NFTs and Publishing Contracts
Have authors given up the right to create NFTs from their books in publishing contracts that were signed before NFTs even existed?
For those of you who are not up to speed on the topic of NFTs, a little context might be in order.
What is an NFT?
NFT stands for non-fungible digital token. A digital token is a unit of encrypted information that provides evidence of ownership of a digital file, like a receipt for a unique digital artifact. Its uniqueness is what makes it non-fungible; there's nothing else like it.
An NFT is created, or minted, on a blockchain using a smart contract. A smart contract is nothing more than a computer program. It stores rules, verifies rules, and self-executes. When used to create an NFT, a smart contract references the unique digital file.
The digital file contains the creative work – think a .jpg or .pdf or .mp4 file, or any digital file that holds creative work.
A blockchain is a public transaction ledger that shows ownership. It is a ledger that cannot be changed, only added to, making it immutable. Think chain of title of land ownership in government land records as an analogy. In Baltimore, Maryland, USA, for instance, land ownership can be traced back to 1632 when King Charles I of England granted a charter to George Calvert, the first Lord Baltimore, giving him proprietary rights to land east of the Potomac River. All real property ownership traces back to that grant.
On a blockchain, ownership of an NFT can be traced back to its creation, or minting, on the blockchain.
An NFT’s smart contract includes various terms which are also recorded on the blockchain: the creator's identity; current and past owner identity; information on the NFTs authenticity (its hash); and requirements, or rules, for selling the NFT. A smart contract's terms are also immutable. They cannot be changed, only added to.
In short, an NFT on a blockchain is a record of authenticity of a unique digital artifact and a complete chain of title.
The Potential of NFTs for Creatives
It's the rule setting function of a smart contract that is exciting for creatives. With smart contract rules, creatives can conceivably collect royalties on the resale of their creative work, of the NFT. If an NFT appreciates in value, the creator (or their heirs) can collect a percentage of the increased value.
Consider what Charles Dickens's heirs would be entitled to on the resale of a first edition of A Christmas Carol if there were a rule that required payment of 10%, say, of the appreciated value to the creator.
Visual artists have been working to build that kind of revenue stream into sales of physical works for years using vehicles like the FARE Contract (Fair Artist’s Reserved Equity).
The right to receive a portion of the increased value of an NFT would not be extinguished when the copyright term is up. The text or image or other creative expression embodied in the work might become part of the public domain, but the thing, the book, painting, or unique digital token, does not become part of the public domain.
Van Gogh's Starry Night, the image, is in the public domain. The original painting, the thing? Priceless.
There are a lot of new concepts in those few paragraphs: NFT, token, minted, blockchain, smart contract, immutable ledger, hash. For further exploration of NFTs, what they are, how they are created, and why they may offer exciting new horizons for creatives, I recommend going down the rabbit hole with Joanna Penn who has explored these issues on her podcast with a number of interesting and knowledgeable guests.
The Dark Side of NFTs
NFTs are not all sunshine and happiness. There are many who say that NFTs are a scam, Ponzi schemes, used by anonymous fraudsters looking for marks. And in these early days of this relatively poorly understood technology, there is a lot of scamming going on. Many people are losing lots of money in lots of different ways.
Serving as a vehicle for scams is not the only problem with NFTs. NFTs and blockchain technology have a scorchingly horrible impact on our environment. The devastating environmental effects of blockchain need to be addressed, and quickly, because the horse has left the barn. NFTs are here to stay.
The promise and pitfalls of NFTs are subjects for other posts and another day. This post explores whether language in a publishing contract signed before NFTs were known (~August, 2015) secures NFTs rights in the creative work that is the subject of the contract to the publisher.
Publishing Contracts and Unknown Technologies
You may remember back in the day before the invention and large-scale adoption of ebooks. Publishing contracts didn’t consider or mention ebook rights. How could they? eBooks didn’t exist. Who knew to include those rights in the grant of rights provision of a publishing contract?
When ebooks came along and started gaining market share, the issue of whether ebook publishing was included in the grant of rights came into focus. Two seminal cases were brought against ebook publishing platforms. The first in 2001 by Random House and the second in 2011 by HarperCollins.
Random House sued Rosetta Books for copyright infringement when Rosetta Books published works by William Styron, Kurt Vonnegut, and Robert B. Parker, all under contract to RH, in ebook format. Random House argued that contract language that gave Random House the right to "print, publish and sell the work in book form" included the right to sell ebooks.
In a preliminary ruling, the court held that the contract language from the '60s was a limited grant of rights that did not include ebooks. The court went on to say that sending electronic digital signals over the internet (the basis of ebook publishing), is a separate medium from printed words on paper and not a "new use" of granted rights. The case settled in a way that gave Random House the ebook rights.
The HarperCollins case involved ebook rights to Julie of the Wolves by Jean Craighead George. The publishing contract at issue was signed in 1971 and included language that, according to the court, was broad enough to include future electronically based licensing rights. The grant of rights included the right to license the book for use in "storage and retrieval and information systems, and/or whether through computer, computer-stored, mechanical or other electronic means now known or hereafter invented."
Whether rights have been granted for use of the work in future technologies turns on the language in the contract.
NFTs and Publishing Contracts Today
These days, of course, the language of publishing contracts specifically includes ebooks. But it doesn't include NFTs. Having learned its lesson from the ebook litigation, the publishing industry now routinely includes expansive language in the grant of rights provision securing the right to exploit technologies that exist now or will exist in the future.
The broad grant of rights provision may read something like this, "to print, publish, republish, reproduce, distribute, sell, display, and transmit the Work, in English and in all other languages, in all media of expression now known or later developed including all forms of physical, electronic and/or digital media, and to license or permit others to do so."
Would that language encompass the right to mint and sell NFTs? That is the question.
NFTs are digital. They are a display right that is bought and sold. At first blush, that contract language would seem to encompass NFTs. Publishers with language like that in their contracts would have an argument that they have secured the right to mint NFTs of an author's work.
But probably not a successful argument.
A grant of rights in publishing contracts is also limited to the copyright term in the work at issue. ("The Author hereby grants to the Publisher during the full term of copyright and all renewals and extensions thereof the full and exclusive rights throughout the world . . . .")
NFTs are controlled by smart contracts that exist beyond the copyright term.
If a publisher were to mint an NFT based on an author's work, an NFT based on a smart contract that lives beyond the copyright term, that could be considered a breach of the publishing contract. A publishing contract is a license agreement. The breach of a license agreement could be more than a breach of contract, it could be copyright infringement.
Contract interpretation is a state law question. The ebook cases were both decided under New York law, for instance. The analysis suggested in this post would be subject to the interpretation of the law called for in the contract at issue.
Publishers who attempt to mint NFTs of an author's work will run headlong into the contract language that limits their rights to the term of copyright in the work. It wouldn't be pretty.
What to Do about NFTs in Your Publishing Contract
Until the publishing industry displays some dexterity with respect to cutting edge technologies like NFTs, I recommend that authors expressly reserve their rights to NFT minting and use of blockchain technology. Creators need to maintain control of the rights to their work.
It's all too new. We don't have a handle on these technologies, how they are best used or whether we even want to use them, let alone what the royalty rates should be.