A digital image NFT titled ‘EVERYDAYS: THE FIRST 5000 DAYS’ sold at Christie’s for US$69.3 million in 2021. Other spectacular NFT sales have since followed. This development opens up new opportunities for artists. They can trade their works in new markets and offer them to a wider audience. Due to the growing popularity of NFTs, there is a growing debate about whether authors of digital artworks can claim a resale right and receive a post-resale royalty.
What is resale right and how do authors of works of art benefit from it?
The idea behind a resale right is as follows: authors of works of art generally receive a one-time payment when their work is sold. They do not participate in its eventual subsequent success. The same goes for authors if their work is linked to an NFT. Once the NFT is sold, they normally have no way to participate financially in its future success. In this respect, their situation differs from that of other art creators, since literary or musical works offer continuous possibilities of financial participation (royalties) due to their various types of use.
A resale right is provided for by Article 16b of the Austrian Copyright Act, which itself is a transposition of Directive 2001/84/EC into national law. In the event of resale of an original work and with the involvement of a representative of the art market in the transaction, the author of the work may claim a resale right from the seller. For Austria, the royalty amounts to EUR 12,500 for each resale. The specific amount depends on the percentage of the net selling price, which is decreasing and varies from 4% to 0.25%. The resale right cannot be waived by the author.
Does the resale right apply to NFTs?
Since an NFT is intended to create a digital original of a work of art, the applicability of the resale right may seem obvious at first glance. However, according to Article 16b of the Austrian Copyright Act implementing Articles 1 to 5 of Directive 2001/84/EC, a work of art is an original if it (i) was created by the author himself; (ii) was produced by the author himself or under his direction in a limited edition, for which his signature or another form of authorization is required; (iii) may otherwise be considered an original. It is debatable whether an NFT fits this definition, mainly because an NFT is not the work of art itself, but only its representation. The sale of an NFT is therefore probably not a sale of a work of art, but the reassignment of a set of data in the blockchain. However, such a sale usually includes a licensing agreement regarding the digital artwork. Depending on the specific form of the agreement, the sale of the NFT could therefore be considered a sale of an original work of art and constitute a resale right.
Another aspect that must be considered is whether the legal requirements for a work of art can be qualified as such. Recital 2 of Directive 2001/84/EC states:
The object of the resale right is the material work, namely the medium in which the protected work is incorporated.
It follows that to claim the resale right, the artwork must be original and must exist in physical form. As is generally not the case with NFTs, authors will have difficulty successfully claiming royalties from resales of digital or digitized artworks. Nevertheless, in cases where an NFT is also physically transferred, authors have a reasonable chance of asserting resale rights. A possible use case is the further transfer of the NFT to a data carrier such as a USB stick. Another would be the placement of the NFT pattern on merchandise items.
It should be mentioned that due to the growing popularity of NFTs and digital art in general, some of the legal issues involved may be subject to a ruling by the Court of Justice of the European Union at the to come up.
NFT smart contract review needed
When selling NFTs, the owner of NFTs should take into account that authors of works of art do not necessarily need to fulfill the legal requirements in order to be able to claim a resale right. It is possible to program a smart contract assigned to an NFT to enforce the payment of a certain percentage of the price at which the NFT was sold. In the event that the owner of the NFT is not the same person as the author of the work, the agreement contained in the smart contract must be carefully examined to determine whether the underlying terms of sale offer appropriate safeguards to the owner. Otherwise, the owner of the NFT could face demands for payment of royalties in an amount set by the author in the smart contract and be subjected to an automated process of executing the payment.