Many people who’ve lived with the traditional rules of intellectual property during their professional lives are struggling with non-fungible tokens, or “NFTs”. I’m one, and it’s a bit of an existential crisis for us. My advice – relax and repeat after me: “this has nothing to do with copyright law.”
The existence of NFTs came to the attention of many people after Christie’s sold Beeple’s Everydays: the First 5000 Days – a collage of 5000 digital art images – for $69 million in early 2021. One of the 5000 images is at the top of this post. The purchaser was Vignesh Sundaresan, and to be precise, Sundaresan purchased this NFT in exchange for $69 million worth of Ether cryptocurrency.
What, I asked when I first heard this, did the buyer receive in exchange? I assumed the buyer received copyright title in the artwork. Or perhaps a license to the work. This was a copyright transaction involving digital art, right? Old wine in new bottles.
Wrong!
Although the subject matter of the Beeple NFT appeared to fall in the realm of copyright law – digital artwork – Mr. Sundaresan received none of these things, nor anything else that one would associate with copyright law.
Warning, blockchain jargon ahead: Mr. Sundaresan received a unique (hence “non-fungible”) crypto “token” – not to be confused with non-unique (hence “fungible”) cryptocurrencies like Bitcoin and Ethereum that can be traded on a blockchain. His purchase of this NFT was subject to a “smart contract” that you can read here (2,000+ lines of code, good luck). The token is managed (recorded, bought/sold) on a public blockchain, a decentralized, peer-to-peer network-based digital ledger system that tracks the ownership of the NFT. The token contains a link to a location on the Internet that holds a copy of the digital artwork, but there was no transfer of ownership of the artwork. Christie’s terms of sale made this clear to potential purchasers.
Beeple’s Everydays: the First 5000 Days
Let me stop now and note that, based on my reading on the subject, there’s a lot of confusion around NFTs, even among the Internet 3.0 cognoscenti. A photo or musical work created today is under copyright, and the owner (often the author, particularly in the world of NFTs) can control reproduction and public display/performance. In the world of traditional copyright transactions a buyer owns the physical copy s/he purchases. If there’s only one copy, or a limited series, the original may increase in value – this is why people invest in art.
By contrast the buyer of an NFT rarely (if ever) acquires ownership of the art work. And here we see the copyright conundrum – historically, no knowledgeable art investor would spend a large sum of money to buy a piece of digital art to which they didn’t own the copyright or a physical copy, and which could be reproduced and downloaded off the Internet with the right-click of a mouse.
This is the “legal” aspect of NFTs that leaves intellectual property lawyers perplexed – in many instances the seller of the NFT makes no promises, other than not to resell the specific NFT purchased by the buyer. The buyer owns nothing more than a fragment of code that exists on a blockchain, and a link to a website that holds an authentic copy (one hopes) of the artwork.
The point is this: in the world of NFTs – which typically involve artwork, video and music – purchasers of NFTs do not obtain any intellectual property ownership in the work associated with the NFT unless it is explicitly transferred. In the case of Beeple’s artwork, the buyer didn’t purchase the artwork and he didn’t purchase the copyrights – the buyer purchased the token, and the right to hold or resell it. The images in Beeple’s $69 million collage are all freely available on his website.
Now, lawyers, wake up! There’s good news for you. NFTs may be subject to “smart contracts.” What is a smart contract? It’s a computer program executed in the blockchain by algorithmic code when given certain data. You can see the Beeple contract linked above (the MakersTokenV2 standard), and another example here (the ERC721 standard). If you have the courage to click through you’ll see that these so-called “contracts” look nothing like traditional contracts – they are computer code.
However, with smart contracts traditional legal principles have infiltrated the world of NFTs – at least to the extent that a court can “translate” and enforce a code-based contract. The buyer and seller of the NFT can agree to copyright-like rights, either on the blockchain or even in a traditional “off-blockchain” natural language contract. They could also agree, for example, that if the token is resold a percentage of the resale price would be paid to the NFT creator, or some other third party (perhaps a charity). The smart contract would cause this to occur automatically and the designated recipient would receive payment in crypto currency without any human intervention.
So, to return to my original point – at first this is all a bit mind boggling to people steeped in traditional copyright law, but not so much if you understand that NFTs often involve works that could be the subject of traditional copyright transactions, but aren’t.
If you’ve been paying attention and think you’ve understood everything I’ve said, you may still feel confused. Don’t feel badly, almost everyone else is too. If you’d like to read further on this topic I recommend Deconstructing that $69million NFT (explaining what an NFT is, in technical detail) and the October 26, 2020 episode of the 4PC Podcast, which explains some of the legal issues involved with smart contracts.
If you still aren’t sure what an NFT is, or why people are willing to pay huge sums of money for them, I’ll leave you with copyright lawyer Rebecca Tushnet’s explanation. When asked to explain the value of a NFT she responded –
The value is the ability to say that you own the NFT. Like blockchain currency, it is worth whatever humanity collectively or individually decides it’s worth. It is a melding of Oscar Wilde and Andy Warhol, art for art’s sake and commerce for commerce’s sake.
When Massachusetts passed its complex and restrictive noncompete law in 2018 (the “Massachusetts Noncompete Act” or the “Act”) it was predictable that the use of noncompete agreements in the state would decline. See A New Era In Massachusetts Noncompete Law. And, in fact, until now there have been no reported cases that involve the Act. Anecdotally, with few exceptions employers have stopped asking employees to enter into noncompete agreements. It’s just too darn complicated.
As I summarized in my 2108 post, the Massachusetts Noncompete Act created eight requirements for a noncompetition agreement to be legally binding. Of these the most challenging (for employers and the lawyers who advise them) is the requirement that the agreement provide the employee with garden leave “or other mutually-agreed upon consideration . . . specified in the noncompetition agreement.”
“Garden leave” is a term used to describe when an employee leaving a job is required to stay away from work for a period of time while continuing to be paid. As I described in 2018 in describing the Massachusetts Noncompete Act, garden leave occurs when an employer is required “to continue paying the employee, during the restricted period on a pro rata basis, no less than 50% of the employee’s annualized base salary, thereby financially enabling the employee to putter around in her ‘garden’ during the restricted period.” In other words, a one year noncompete would require the employer to pay the employee 50% of her base salary during the year.
Garden leave can be expensive for employers. However, the law contains a loophole – it allows the employer and employee to avoid garden leave by agreeing on “other mutually-agreed upon consideration.”
What constitutes “other consideration”? Does it have to be reasonable? Could an employer buy its way out of garden leave if the employer and employee agreed that the consideration could be one dollar? Could they agree that the very job offer itself is the mutually-agreed upon consideration?
Now a decision by Judge Timothy Hillman in the Massachusetts federal district court is the first reported case to apply the Massachusetts Noncompete Law. Because it is the first case in three years, it has received a good deal of attention in the legal community – however, I see it as little more than a nothingburger, beyond being a warning to employers not to ignore the Act.
In the case – KPM Analytics Corp. v. Blue Sun Scientific, LLC – Philip Ossowski signed a noncompete with KPM in 2019, after the new law took effect. However, Ossowski’s agreement did not state that Ossowski had the right to consult with counsel prior to signing (one of the eight requirements). And, it did not contain a garden leave clause or an agreed-upon consideration that would have allowed the employer to avoid garden leave payments. Hence, the court concluded that the agreement was unenforceable by KPM.
What’s the takeaway from this case?
Well, for starters any other outcome would have been surprising. The noncompete agreement violated the “consult with counsel” requirement, and it made no mention of garden leave at all. Therefore it failed two of the eight requirements. It seems that some Massachusetts lawyers have read the decision as holding that employment alone may not provide consideration for garden leave, but to me that seems self-evident, since it would largely obliterate the garden leave requirement. In any event, Judge Hillman does not address this theory or discuss it in his opinion.
However, Massachusetts lawyers are starved for court guidance on this law – after all it’s been three years since the law took effect. The only other case to touch on garden leave in the last three years is Nuvasive, Inc. v. Day (D. Mass. May 29, 2019), which involved a noncompete that had been entered into before the effective date of the Act. The Act does not apply to noncompetes entered into prior to its enactment.
In Nuavsive Massachusetts federal district court Judge Caspar suggested that had the new law applied and garden leave required, “compensation … received from the Company (including for example monetary compensation, Company goodwill, confidential information, restricted stock units and/or specialized training)” might have satisfied the option for “other mutually-agreed upon consideration.” However, given that the law did not apply in that case this was little more than dicta. And, she provided no discussion or rationale for such a conclusion.
The bottom line is that after KPM Analytics and Nuvasive, and three years after the law took effect, we still have no guidance from the legislature or the state courts as to how an employer and employee can agree on consideration that will stand in lieu of garden leave, without the risk that the employee will argue that the consideration was inadequate and therefore the noncompete is unenforceable.
I ended my 2018 post with the comment that “lawyers will struggle to explain all of this to bewildered clients, both employers and employees, for years to come.” Three years later, nothing has changed.
When you sign up for an online service do you read the terms and conditions? Few people do, not even the lawyers that are hired to write these things. While online agreements are ridiculed for their length and complexity they are important to the online service companies – companies like Uber, Airbnb and countless others that have to deal with the risk of customer lawsuits. Companies use online agreements to protect themselves in a variety of ways – against jury trials (often by requiring arbitration), to establish the location where customer lawsuits must be filed (often the merchant’s home state), and to limit damages customers can recover.
The strange reality is that when a customer challenges the enforceability of an online agreement the courts have to disregard the fact that the customer likely wouldn’t have read the agreement no matter how it was presented. When was the last time you read the terms and conditions when registering for a service on your smartphone? If you’re like most people, never.
Assume that you were signing up for Uber on your smartphone, and after navigating through two screens where you entered your contact info and created a password you were presented with this third, final screen (click on the image for clarity):
Would you think that by creating an account you had agreed to Uber’s terms and conditions, even if you didn’t click on the “Terms & Conditions and Privacy Policy” box and never read those terms? What if I told you that the text in that box was not blue or underlined, would that make a difference? Would the fact that the top line – “By creating an Uber account, you agree to the” – is in a lighter font than the words below it – “Terms & Conditions and Privacy Policy” – have made a difference to you? Might you not have completed your registration with Uber if you’d realized that any damages claim against Uber was barred? That any legal claim had to be brought before an arbitrator rather than a court?
These factors made a big difference to the Massachusetts Supreme Judicial Court when it was presented with the question whether Uber’s online agreement formed an enforceable contract. On these facts the SJC held that no contract had been formed.
The case was brought by Christopher Kauders, a blind man who alleges that on three occasions Uber drivers discriminated by refusing to pick him up because he was accompanied by a seeing eye dog, in violation of a Massachusetts statute that protects handicapped people with dog guides. Uber claimed that during the online registration process Mr. Lauder had agreed to its terms and conditions, one of which required him to resolve any claim by arbitration, another of which absolved Uber of any monetary damages.
After a byzantine procedural history the case eventually found its way to the SJC, which held that the framework for analyzing issues of online contract formation requires a two-part test: first, was there reasonable notice of the terms, and second, did the customer provide a reasonable manifestation of assent to those terms?
While this may sound straightforward (although I doubt it), in a case like this the devil is in the details – or, as the court put it, “the trick here is to know how to apply these general principles to newer forms of contracting over the Internet.”
What is “reasonable notice”? The court explained: “In examining the interface, we evaluate the clarity and simplicity of the communication of the terms. Does the interface require the user to open the terms or make them readily available? How many steps must be taken to access the terms and conditions, and how clear and extensive is the process to access the terms?”
What is a “reasonable manifestation of assent”? According to the court, “when considering whether the user assented to the terms of the online agreement, we consider the specific actions required to manifest assent.” Not surprisingly, the court noted that clickwrap agreements are the clearest manifestation of assent.
What about an online agreement such as Uber’s, which is not a clickwrap agreement, but rather a “browsewrap”? To analyze Uber’s agreement – and ultimately reach the conclusion that a contract had not been formed – the court applied a “totality of the circumstances” test. Among the factors the court considered were –
– The nature of the online transaction
– The scope of the agreement
– The interface design
Applying this criteria the court found that factors 2 and 3 favored a finding that Uber’s online contract was not enforceable – the agreement was broad, and the interface design was inadequate to provide reasonable notice that a new subscriber was entering into a contract.
What does this mean for online service providers?
First, online service providers should pay close attention to this case, whether they are based in Massachusetts or not, since almost any online provider could be sued in Massachusetts based on principles of personal jurisdiction. As a practical matter, the most conservative state sets the “lowest common denominator” standard for online providers nationwide. After the Kauders case, and at least for the moment, Massachusetts is that state.
Second, “browsewrap” agreements are now a thing of the past. No online provider wants to go through what Uber went through in this case – having their online contracting process and content picked apart in minute detail and argued over by lawyers and judges who have shown an inexhaustible capacity to do just this. While allowing users to register via a streamlined process that doesn’t force them to scroll through terms and conditions may be desirable, it’s not worth the risk. Clickwrap agreements are now the standard for every online company.
Third, even a clickwrap agreement is not totally immune from challenge. Online providers need to be careful to structure the registration process so that the user cannot register without being presented with the online agreement in a standard font size, being required to scroll through the agreement to the bottom of the screen, and to then either check a box indicating assent (preferable) or click a link stating “I Agree.”
Postscript for lawyers and other legal beagles: Uber faced an uphill fight in this case. In 2018 the same online agreement was at issue before the First Circuit, which held that the agreement was not enforceable. Cullinane v. Uber Techs., Inc. (1st Cir. 2018). See If Everything Is Conspicuous, Nothing Is Conspicuous: Forming an Online Contract in the First Circuit (July 2, 2018). While a First Circuit decision on a matter of state contract law is not binding on the SJC, it is highly persuasive. During oral argument before the SJC Uber’s lawyer described the First Circuit’s Cullinane decision as an “outlier.” The SJC didn’t buy that, and Uber now faces trial in a Massachusetts state court.
Nestled within the Biden administration’s recent, sweeping Executive Order on Promoting Competition in the American Economy is a small, rather oblique paragraph that has garnered little attention to date. Appearing as Section 5(d), it urges the Attorney General and the Secretary of Commerce to “consider whether to revise their position on the intersection of the intellectual property and antitrust laws,” in order to “avoid the potential for anticompetitive extension of market power beyond the scope of granted patents, and to protect standard-setting processes from abuse…” And specifically, to revisit a position taken in 2019 by three agencies they supervise – the Department of Justice (DOJ), Patent and Trademark Office (PTO) and National Institute of Standards and Technology (NIST).
This short statement signals a significant shift in policy on the proper balance between the rights of the owners of patents that would be “necessarily infringed” by the implementation of a standard and the rights of those buildings product that comply with a standard. Its importance to the administration is evidenced by the fact that presidents before Donald Trump rarely made public requests of the DOJ.
I don’t know how much money Trump’s lawsuits against Facebook, Twitter, and YouTube (and their CEOs) will help him raise, or whether it will gain him political support, but I do know one thing about these cases – they have no basis in current law.
Of course it’s not outside the realm of possibility that Republican judges in Florida will see it his way, but it seems very unlikely.
At issue is the infamous Section 230 of the Communications Decency Act (CDA) – 47 USC Section 230. The relevant part of this law states:
No provider or user of an interactive computer service shall be held liable on account of–
(A) any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected
Trump argues that the companies are state actors and are required to host content protected by the First Amendment.
However, the courts have consistently held that social media companies like Facebook are not state actors subject to the First Amendment, and that their decisions to delete or block access to a user’s account fall squarely within Section 230 immunity.
Not surprisingly, the prolific Prof. Eric Goldman explains why Trump has no case in this interview by Michael Smerconish:
Prof. Goldman has a paper coming shortly which analyzes 61 prior lawsuits by users over having their account terminated or content removed. In every case Internet service providers have won lawsuits challenging termination/removal decisions:
I have a paper coming very soon which analyzed 61 prior lawsuits by users over having their account terminated or content removed. A snippet: pic.twitter.com/PbE5Z5SvCz
— Eric Goldman (he/him) (@ericgoldman) July 7, 2021
You can’t know for sure, but to say that Trump’s lawsuits are a long shot doesn’t do them justice.
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