An NFT of digital images titled "EVERYDAYS: THE FIRST 5000 DAYS" was sold at Christie's for 69.3 million US dollars in 2021. Since then, other spectacular sales of NFTs have followed. This development opens new opportunities for artists. They can trade their artworks on new markets and offer them to a wider audience. Due to the increasing popularity of NFTs, there is a growing debate as to whether authors of digital artworks can claim a resale right and receive a royalty after the reselling.
What is a resale right and how do authors of artworks benefit?
The idea behind a resale right is as follows: Authors of artworks generally receive a one-time payment when their work is sold. They do not participate in its possible further success. The same is true for authors if their artwork is linked to an NFT. Once the NFT has been sold, in principle they have no way of financially participating in its further success. In this regard, their situation differs from that of other creators of art, since works of literature or music offer continued financial participation opportunities (royalties) due to their various types of use.
A resale right is provided by section 16b of the Austrian Copyright Act, itself being a transposition of the Directive 2001/84/EC into national law. In case of a resale of an original artwork and with the involvement of a representative of the art market in the transaction, the author of the artwork can claim a resale royalty from the seller. For Austria the royalty amounts up to EUR 12,500 for each resale. The specific amount depends on the percentage of the net sales price, which is scaled degressively and ranges from 4% to 0.25%. The resale right can’t be waived by the author.
Does the resale right apply to NFTs?
Since an NFT is intended to create a digital original of an artwork, the applicability of the resale right might seem obvious at first glance. However, according to section 16b Austrian Copyright Act implementing Art 1 to 5 of the Directive 2001/84/EC, an artwork 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, whereby his signature or another form of authorization is necessary; (iii) can otherwise be regarded as an original. It is questionable, whether an NFT fits that definition, mainly because an NFT is not the artwork itself, but only its representation. The sale of an NFT is therefore arguably not a sale of an artwork, but the reassignment of a dataset in the blockchain. However, usually such a sale includes a license agreement regarding the digital artwork. Depending on the specific form of the agreement, the sale of the NFT might therefore be considered a sale of an original artwork and constitute a resale right.
Another aspect that needs to be considered is the question of whether the legal requirements for an artwork can be qualified as such. Recital 2 of Directive 2001/84/EC states:
The subject-matter of the resale right is the physical work, namely the medium in which the protected work is incorporated.
It follows that in order to claim the resale right, the artwork has to be original and needs to exist in a physical form. Since this is generally not the case for NFTs, authors will have difficulties in successfully claiming royalties from resales of digital or digitalized artworks. Nevertheless, in cases where an NFT is also physically transferred, authors have a reasonable chance to claim resale rights. One possible use case is the additional transfer of the NFT on a data carrier such as a USB. Another one would be the placement of the NFT motif on merchandise articles.
It’s worth mentioning that due to the growing popularity of NFTs and digital art in general some of the legal issues involved might become subject to a decision of the Court of Justice of the European Union in the future.
Review of NFT smart contract necessary
When selling NFTs, the NFT-owner should consider that authors of artworks don’t necessarily need to fulfill the statutory requirements 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 the NFT was sold for. In case the NFT-owner is not the same person as the author of the artwork, the agreement contained in the smart contract needs to be carefully reviewed to determine whether the underlying sales conditions do offer appropriate safeguards for the owner. Otherwise, the NFT-owner might face claims to pay royalties in the amount set by the author in the smart contract and be subject to an automatized process of enforcement of the payment.
