The Laboratorium (3d ser.)

A blog by James Grimmelmann

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Posts about law

Some Skepticism About NFT Copyright

I am participating today in the Copyright Office’s NFT Roundtable. Here is the text of my (brief) opening remarks:

Good morning, and thank you. I’m a professor at Cornell Law School and Cornell Tech. I would like to make one point, at a high level of abstraction. It may seem obvious, but I think it is urgent not to lose sight of.

One promise of blockchain is that it is a perfect paper trail. But all paper trails can fail. Sometimes this is because of technical failures in a record-keeping system itself, which is the problem that blockchain attempts to address. But more often it is because the information that parties attempt to record never corresponded to reality in the first place.

Some transactions that look valid on paper are not, because of forgery, fraud, duress, or mistake. And some otherwise valid transactions are imperfectly documented: perhaps the contract was signed in the wrong place. If a transactional form is used enough times, everything that can go wrong with it eventually will.

The legal system deals with these cases all the time. When the facts on the ground and the records in the books get out of sync, a court or agency will step in to bring them back into alignment. Sometimes in such cases the paper trail prevails. But often it does not, and the legal system will ignore the records, or correct them to match reality.

The application to NFTs should be apparent. The transfer of an NFT by entering a smart-contract transaction on a blockchain is a kind of paper trail, and all paper trails can fail. Some intended NFT transfers will not go through, and some NFT owners will lose control of their NFTs without giving legally valid consent.

This means that if the state of copyright ownership or licensing is tied to ownership of an NFT, one of two propositions must be true. Either the legal system must have some mechanism for correcting the blockchain when its records are in error, or else in some cases copyright owners will lose legal control of their works through preventable forgery, fraud, duress, or mistake.

It is sometimes said that the advantage of a blockchain is that on-chain records are immutable and authoritative. That is precisely why I am skeptical of blockchains in the copyright space. To quote Douglas Adams, “The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at and repair.”

Reading Without Footprints

The phrase “I’m not going to link to it” has 385,000 results on Google. The idea is usually that the author wants to explain how someone is wrong on the Internet, but doesn’t want to reward that someone with pageviews, ad impressions, and other attention-based currencies. “Don’t feed the trolls,” goes the conventional wisdom, telling authors not to write about them. But in an age when silent analytics sentinels observe and report everything anyone does online, readers can feed the trolls without saying a word.

Actually, the problem is even worse. You can feed the trolls without ever interacting with them or their websites. If you Google “[person’s name] bad take,” you tell Google that [person’s name] is important right now. If you click on a search result, you reward a news site for writing an instant reaction story about the take. Every click teaches the Internet to supply more car crashes.

Not linking to the bad thing is usually described as a problem of trolls, and of social media, and of online discourse. But I think that it is also a problem of privacy. Reader privacy is well-recognized in law and in legal scholarship, and the threats it faces online are well-described. Not for nothing did Julie Cohen call for a right to read anonymously. Surveillance deters readers from seeking out unpopular opinions, facilitates uncannily manipulative advertising, and empowers the state to crush dissent.

To these I would add that attention can be a signal wrapped in an incentive. Sometimes, these signals and incentives are exactly what I want: I happily invite C.J. Sansom to shut up and take my money every time he publishes a new Shardlake book. But other times, I find myself uneasily worrying about how to find out a thing without causing there to be more of it in the world. There’s a weird new meme from an overrated TV show going around, and I want to know what actually happened in the scene. There’s a book out whose premise sounds awful, and I want to know if it’s as bad as I’ve been told. Or you-know-who just bleated out something typically terrible on his Twitter clone, and I don’t understand what all the people who are deliberately Not Linking To It are talking about.

We are losing the ability to read without consequences. There is something valuable about having a realm of contemplation that precedes the realm of action, a place to pause and gather one’s thoughts before committing. Leaving footprints everywhere you roam doesn’t just allow people to follow you. It also tramples paths, channeling humanity’s collective thoughts in ways they should perhaps not go.

I Do Not Think That NFT Means What You Think It Does

I recently tweeted that every sentence of this “explanation” of blockchain-based non-fungible tokens (NFTs) from the Harvard Business Review is false:

NFTs have fundamentally changed the market for digital assets. Historically there was no way to separate the “owner” of a digital artwork from someone who just saved a copy to their desktop. Markets can’t operate without clear property rights: Before someone can buy a good, it has to be clear who has the right to sell it, and once someone does buy, you need to be able to transfer ownership from the seller to the buyer. NFTs solve this problem by giving parties something they can agree represents ownership. In doing so, they make it possible to build markets around new types of transactions — buying and selling products that could never be sold before, or enabling transactions to happen in innovative ways that are more efficient and valuable.

In a follow-up thread, I expanded on why I am so skeptical about NFTs. I thought it would be useful to clean up and collect my thoughts in one place. I am a law professor who thinks a lot about digital property and about decentralized systems, and I think the idea that NFTs are about to revolutionize property law misunderstands how property law actually works.

Loosely speaking, there are three kinds of property you could use an NFT to try to control ownership of: physical things like houses, cars, or tungsten cubes; information like digital artworks; and intangible rights like corporate shares.

By default, buying an NFT “of” one of these three things doesn’t give you possession of them. Getting an NFT representing a tungsten cube doesn’t magically move the cube to your house. It’s still somewhere else in the world. If you want NFTs to actually control ownership of anything besides themselves, you need the legal system to back them up and say that whoever holds the NFT actually owns the thing.

Right now, the legal system doesn’t work that way. Transfer of an NFT doesn’t give you any legal rights in the thing. That’s not how IP and property work. Lawyers who know IP and property law are in pretty strong agreement on this.

It’s possible to imagine systems that would tie legal ownership to possession of an NFT. But they’re (1) not what most current NFTs do, (2) technically ambitious to the point of absurdity, and (3) profoundly dystopian. To see why, suppose we had a system that made the NFT on a blockchain legally authoritative for ownership of a copyright, or of an original object, etc. There would still be the enforcement problem of getting everyone to respect the owner’s rights.

There are two ways to enforce NFT “ownership.” The first is to get the legal system to do it. Judges would issue orders saying you own this widget because you have the Widget NFT, and then county sheriffs would show up to take possession of the widget and give it to you. The thing is, if you’re going to do that, there’s no point to the blockchain. We already have land registries, the DMV, and the Copyright Office. The blockchain is just an inefficient way of telling judges and sheriffs to do the same thing.

The other is to enforce everything digitally, by linking the physical world to the blockchain using secure digital hardware devices. That way, your car won’t start unless you prove ownership of the YourCar NFT. There are some serious downsides here. When your computer gets hacked, you also lose ownership of your car!

Sometimes, NFT advocates avoid dealing with the inconvenient fact that the physical world doesn’t run on a blockchain by shifting to a future in online spaces that do. They propose a blockchain-based metaverse, or online games with NFT-based economies, etc. The thing is that we’ve had digital property in those virtual spaces for decades. None of them needed a blockchain to work.

The bottom line is that almost1 everything NFT advocates want to do on a blockchain can be done more easily and efficiently without one, and the legal infrastructure needed to make NFTs work defeats the point of using a blockchain in the first place.

I say “almost” everything because NFT art may be an exception. A lot of the current hype around NFTs consists of the belief that the rest of the world will follow the same rules as NFT art. But of course part of the point of art is that it doesn’t follow the same rules as the rest of the world. ↩︎

Some Mistakes I Have Personally Found in Published Federal Judicial Opinions

Applying these principles, the court [in Armstrong v. Eagle Rock Entm’t, Inc., 655 F. Supp. 2d 779, 786 (E.D. Mich. 2009)] found that Eagle Rock Entertainment’s decision to use Louis Armstrong’s picture on the cover liner of its DVD entitled, ‘Mahavishnu Orchestra, Live at Montreux, 1984, 1974,’ without consent was protected by the First Amendment. Rosa & Raymond Parks Inst. for Self Development v. Target Corp., 90 F. Supp. 3d 1256, 1264 (2015).

Armstrong involved Ralphe Armstrong, not Louis Armstrong, who died in 1971.

The examiner’s final rejection, repeated in his Answer on appeal to the Patent and Trademark Office (PTO) Board of Appeals (board), was on the grounds that claims 1 and 2 are anticipated (fully met) by, and claim 3 would have been obvious from, an article by Kalabukhova and Mikheyew , Investigation of the Mechanical Properties of Ti-Mo-Ni Alloys, Russian Metallurgy (Metally) No. 3, pages 130-133 (1970) (in the court below and hereinafter called “the Russian article”) under 35 U.S.C. §§ 102 and 103, respectively. Titanium Metals Corp. of America v. Banner, 778 F.2d 775, 776 (Fed. Cir. 1985)

The author’s surname is Михеев, i.e., Mikheyev, not Mikheyew. There is no letter in the Cyrillic alphabet that transliterates to “w” under any commonly used system of Romanization.

GCC filed a trademark application for the mark GUANTANAMERA for use in connection with cigars on May, 14, 2001. When translated, “guantanamera” means “(i) the female adjectival form of GUANTANAMO, meaning having to do with or belonging to the city or province of Guantanamo, Cuba; and/or (ii) a woman from the city or province of Guantanamo, Cuba.” (Op. U.S.P.T.O. at 2.) Many people are also familiar with the Cuban folk song, Guantanamera, which was originally recorded in 1966. (Id. at 12-13.) Guantanamera Cigar Co. v. Corporacion Habanos, SA, 729 F. Supp. 2d 246, 250 (D.D.C. 2010)

The first recording of “Guantanamera” (lyrics adapted by Julián Orbón from poetry by José Martí, music by Joseíto Fernández) was probably sometime in the 1930s by Fernández. It was released in the United States in two well-known versions in 1963, one by the Weavers (from a 1955 concert) and another by Pete Seeger. All of these predate the 1966 easy-listening version by the Sandpipers.

The Copyright Law of Embedding Just Got a Lot More Interesting

Tim Lee has a remarkable story at Ars Technica about a remarkable copyright case, McGucken v. Newsweek. Its headline, “Instagram just threw users of its embedding API under the bus,” is not an exaggeration. (Disclosure: I am quoted in the story, and I learned about the case from being interviewed for it.) The facts are simple:

Photographer Elliot McGucken took a rare photo (perhaps this one) of an ephemeral lake in Death Valley. Ordinarily, Death Valley is bone dry, but occasionally a heavy rain will create a sizable body of water. Newsweek asked to license the image, but McGucken turned down their offer. So instead Newsweek embedded a post from McGucken’s Instagram feed containing the image.

This is the third case I am aware of in the Southern District of New York in the last two years on nearly identical facts. One of them, Sinclar v. Ziff Davis, held that the Mashable was not liable for an Instagram embed. The court reasoned that by uploading her photograph to Instagram, photographer Stephanie Sinclair agreed to Instagram’s terms of service, including a copyright license to Instagram to display the photograph – and also thereby allowed Instagram to sublicense the photograph to its users who used the embedding API. Thus, Mashable had a valid license from Sinclair by way of Instagram, so no infringement.

McGucken agrees with most of this reasoning, but stops just short of the crucial step.

The Court finds Judge Wood’s decision [in Sinclair] to be well-reasoned and sees little cause to disagree with that court’s reading of Instagram’s Terms of Use and other policies. Indeed, insofar as Plaintiff contends that Instagram lacks the right to sublicense his publicly posted photographs to other users, the Court flatly rejects that argument. The Terms of Use unequivocally grant Instagram a license to sublicense Plaintiff’s publicly posted content, and the Privacy Policy clearly states that “other Users may search for, see, use, or share any of your User Content that you make publicly available through” Instagram.

Nevertheless, the Court cannot dismiss Plaintiff’s claims based on this licensing theory at this stage in the litigation. As Plaintiff notes in his supplemental opposition brief, there is no evidence before the Court of a sublicense between Instagram and Defendant. Although Instagram’s various terms and policies clearly foresee the possibility of entities such as Defendant using web embeds to share other users’ content, none of them expressly grants a sublicense to those who embed publicly posted content. Nor can the Court find, on the pleadings, evidence of a possible implied sublicense. (citations omitted)

Lee did something smart with this dueling pair of cases: he got Facebook (Instagram’s owner) to go on record with its interpretation of its own terms of use.

“While our terms allow us to grant a sub-license, we do not grant one for our embeds API,” a Facebook company spokesperson told Ars in a Thursday email. “Our platform policies require third parties to have the necessary rights from applicable rights holders. This includes ensuring they have a license to share this content, if a license is required by law.”

In plain English, before you embed someone’s Instagram post on your website, you may need to ask the poster for a separate license to the images in the post. If you don’t, you could be subject to a copyright lawsuit.

This statement, I think it is fair to say, comes as a surprise to Mashable, to Judge Wood, and to all of the Instagram users who embed photos using its API. Major online services offer widely-used embedding APIs, and media outlets make extensive use of them. I would not say that it is universal, but it is certainly a widespread practice for which, it is widely assumed, no further license is needed. If that is not true, it is a very big deal, and a great many Internet users are now suddenly exposed to serious and unexpected copyright liability.

McGucken is not the end of the story. I would have said – and in fact I initially told Lee – that it is possible the court would reach a different conclusion at a later stage of the case, once it had more facts about Instagram’s terms of use. That … no longer seems likely. But it is still quite possible Newsweek could win and be allowed to use the embedded photograph. It raised a fair use defense, and might well prevail on that at a later stage. It might also be able to rely on the server rule.

The server rule, which can be traced to Perfect 10 v. from the Ninth Circuit in 2007, holds that only the person whose server transmits a copy of an image “displays” that image within the meaning of the Copyright Act. In an embedding case like Sinclair or McGucken, that would be Instagram, not Mashable or Newsweek – that is how embedding works. There is no dispute that Instagram is licensed to publicly display copies of these photographs; the photographers agreed as much when they uploaded them. So on the server test, no sublicense is needed; embeds are noninfringing.

The server test, although widely relied on by Internet users and Internet services, has also been criticized. The third SDNY embedding API case, Goldman v. Breitbart, held that the defendant websites could be liable for Twitter embeds of Goldman’s photograph. In a detailed opinion, the Goldman court considered and rejected the server test. (Side note: There was an important potential factual distinction in Goldman. There, unlike in Sinclair and in McGucken, the photograph had been uploaded to Twitter by unauthorized third parties, who could give no license to Twitter and thus none to the defendants. But this distinction played no part in Goldman’s legal analysis. While these facts could be relevant to the existence of a license, they don’t affect whether the image was displayed or by whom.)

To summarize, there are two possible routes to finding that API embeds of a photographer’s own uploads are allowed: either the service itself displays the image under the server rule, or the embedder displays it but has a valid sublicense. Goldman rejected the server rule, but did not consider the existence of a sublicense. Sinclair did not consider the server rule but held there was a sublicense. McGucken did not consider the server rule – inexplicably, Newsweek did not ask the court to hold that there was no direct infringement under the server rule – and held that there was no sublicense. No court has considered and ruled on both arguments together, despite the fact that they are joined at the hip.

A particularly careful and thorough critique of the server is Embedding Content or Interring Copyright: Does the Internet Need the “Server Rule”?, by Jane Ginsburg and luke Ali Budiardjo. They argue that the server rule misreads the Copyright Act and should, with Goldman, be rejected. They believe, however, that the sky will not fall, because licenses will fill any gaps that should be filled. They note that YouTube’s terms of service, for example, explicitly provide for a license grant from uploaders to YouTube’s users, and they predict that this practice will be common:

Therefore, it seems likely that platforms can (and will) utilize Terms of Service agreements that are sufficiently broad to protect themselves and their users from infringement claims based on user “sharing” of platform content through platform mechanisms.

I would have thought so, too. Hence my surprise at Instagram’s position. There are two possibilities here. One is that Instagram does not explicitly grant a license because it believes the server test is the law. That position has been risky ever since Goldman. The other is that Instagram is willing to expose its users to copyright liability when they use its system as intended. I think it is not unreasonable to describe this, as Ars does, as throwing its users under the bus.

One last twist. In late April, Sinclair filed a motion for reconsideration of the holding that Mashable had a sublicense from Instagram, including some challenges to the court’s interpretation of Instagram’s terms of use. The main brief in support of reconsideration could be clearer, but her reply brief puts the issue squarely: “Nowhere has Mashable put in the record any proof as to how Instagram ‘validly exercised’ its right in granting Mashable a sublicense of Plaintiff’s photo.” There things sat, until on June 2, Sinclair called the court’s attention to the McGucken order, and then today, June 4, called its attention to the Ars story published just hours before. I speculated to Lee that McGucken “is going to blow up the Sinclair case.” I shouldn’t have used the future tense. It already has.

A Few Thoughts on Cisco v. Beccela’s

Rebecca Tushnet blogged a trainwreck of a copyright opinion in Cisco Systems, Inc. v. Beccela’s Etc. from the Northern District of California. The software-licensing caselaw was not good, but this is one of the most confused opinions I’ve seen.

In brief, Cisco sells networking devices through a network of authorized dealers. The defendants allegedly sell Cisco devices outside of these authorized channels. Cisco sued on a variety of theories, including copyright infringement. In response, the defendants claimed they were making legal first sales.

Ninth Circuit caselaw (see Vernor, Psystar, and Christenson) has held that first sale doesn’t apply to software distributed on CD-ROMs or DVDs which are “licensed” rather than “sold,” and use a messy multi-factor test to determine whether a given shiny plastic disc is licensed or sold. The defendants here argued that the result should be different where the software is “embedded in hardware,” but the court disagreed that this made a difference. “The Ninth Circuit in these cases did not distinguish the first sale doctrine’s application between software and hardware … .” As a result, “[T]he first sale doctrine does not apply to software licensees even when the software is embedded in lawfully purchased hardware … .”

To which I can say only, what does the court think that software IS?

Zoolander: The files are in the computer?!

“Software” could refer to the information in a program – the sequence of bits or characters – or it could refer to a specific physical instantiation of the program – a chip, printout, or other object encoding that information. In copyright terms, the former is a “work”; the latter is a “copy.” Cisco has a copyright in the work, and we can assume that the copyright has never been validly licensed to the defendants. But in first sale, that’s irrelevant. If I’m “the owner of a particular copy … lawfully made,” then I can distribute that copy regardless of whether I have any license from the copyright owner. That’s what first sale is. The reason that Vernor and other cases rejected the application of first sale is that the copy had been licensed rather than sold: that messy multi-factor test tries to figure out what rights the possessor has over a particular shiny plastic disc. For example, does the copyright owner have the right to demand the shiny plastic disc back? If so, then the possessor may not be an “owner” of that “particular copy” and so first sale may not apply.

This reasoning doesn’t on its face distinguish between shiny plastic discs and computer hardware. But that doesn’t mean the two cases are the same. It’s right there in the Beccela’s opinion. In fact, it’s right there in the same sentence where the court announces its conclusion. Cisco’s software isn’t just “embedded in hardware”; it’s “embedded in lawfully purchased hardware,” in the court’s own phrase. That ought to end the case. If the hardware is lawfully purchased (note: “purchased” and not “licensed”), then the defendants are owners of the copies of the software and have full first sale rights. Remember: “copies” are “material objects … in which a work is fixed,” a definition that includes both shiny plastic discs and dense arrays of transistors.

The court here honestly seems to believe that software can somehow be “embedded” in hardware without the hardware being a copy of the software, as though a file were in the computer but not of it. But there is no such thing. That is what it means to store digital information in a thing: the physical structure of the thing becomes an encoding of the thing. Or, in copyright terms, a copy is a physical thing “from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” That’s how software works.

To be fair, I don’t think that courts in previous first-sale and software-licensing cases have been terribly careful about the work/copy distinction or about what software is. The opinions cited in Beccela’s are full of sloppy language that seems to invite this result. But that language was unnecessary; you could come out the same way in a DVD software first sale case while being careful about your terminology. Beccela’s takes these unintelligible fictions about how software works and turns them into an actual holding that is essential to the outcome of the case. It is rare to see the confusion at the heart of modern software copyright licensing so plainly stated.