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September 20, 2022

To Have And To Hold Until Transfer Do Us Part

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Earlier this year, actor and producer Seth Green had his Bored Ape "Fred Simian" NFT stolen through a phishing scam. He eventually bought it back for approximately $260,000, but the theft of Fred spurred a lot of debate about his ownership of the NFT and his licensing rights.

When Seth Green purchased Fred Simian, Yuga Labs, the creator of the Bored Ape Yacht Club, granted Green "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"). Examples of such Commercial Use would e.g. be the use of the Art to produce and sell merchandise products (T-Shirts etc.) displaying copies of the Art." In other words, according to Yuga Labs' Terms and Conditions, Seth Green could use his NFT for just about anything. And Seth Green planned to use his NFT Fred Simian on an upcoming television show "White Horse Tavern." However, Green's freedom to use his NFT came to an abrupt halt when Fred was "kidnapped."

Intellectual Property attorneys offered conflicting opinions across the internet: some advised that Green still would have been able to air "White Horse Tavern" even if he had not been able to recover Fred from the hacker, arguing that ownership of the NFT was not coextensive with possession of the NFT, while others advised that the two were coextensive and that Green lost his rights to use Fred in "White Horse Tavern" when Fred was kidnapped. Lucky for Green, or perhaps not-so-lucky for Green, he was able to recover Fred, and Green is now able to continue production of "White Horse Tavern." It is always prudent to consult an IP attorney to determine whether you have the right to create derivative works of your NFT (even after it's stolen) as the Terms and Conditions differ for each transaction.

After Seth Green's Bored Ape saga, last month, Yuga Labs released a new license for owners of CryptoPunks, an NFT collection acquired from Larva Labs, granting its license holders (1) full commercial IP rights (as do the Terms and Conditions of Bored Ape holders), (2) an exclusive license of the derivative work, including the right to sue others for infringement of same, (3) a right to designate a third party as the copyright owner of your derivative work, and (4) a right to register a trademark based on the actual use of your derivative work, among other rights. These new rights afforded by the 2022 license for CryptoPunks holders seem broad and potentially a solution to the question raised by the theft of Seth Green's Bored Ape (i.e., Can I continue commercializing my NFT through derivative works when my NFT has been stolen?).

However, all of these rights have been limited to what Yuga Labs calls the "License Term."

  1. Subject to your acceptance of, and compliance with, these Terms, upon lawfully acquiring Your CryptoPunk NFT and, for so long as you hold Your CryptoPunk NFT (both dates as recorded by the CryptoPunks Smart Contract) (the "License Term"), Yuga Labs grants to you an exclusive, universe-wide, royalty-free, sublicensable license to reproduce, distribute, prepare derivative works based upon, publicly display, publicly perform, transmit, and otherwise use and exploit, Your CryptoPunk Art ("License"). The License is intended to be broad, enabling you to make both commercial and non-commercial uses of Your CryptoPunk Art, in any and all media, whether existing now or invented later, subject only to restrictions set fort [in the Terms and Conditions].

  2. To the extent applicable law authorizes you to bring a claim for infringement based upon the unauthorized use of Your CryptoPunk Art [defined as the CryptoPunk Art associated with Your CryptoPunk NFT for as long as you hold your CryptoPunk NFT], you agree that: (1) any such claim shall be based solely upon the unauthorized use of Your Crypto Punk Art, not other CryptoPunk Art …

  3. Any application to obtain a copyright registration in a Derivative CryptoPunk Work may identify you or such other person you designate as the copyright owner …

  4. Any application to register a trademark in Your CryptoPunk Art must occur during the License Term and be based solely upon the actual use of the CryptoPunk Art in commerce and solely for the goods and services in connection with which Your CryptoPunk Art has actually been used in commerce …

According to the new license, the "License Term" begins when you "lawfully acquir[e] Your CryptoPunk NFT" (in Green's case, when he purchased a CryptoPunk NFT, assuming arguendo that he owns a Punk) and expires when you no longer "hold Your CryptoPunk NFT (both dates as recorded by the CryptoPunks Smart Contract)" (same assumption, in Green's case, when his Punk was kidnapped).

In other words, Yuga Labs has determined that when you no longer "hold" your NFT, your exclusive right to create derivative works ends. But this raises the question: what does it mean to "hold" an NFT? It depends on whether CryptoPunks Smart Contract is programmed in a way to record all transfers. If a hacker is able to access your wallet and force a transfer to his or her wallet, stealing your NFT, then perhaps the smart contract will record the transfer and, according to the Yuga Labs Terms and Conditions, you no longer "hold" your NFT, and your exclusive right to derivative works ends. (The illegitimate transfer does not, however, give the thief an exclusive right to derivative works of the Punk because the Terms and Conditions provide that the License Term begins when you lawfully obtain your NFT.)

While we may have hoped that the new Yuga Labs Terms and Conditions for CryptoPunks NFT holders would have provided direction on how to preserve an NFT holder's rights in response to the growing number of stolen NFTs, the question remains. Creators and consumers, alike, should be wary of the terms and conditions of their transactions, and it is always recommended to consult intellectual property or contract attorneys to determine your ownership of an NFT and licensing rights.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

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