she can make dozens of the bunnies and then sell them at craft sales.  This is not technically against the law, but it goes against the intent of the designer who sells the $5 for single use only.  Some people look at the design and reverse engineer it. Human “ingenuity” has no bounds when it comes to trying to get something for “free”.  So how can micro businesses protect the IP that is the stuff and substance of their product offering.

In Joanne’s view, there has to be sufficient capital available to invest in IP protection at the beginning of the process. Shortage of capital is a perennial problem for small businesses, who have to make difficult decisions as to where to allocate scarce funds. Product design, better distribution or legal fees to protect IP? Some small businesses have enough money upfront to protect their product (through patents, copyright, registered designs, etc) and to fund the legal support to fight the battles on the business’ behalf. But unfortunately, most knitting designers (writers, artists, etc.) are never in this category.  For many people who have a very small business, there’s not enough income up front to do anything preventative from the outset.  Further, when something goes wrong, there’s not enough money to follow up properly with legal action.

It is not just pattern designers who face this dilemma. Many writers, graphic artists and musicians, as soon as they start to enjoy some sort of success, face the same challenge of monitoring infringement, chasing it down, sending notices to online sellers and distribution platforms, (usually while trying to avoid incurring legal bills by not engaging a law firm), all while trying to continue to create and produce appealing new content. This is the curse of the small or micro business and the independent artist.

If governments want to help SMEs and empower the small business sector, they need to find ways to allow small businesses to protect their IP without breaking the bank. That is the prime motivation for the passage of the CASE Act in the US (Copyright Alternative in Small-Claims Enforcement Act of 2019), which was enacted in January of this year. Once operative, it will establish an alternate form of settling copyright infringement claims (think, “small claims court” for copyright cases) to allow rights-holders to avoid the costs of litigation in a federal court. Under the CASE Act, a Copyright Claims Board will be established within the US Copyright Office. The process is voluntary (the plaintiff must choose to use the Board and the respondent must agree), statutory damages are limited to $15,000 per work or $30,000 per case and the work in question must be registered with the Copyright Office.

The CASE Act is one example. In the UK there is the Intellectual Property Enterprise Court (IPEC) which has the capacity to perform much the same function. According to IPEC, the small claims track within the court provides “a forum with simpler procedures by which the most straightforward intellectual property claims with a low financial value can be decided:

• without the need for parties to be legally represented

• without substantial pre-hearing preparation

• without the formalities of a traditional trial and

• without the parties putting themselves at risk of anything but very limited costs.”

That is the sort of facility that small businesses need, but a streamlined legal process only works when the perpetrator (or suspected perpetrator) is known. Much infringement takes place online, where perpetrators can hide their true identity. To combat this kind of infringement, both platforms (like Amazon) and governments have a role to play. My brother, a successful indie author who has published several e-books on Kindle through Amazon, discovered that one of his more successful books was being pirated (by definition, only successful books get pirated) and listed on Goodreads (owned by Amazon).   It was also a Kindle edition, with only a slight spelling change in the title. He brought it to Amazon’s attention whose response was to suggest he contact the website (which Amazon owns) and consider applying DRM (digital rights management) to the work. DRM is one solution but is easily stripped off the work. In fact, when I searched “DRM and Kindle”, the first listing on Google was “Remove the DRM from Kindle Books”. If you do decide to list your work on Amazon, the platform has a form you can submit to report infringement. How much is done about it by Amazon is another question.

Given the prevalence of online copyright infringement, any means that helps interrupt the distribution of pirated content is helpful. In this regard, various forms of site-blocking that have been instituted in a number of countries are a useful tool. (My World IP Day blog last year focused on the need to forge a global solution to the problem of global piracy by expanding site blocking). Site blocking in some countries (UK, Australia, Canada—just one case so far) is triggered only through the courts—a process which favours complainants with the means to pursue legal action, normally large companies. However, in some other countries (Portugal, Italy, Korea, for example) there is a relatively simple administrative process in place that allows rights-holders to seek a site blocking order, making it more accessible to SMEs. Site blocking orders require ISPs to block offshore web and streaming sites that promote and distribute infringing pirated content. In Canada a number of content owners tried unsuccessfully to petition for the establishment of an administrative site blocking review entity (the Independent Piracy Review Agency) operating under the oversight of the telecommunications and broadcast regulator, the CRTC, but were unsuccessful when the CRTC determined that establishment of such an agency was beyond its mandate. The problem, however, has not gone away and is now being resolved through the courts.

To come back to SMEs—they face many challenges; underfunding, difficulties in distribution, and issues related to IP, both access to innovation and protection of IP they have developed. For small businesses that require access to patented knowledge, mechanisms and concepts such as open innovation and various technical support programs offered by national governments and WIPO can help. For copyright based small businesses, the biggest IP challenge is fighting piracy with minimal available resources. The more that governments can do to facilitate enforcement action and lighten the burden on rights-holders seeking to protect and enforce their rights, the better.

As Joanne Seiff summed it up, “yes, SMEs can definitely succeed if enabled by good IP protection”. That is a big “if” and a good reminder to all concerned as we mark World IP Day.

© Hugh Stephens, 2021. All Rights Reserved.

The 2021 Global IP Index Report: Implications for Copyright

Credit: US Chamber of Commerce. Used with permission

The US Chamber of Commerce’s Global Innovation Policy Center (GIPC) has just published its 9th annual report assessing and ranking the intellectual property (IP) policies of 53 countries worldwide against a set of performance indicators, 50 in all. IP policies and practices are evaluated in nine categories, covering patents, copyrights, trademarks, design rights, trade secrets, commercialization of IP assets, enforcement, systemic efficiency and membership in international IP treaties. Each category has a set of specific sub-criteria against which each economy is evaluated. In the case of copyright, the seven sub-categories are term of protection, exclusive rights, injunctive-type relief, cooperative action against piracy, limitations and exceptions, digital rights management, and government use of licensed software. There is a detailed report on each of the 53 economies, a chapter summarizing the global IP environment in 2020 and chapters highlighting key issues in each of the categories. Produced for the Chamber by the consulting firm Pugatch Consilium, it is truly a magistral work, an amazing compendium of information and insights.

Current Trends

While the country rankings are interesting, it is the trends as much as the rankings that are important. In 2020, GIPC concluded that 60 percent of the 53 countries measured improved their overall scores over the previous year, with an overall improvement rate of over six percent since 2014, with improvement rates in many large developing countries exceeding that substantially. The score for China, for example, has improved by 18 percent over that period while India’s has increased by 13 percent. This year the report understandably focusses on the role of IP industries in meeting the challenges of COVID-19, from the rapid development of vaccines to the role of digital industries in keeping us connected and sane during periods of COVID lockdown. In particular, the research-based pharmaceutical industry has stepped up to meet the challenge of developing several vaccines in a historically short period of time, and then producing them to scale. The report states clearly what must surely be an intuitive conclusion for most people, namely that “economies with stronger national IP environments have higher levels of innovation capacity and produce more innovation in the form of new products and technologies”.

I last wrote about the GIPC Index Report in 2017 and 2018, focusing primarily on its copyright aspects, as I will do today. Not having looked at it closely for the past three years, I thought it was time to see what has changed, what progress has been made, and what new challenges have surfaced, particularly with respect to the copyright world. The report notes that there continues to be a challenging environment for creators and copyright holders in the majority of the economies sampled, with 32 of the 53 economies failing to reach a score of 50%. The scores (out of 100) ranged from a high of 96.43 for the US to a low of 18.29 for Vietnam. Some economically advanced countries, like Switzerland, scored below the 50 percent mark, and there is an extensive discussion of the problems with protection of copyright in Switzerland in the Copyright chapter.

Copyright in Switzerland

The problem has to do with a loophole in Swiss law related to the protection of personal data that makes it difficult to combat online infringement, leading to the country becoming a preferred location for pirate sites. Also, there is a private use exception allowing downloading even if the material downloaded is infringing, and there are no injunctive relief (site blocking) measures. Overall, Switzerland scores just 48.29 in the copyright category although it scores highly in other categories and is ranked 9th overall out of 53.

Effect of Trade Agreements

One of the Report’s key findings is that “trade agreements continue to substantively improve national IP frameworks. That is certainly true with respect to trade agreements signed by the United States given that strengthening of IP protection is always one of the prime negotiating goals of the US Trade Representative, the US trade negotiator. However, even in the case of trade agreements not involving the US this principle holds generally true, although perhaps not to the same extent as with agreements to which the US is a party. The recent Regional Comprehensive Economic Partnership (RCEP) Agreement is a case in point. Although its IP chapter was not the most sophisticated or far-reaching, it nevertheless marked a positive step forward in terms of levelling up standards of IP awareness, compliance and commitments across 15 economies of varied size and development in the Asia-Pacific region.

A major trade agreement cited in the GIPC Report is the new NAFTA (aka USMCA/CUSMA) Agreement, which has led to positive copyright changes in both Canada and Mexico.

Canada and the CUSMA/USMCA

In the case of Canada (which scored 16th overall and 19th in the copyright category, at 57.71), the report notes that under the terms of the CUSMA/USMCA, Canada extended the terms of “some” copyright terms to 75 years. This actually relates to a very minor category of works (anonymous and pseudonymous works) where, if the identity of an author is unknown and the work is unpublished, the work will now be protected for 75 years following its creation (an increase from 50 years of protection). If it is published during this period, copyright will subsist for a further period of 75 years from the date of publication.  However, if the author becomes known, copyright reverts to life of the author plus 50 years, the current period of protection. But that is going to change by the end of 2022 at the latest as Canada made another commitment in the USMCA that has not yet been brought into effect, namely to extend the term of copyright protection for a known, published work by an additional twenty years beyond the date of death of the author, from “life plus 50 to “life plus 70”.  

How exactly that is going to happen is currently the subject of a public consultation, as I noted in a recent blog (Canada’s Copyright Term Extension Consultation: Why all the Tinkering Around the Edges?)  with various options being floated to deal with orphan works (where the author is unknown or cannot be located), as well as out-of-commerce works. There is also the outside possibility that extension of the term of protection will be made subject to a registration requirement, an additional bureaucratic hurdle advocated by some copyright minimalists. This would be a mistake, and happily the language in the government’s consultation paper seems to suggest that this is not a favoured option.  Presumably when the “life plus 70” standard comes into effect, Canada’s score under the “term of protection” indicator will increase further.

Mexico and the USMCA

Mexico (23rd overall, 20th in copyright at 54.14) also comes in for a shout-out owing to USMCA commitments in the copyright area. Changes to Mexican law as a result of USMCA commitments include a new notification system for removal of infringing online content, provisions outlawing the use, manufacture, sale, importation and distribution of DRM (digital rights management) and technical circumvention devices, and making illegal the use, manufacture, and sale of satellite signal decoders. These are all incremental steps toward a better environment for the protection of copyrighted content in Mexico, although there is still room for improvement.

China

Other countries singled out in the copyright section include China, Saudi Arabia, Ukraine and Costa Rica. China (24th overall, 25th in copyright at 43.29) introduced a number of changes to strengthen its copyright laws as a result of bilateral discussions with the US in 2020, among them new definitions of copyrightable material, clearer definitions of performance rights, sound recording and broadcasting, and increases to statutory damages for copyright infringement.

Saudi Arabia

Saudi Arabia (37th overall, 31st in copyright at 36.14) was given credit by GIPC for stronger enforcement efforts. This is a welcome change as the Kingdom has long been a hotbed of piracy, including state-sponsored signal theft directed at Qatar’s BeIN Sports Network. This was done primarily for political reasons as I noted in my blog post on “Content Piracy as Hybrid Warfare”. This situation now seems to have been resolved after a World Trade Organization (WTO) panel ruled against the Saudis and found them in violation of WTO rules by virtue of failing to protect the intellectual property (broadcast signals) of an entity based in another WTO member state (Qatar). For this and other reasons, the Saudis finally took action to block a number of websites that had been distributing Illicit Streaming Devices (ISDs) that were providing access to a Saudi-based pirate sports network (protected by senior Saudi officials) competing with BeIN Sports.

Use of Unlicensed Software

Government use of unlicensed software is the big copyright issue in both Ukraine (39th overall, 43rd in copyright at 26.14) and Costa Rica (25th overall, 22nd in copyright at 49.86), with Ukraine failing to make any progress over the past eight years despite an official edict requiring government offices to use only licensed software. Costa Rica, on the other hand, has managed to get a handle on the problem by implementing a new automated registration, compliance and software asset management platform, allowing all ministries and government organizations to file annual software audits and proof of licensing compliance. This is a good example of how simply passing a law requiring government entities to acquire software licences has no effect without a concrete and enforceable implementation and monitoring plan. Costa Rica has figured this out; Ukraine is either unable or unwilling to do so.

Conclusion

In addition to analysis of IP performance by category, the GIPC Index includes detailed country reports on all 53 economies included in the survey. This makes it an invaluable comparative resource. Whether you want to know more about the state of enforcement in Algeria, systemic efficiency in Morocco or how copyright is protected (or not) in Venezuela, it is all here, along with a complete explanation of how the various indicators were assessed and scored. I have mentioned the scores of the countries highlighted in the copyright section, but if you want to know how “your country” fared you can check the results quickly by going to the Executive Summary of the Report.

Let’s hope the trend of steady improvement seen over the past several years continues, in the area of copyright as well as the other aspects of intellectual property measured by the Index. Kudos to GIPC for producing this invaluable report.

© Hugh Stephens 2021. All Rights Reserved.

Caillou: Did the Little Boy’s Bad Temper Spill Over to the Copyright Squabble between his two “Mothers”?

Credit: Flyclipart.com

Early this year PBS announced that it would cease to carry the Canadian animated children’s TV show “Caillou” (which means “pebbles” in French) after twenty years on the network. Since Caillou is a series not without controversy, some parents no doubt breathed a sigh of relief while others pondered their electronic babysitting options.

To those of you who don’t have young children in your life (at the moment or previously), Caillou may not be on your radar. There is a whole world out there—characters, vocabulary, controversy—forming part of the children’s entertainment scene that is familiar to many, and almost unknown to others. If you have had children, or looked after young children—yours, those of others, your grandkids etc.—names like Dora the Explorer, Peppa Pig, Curious George and, of course, Caillou, will be well known to you. How else to get through the period of preparing dinner with a four-year old around your ankles?

The demise of Caillou on PBS—it will continue to be broadcast on the Family Jr. channel in Canada and may be picked up by some other outlet in the US—will no doubt not end the controversy over the main character’s behaviour. Parents either love or loathe the little bald boy. Caillou was produced between 1997 and 2010 under licence to CINAR and has aired in 70 countries around the world. The books on which the series is based have been translated into over a dozen languages and sold 15 million copies. This makes it one of the more successful Canadian cultural exports, although some who dislike Caillou’s behaviour when he is frustrated have wondered whether his occasional histrionics reflect lax parenting standards in Canada. The smouldering discontent with Caillou burst into open flames a couple of years ago when he was featured in one of Canada’s two national dailies, the National Post, under the title, “Caillou is an aggressively bad show ruining the world’s children … and it’s all Canada’s fault”.

To parents who don’t like Caillou’s portrayal of a four-year old’s behaviour, I say, “change the channel”. Maybe four and five year old kids enjoy watching a show that portrays how someone their age actually reacts to things beyond their control rather than having to absorb a morality play. I must say I have never been able to force myself to actually watch a full episode of Caillou—although I have read the newspaper or books while it has been on the screen and have thus listened with one ear—but I don’t recall anything especially obnoxious. I do recall certain homilies and virtues being emphasized, but I don’t think that my grand-daughter’s behaviour was any better—or worse—for having watched it. All I know is that she enjoyed it and, for a certain period of her young life, when asked what she wanted to watch on TV, the response was invariably “Caillou!”.

While Caillou has generated lots of controversy among parents and even child psychologists, it also has an interesting legal and copyright history which, no surprise, is why I am blogging about it here. Caillou was created by Quebec writer Christine L’Heureux in 1989. L’Heureux had founded Chouette Publishing two years earlier. The Caillou books were illustrated by artist Hélène Desputeaux. Like so many artistic collaborators (Gilbert and Sullivan, Simon and Garfunkel, Abbot and Costello…) L’Heureux and Desputeaux had a falling out. And, yes, it was about copyright, and money.

As with many cases of this nature it is complicated. Originally the two (Chouette Publishing of which L’Heureux was the majority shareholder on the one hand and Desputeaux on the other) formed a partnership for the purpose of creating the books. They entered into contracts with each other as co-authors, including assigning the reproduction rights for the use of the Caillou character to Chouette Publishing. This covered merchandising and audiovisual works. Desputeaux was to be paid if she provided illustrations for any works using the character. Moral rights were waived by both parties. Subsequently there was a dispute over the terms of the contracts. The dispute went to arbitration under Quebec’s civil code. The arbitrator upheld the contracts, concluded that Chouette held the reproduction rights and determined that the work was of joint authorship (copyright held jointly) because both parties had signed the contracts as co-authors. Desputeaux’s position was that she held the sole copyright for the illustrations of the Caillou character and in the character itself.

Desputeaux challenged the arbitral decision and asked the Quebec Superior Court to annul it. She argued that the arbitrator had exceeded his mandate and, rather than just ruling on the validity of the contracts, had intervened on the question of intellectual property and the status of the parties as co-authors. Her challenge was dismissed and the Superior Court upheld the arbitral decision. Desputeaux then appealed to the Quebec Court of Appeal, where she had better results. The Court of Appeal upheld her appeal, ruling that any determination of copyright fell within the domain of the federal government under the Copyright Act and was not subject to provincial arbitration.

At this point, we need to step back briefly into history and look at the Quebec Code of Civil Procedure under which the arbitration took place. The Quebec civil code goes back to the Quebec Act of 1774 which reinstated French law in civil matters as part of an attempt to win the loyalty of French Canadians by preserving the French language and French institutions (civil law and role of the church) after the British conquest. British law had prevailed during the brief period from 1763, when France ceded control of Quebec to Britain, and the passage of the Quebec Act. A civil code ultimately based on the Napoleonic Codes in France was formally adopted in Quebec (Lower Canada) in the 1860s and, with minor changes and updates, has prevailed in Quebec ever since, operating alongside British criminal law principles and federal laws. The civil code required arbitration in matters of disputes between professional artists and promoters.

With the provincial Court of Appeal having ruled in favour of Desputeaux the illustrator, L’Heureux and Chouette appealed that decision to the Supreme Court of Canada (SCC). The SCC ultimately determined that the federal Copyright Act does not prevent an arbitrator from ruling on the question of copyright. The arbitrator’s mandate includes everything closely connected with the agreement they are adjudicating and in this case, the question of co-authorship was intrinsically related to other questions raised within the terms of the agreement in question. Even though copyright affirms rights against all third parties globally, two parties to a copyright dispute should not be denied the right to arbitration, the SCC ruled. L’Heureux’s appeal and joint authorship was upheld. A more learned explanation of the outcome of the case can be found here.

It doesn’t end there, however. Two years after the SCC ruling, the two parties were back in court again but finally reached an agreement which remained confidential for ten years until it was released in 2015. Basically, this agreement affirmed Desputeaux’s rights to her original illustrations of Caillou but gave Chouette permission to license and create subsequent versions, including through its agreement with CINAR for the animated television production. Desputeaux was to be granted a percentage of the royalties. Desputeaux agreed to limit production of Caillou depictions for a 5 year period. Was this the final end to the dispute? Regrettably, it was not.

As outlined in a blog posting just two years ago “This Precedent-Setting Cartoon is Back at it Again”, Desputeaux subsequently applied for a judicial declaration that L’Heureux had no claim to co-authorship of Caillou following the 2005 settlement agreement. She wanted the Court to declare that the 2005 settlement agreement prevailed over the original arbitral decision and that its terms precluded L’Heureux from claiming moral rights in the works or to be their co-author. The application was dismissed in November 2018 on the basis that this was a disguised form of appeal of a case that had already been decided by the SCC. It’s never over until it’s over, as they say.  

How is it all going to end? I know that Caillou believes in “sharing” because I have heard him say so. But what constitutes a fair share can depend on your perspective, which perhaps explains why Caillou’s bad temper seems to have rubbed off on his creators.  More than two decades of copyright litigation has surrounded this little character who continues to either enthrall or enrage parents and kids—and his co-authors as well. Maybe there is a moral lesson hidden in there somewhere.

© Hugh Stephens 2021. All Rights Reserved.

NFTs and Copyright

Credit: author

The English language is constantly being transformed by the addition of new words, meanings, terms and acronyms. It is hard to keep up sometimes. The latest to crowd into my consciousness is “NFT”. While the expression NFW (you can look it up and no, it doesn’t stand for Nashville Flower Week) is quite familiar to me, WTF is NFT? And does it have anything to do with copyright? Of course it does, you say, or else he wouldn’t be blogging about it.

An NFT is a “non-fungible token”, the digital phenomenon that has taken off in recent weeks as wealthy investors purchase, often at art auctions, digital representations of “something”. Rather than try to explain it, I will crib from someone who undoubtedly knows more about NFTs than I do. As explained by Luke Heemsbergen, a Ph.D candidate at Deakin University in Melbourne, in his blog “NFTs Explained: What They Are and Why They Are Selling for Millions of Dollars”;

“NFTs are digital certificates that authenticate a claim of ownership to an asset and allow it to be transferred or sold. The certificates are secured with blockchain technology similar to what underpins Bitcoin and other cryptocurrencies…  (Unlike Bitcoin) NFTs are by definition non-fungible, and thus, are deployed as individual chains of ownership to track a specific asset….   NFTs are designed to uniquely restrict and represent a unique claim on an asset. And that is precisely where things get weird: often, NFTs are used to claim “ownership” of a digital asset that is otherwise completely copiable, paste-able and shareable, such as a movie, JPEG, or other digital file”.

NFTs can be bought and sold (for a lot of money—usually cryptocurrency), as shown by the example of the token created by digital artist Beeple (Mike Winkelmann) and sold to an anonymous buyer for $69 million through auction house Christie’s in early March. They exist only digitally but unlike most digital images they cannot be duplicated as each has a unique digital signature, although a semblance of the NFT can certainly be reproduced. Basketball fans can buy unique NFTs of video game highlights of NBA games, a collectible that can be traded or sold, even though the same video clip can be viewed for free on Youtube. But the NFT owned by the fan is identified and unique. I guess it is a bit like anyone being able to see Monet’s Artist’s Garden at Giverney in an art magazine or even on the internet, but the one and only original is in the Musée d’Orsay in Paris.

An NFT can be made out of just about anything digital—images, text (Jack Dorsey’s first Tweet), videos, music, etc. and just like the famous Dutch tulip bulb is a product of scarcity. It has value because someone will pay something for it, in the expectation that in future it can be sold to someone else who will be willing to pay even more for it.

How about the role of copyright with respect to NFTs?

One thing is certain. It is the creator of the artwork or music in an NFT who owns the copyright to the underlying work, not the purchaser unless the sale includes the sale of certain rights.  In many cases, even though the buyer is the sole owner of a particular NFT, the artist who created the work to which the NFT is linked could continue to produce copies of the work. One legal blog illustrates the limits of an NFT owner’s copyright by using the following example;

“Unless the NFT owner has received explicit permission from the seller, the NFT owner does not automatically acquire the legal right to take pictures of the creative work attached to the NFT and make T-shirts or postcards for sale.”

Can the NFT itself be copyrighted? The answer is unclear but it is unlikely because the NFT itself (i.e. the certificate of ownership) is not a creative work. Some people have compared it to a deed to a house, but not the actual house. The NFT gives title to the underlying work but normally is not the work itself. (There are some exceptions when an original piece of art is uploaded directly into the blockchain but this is unusual because, as explained here, the cost of writing data into the blockchain is often prohibitive).

What about NFTs based on works created by a team, or by employees in the course of employment or by AI machines?  The answer to these questions is the same with respect to other tangible works, it depends on the circumstances, except that a machine cannot hold a copyright. There has to be a human creator behind the AI.  

This raises an intriguing question with regard to the NFT created by the humanoid robot “Sophia” that was put up for sale in an online auction at the end of March. The underlying art is based on a collaboration between Sophia and Italian digital artist Andrea Boneceto, with Sophia shown manipulating Boneceto’s original creations to produce something new. The NFT of the work will not include the copyright which pershaps will belong jointly to Boneceto and David Hanson, the owner and founder of Hanson Robotics, Sophia’s creator. It will be interesting to find out.

Can the copyright of the underlying work be transferred to the owner of the NFT? That question has been pondered by legal experts; the conclusion seems to be yes, although the actual modalities of transferring a Blockchain-verified digital file written in software code might be complicated. A rights-holder might also choose to license certain, but not all, of their rights associated with an NFT. A key element in the process is ensuring the integrity of the link between the NFT and the underlying work in order to be certain that any given NFT actually represents the art on display.

NFTs offer some potentially exciting new advantages to artists in terms of copyright tracking, as well as greater returns from selling the copyright. As I wrote in a blog posting about a year ago (Blockchain and Copyright: How can this new Technology serve Creators?), blockchains can be a useful tool to enable tracking of authorship attribution, and thus attribution of royalties, as well as monitoring of use of copyrighted materials. They enable digital music distribution companies like Bluebox to flow royalties back to rights-holders more efficiently. With respect to NFTs, these are now being exchanged through the Bluebox platform. As reported by Bloomberg, one technique is to split each song into multiple NFTs, each representing a one percent split of the song’s copyright, half of which will be sold to the public. In this way, fans could purchase “bits” of recordings to help propel their favourite artists to the top of the charts, and then potentially resell their NFT for a profit.

However, it is not all smooth sailing. Artists have found their work appropriated by sellers of NFTs, without permission. It’s a bit like finding your art work adorning posters and T-shirts being sold on the internet, all without permission or licensing. NFTs have their downsides but still, they offer a new revenue-stream for some artists, as long as they can protect their copyright.

NFTs also raise ethical concerns for some artists because of the huge amounts of energy required to power blockchain transactions. Environmental responsibility is a big issue for some artists and consumers and, believe it or not, the way in which content is distributed and consumed can have a significant impact on one’s carbon footprint.

Coming back to copyright, it should be entirely possible for the laws and principles of copyright to be adaptable to works of art that have become digital tokens. However, there are still many unanswered legal questions related to NFTs, several of them involving copyright, others contractual terms. One US legal firm has outlined a number of them in the context of US law;

  • What rights and remedies does a creator have if their work is tokenized without their permission?
  • How can platforms, issuers, and IP owners enforce their rights and remedies against NFT owners in violation of license terms and contractual restrictions?
  • How do you clearly and conspicuously “attach” terms and conditions to an NFT and ensure that those terms follow the NFT and bind subsequent owners?
  • What right of publicity and SAG (Screen Actors Guild) issues are triggered by the tokenization of an asset that includes an individual’s image, likeness, voice, or performance?
  • How do moral rights impact NFTs in the U.S. and abroad? Does the Visual Artists Rights Act (VARA) apply, or should it? (Comment: VARA protects the moral rights of artists in the US).
  • What rights and remedies does an NFT owner have, and against whom, if the underlying asset disappears or changes? (Comment: This could happen if the entity hosting the NFT went out of business or dropped its internet registration).
  • How does the first sale doctrine (17 U.S.C. § 109) operate in the world of NFTs? (Comment: It probably doesn’t since the first sale doctrine does not apply to digital works).
  • How do copyright terminations work in a world of NFTs that is designed to last for eternity?

I certainly don’t know the answers to these questions and I am not sure that anyone does. However, the author of the blog that I have referenced above, Jeremy Goldman of Frankfurt, Furnit, Klein and Selz PC in New York would be more than happy to help you figure it all out. For a fee of course. There, Jeremy, some free publicity in return for providing such a thoughtful piece on the issue of NFTs and copyright. Thank you.

There are a host of challenging and as yet undefined issues when it comes to the sale and monetization of NFTs.  Will NFTs, like the Dutch tulip bulbs of the 17th century flame out, or are they here to stay as part of our digital world? Only time will tell. In the meantime, Beeple has cashed in “big-time” for his digital token “Everydays: The First 5000 Days”. Will his benefactor be so lucky in future? WTHDIK?

© Hugh Stephens 2021. All Rights Reserved.