NFTs in the music industry – trends, functions, and typical copyright issues

This article is intended to give an overview of typical issues arising under German and European copyright law: What is included in the scope of protection in music NFTs? Which rights do you require for the production and marketing of music NFTs? What should you consider in NFT transactions if the musical works involved are already the subject of pre-existing licensing agreements? Are operators of NFT platforms liable for the music NFTs uploaded by their users? How may purchasers use the musical works associated with their new NFTs? The answers to these questions are not always straight forward. In any case, it is worthwhile to carry out a diligent rights clearance in advance of any NFT project or transaction and to address liability risks appropriately in the contracts.

Increasing relevance of NFTs in the music industry

In the shadow of the big hype around CryptoPunks, Bored Apes and Beeple, the music industry as well has been discovering the NFT trend in the last two years. The US rock band Kings Of Leon sold NFTs for their new album “When You See Yourself” as well as for related tickets and artwork in spring 2021. The most popular NFT platforms, such as OpenSea and Rarible, offer NFTs with music and audiovisual content. In addition, a growing number of NFT plat-forms specialise in music – such as HitPiece, Audius, PlayTreks, Blockparty or Royal. The German collecting society GEMA started a cooperation with the music NFT platform twelve x twelve in July 2022. GEMA members can link their works to NFTs at reduced prices and offer them to other users. Via the same platform, Till Lindemann (Rammstein) had previously sold several NFTs of an unreleased music video for USD 100,000 each. Spotify is also testing NFT functions with selected artists. 

First legal disputes related to music NFTs

Given their increasing economic relevance, it is hardly surprising that music NFTs have already become the subject of legal disputes. The record company “Roc-A-Fella Records” sued its co-founder Damon Dash in mid-2021. Dash allegedly intended to market the debut album of rapper Jay-Z using NFTs without owning the necessary rights. After the District Court of New York (S.D.N.Y.) prohibited Dash from using copyrights to the work, the parties settled the dispute. In November 2022, songwriter Luna Aura filed a lawsuit against DJ 3LAU.  Together, they had written the song “Walk Away” for the album “Ultraviolet”. Luna Aura is now demanding payment of a fair share of the revenue generated by the DJ in early 2021 through the auction of NFTs in connection with the album (USD 11.7 million). The proceedings are still ongoing. These examples show how important a diligent clearance of music rights is for NFT projects.

NFTs in a nutshell

NFTs are digital tokens that are stored on a blockchain and represent specific (physical or digital) objects. These can be single sounds, melodies, or entire symphonies – but also physical records, concert tickets or merchandise. Unlike other tokens, such as cryptocurrencies, NFTs are not randomly exchangeable (“non-fungible”), but unique. They are fixed on a de-centralised and publicly available blockchain. Therefore, they are unchangeable and can be verified by anyone. They can be used as a kind of digital certificate.

The NFT itself is a specific small part of a programmed software code. It contains command chains including immutable rules – the so-called “smart contracts”. The blockchain usually contains the data required to uniquely identify an NFT, i. e., metadata such as the token ID, the NFT title and a short description as well as the current owner (account). In addition, the represented object is defined, for example by a hash code of a file with digital content. In the case of transactions, information on the purchaser is also stored, such as the address of his account for storing and managing NFTs (“wallet”).

NFTs and copyright – what is the scope of protection?

When assessing copyright issues in NFT projects, a distinction must be made between the NFTs themselves and the works they represent. Usually, the code on the blockchain associated with an NFT is not protected by copyright. Individual data are no works under German copyright law. The “smart contracts” are computer programs that control simple processes by means of defined commands. In most cases, they will also not meet the requirements of a personal individual creation within the meaning of copyright law.

Therefore, from a copyright law perspective, the acts that concern the work represented by an NFT are most relevant. Audio files typically contain protected content. Simple individual melodies are sufficient for the author’s protection. Even the use of very short audio files regularly requires permission. Single tones and sounds may not be protectable per se. However, if they have been taken from a published record or data carrier and are used in a way recognisable to the listener (e.g., in sampling), the rights of the record producer may be affected.^[1]

The digital content associated with an NFT is usually not stored on the blockchain. This would be unreasonable from an economical view regarding audio files – and even more so regarding audio-visual files – since storing large amounts of data on the blockchain is disproportionately expensive.^[2] Rather, the connection between NFT and audio content is made via a hyperlink (“tokenURL”), which is stored in the NFT’s metadata on the blockchain. The linked audio files can be stored on private servers, the servers of NFT platforms or in decentralised peer-to-peer networks such as the InterPlanetary File System (“IPFS”).

Use of musical works in the production of NFTs

To create an NFT representing digital audio content, the audio file associated with the NFT must be uploaded to an online storage. This is a reproduction of the work under Art. 2 InfoSoc Directive (2001/29/EC) and Sec. 16 German Copyright Act (Urheberrechtsgesetz, “UrhG”). The private copying barrier (Sec. 53 UrhG) does not apply if the NFTs is created – as usual – for commercial purposes. In this case, before uploading the content, permission must be obtained from all rightsholders and a fair remuneration must be agreed on.

In addition, the right of making available to the public under Art. 3 InfoSoc Directive and Sec. 19a UrhG may be affected. This applies if the upload results in the represented work becoming available to a (new) public – e.g., where it is offered directly to users of an NFT website for streaming or download. By contrast, if only the owner of the NFT and/or a narrowly limited number of persons have access to the audio file, it will likely not be “public” in the sense of copyright law. This will likely also apply if the file can only be accessed by entering the exact “tokenURL” which can merely be retrieved from the NFT metadata with special technical knowledge – if at all.

Besides uploading, setting hyperlinks to the represented work can constitute an additional act of making available to the public. This will likely apply to cases where NFT providers link to works that have been unlawfully uploaded by third parties without the permission of the rightsholders or if the link enables circumvention of a technical access restriction.

Use of musical works when offering NFTs

On many NFT platforms, users can stream the musical works associated with the NFTs offered. The upload of the works constitutes an act of reproduction and making available to the public subject to a license. Concerning the marketing of NFTs, reference is often made to the exception pursuant to Art. 5(3)(j) InfoSoc Directive and Sec. 58 UrhG. Under these provisions, the use of certain works such as pictures and films does not require a separate authorisation, as long as it is necessary for the promotion of an exhibition or sales event. However, these provisions are not applicable to musical works.

If promotional purposes are pursued with the use of a musical work on an NFT platform, the granting of further specific rights may be necessary. Under the case law of the German Federal Supreme Court, the use of music for advertising purposes constitutes an independent type of use which the rightsholder must transfer separately.^[3] This should be taken into account when drafting licenses or terms of use.

Use of musical works to produce/offer NFTs within the framework of pre-existing licensing agreements

Before combining musical works and sound recordings with NFTs and marketing them, a thorough rights clearance is necessary. Typically, several composers and lyricists are involved in the creation of musical works. In addition, performing artists and producers hold rights in sound recordings. For NFT projects, it will therefore rarely be sufficient to obtain permission from the creators of the works themselves. In addition, there are usually exclusive administration and licensing agreements with collecting societies, publishers, labels and users concerning the worldwide commercial exploitation of music and recordings. In the online music sector, the fragmentation of rights is particularly far-reaching.

If the works or recordings are covered by pre-existing contracts, it must be assessed which kinds of use are covered by each license. Very few licensing agreements already explicitly address the use of music in connection with NFTs. Rather, it will be a matter of interpretation whether the contracting parties intended to (exclusively) transfer the necessary rights to produce and market NFTs.

In this context, it may also be relevant whether the exploitation of a work in connection with NFTs qualifies as a so-called “independent type of use” within the meaning of Sec. 31 UrhG. According to the Federal Supreme Court, this applies to “any customary, technically and economically independent and thus clearly delimitable kind of use of a work”.^[4] It is likely that the courts will consider the NFT market to be a new marketing opportunity for musical works that does not substitute an existing market (such as recordings or streaming services) and therefore qualifies as “economically independent”. This is supported by the significant sums that can be achieved through NFT transactions without affecting other types of sales. Less clear is the issue of whether the use of musical works in the production and marketing of NFTs can be “technically” distinguished from other types of use in the online sector. On the one hand, the use is linked to novel technologies such as blockchains and purchase via special NFT platforms (mostly by means of cryptocurrency).^[5] On the other hand, compared to typical online music services, the way in which the works are used does not change: they are still reproduced on data storage devices and made available by means of streaming or downloading. Ultimately, it will be decisive whether the courts, in their assessment of NFT-related uses, will focus on the technical process of the individual use (rather not “independent”) or on the overall technical process of using NFTs (likely “independent”).

In case it qualifies as an independent type of use within the meaning of Sec. 31 UrhG, the use of music for the production and marketing of NFTs can be the subject of clauses referring to so-called “unknown types of use”. Such clauses are used as standard in many licensing agreements. If this applies, the contracting parties must take into account several particularities, such as the author’s right of revocation or the potential claims to additional remuneration (Sec. 31a/32c UrhG). This would at least apply to contracts from before 2021, i. e., before the average author became aware of NFTs through public coverage of transactions.

Liability of NFT platforms for illegal third-party content

Many NFT platforms do not offer their own content. Rather, they enable their users to upload content, link it to NFTs and offer them to other users. In this case, the question arises whether these platforms are liable vis-à-vis the rightsholders if the users upload the musical works without permission.

Affected platforms should first check whether they fall under the new specific liability regime of Art. 17 DSM Directive (2019/790/EU) and the German Copyright Service Providers Act (Urheberrechtsdienstegesetz, “UrhDAG”). Some scholars assume that these provisions are not applicable to NFT platforms since “online marketplaces” are expressly excluded from their scope.^[6] However, the courts may not apply this rationale to all NFT platforms. The EU legislator introduced this exemption since “the main activity” of marketplaces such as Amazon or Ebay the “is online retail, and not giving access to copyright-protected content” (Re-cital 62 DSM Directive). In the case of NFT platforms offering links to digital music, courts may find that their primary purpose is the making available of the content connected to the NFTs. The risk will depend on the specific functioning and purpose of the individual service.

Outside this specific regime, NFT platforms may also be liable for third-party content. According to the case law of the CJEU, online platforms engage in their own act of communication to the public under copyright law, in particular, if they do not take the measures individually required to prevent the upload of unlawful content or if they support such upload by their own actions.^[7]

In order to mitigate these liability risks, an appropriate technical and contractual design of the service is key.

Use of musical works by the purchaser of an NFT

The purchaser of a music NFT usually receives access to a specific digital copy of a musical work. In some NFT transactions, additional physical data carriers (e.g., USB sticks) or records are delivered. As with the common purchase of a sound recording or a painting, the new owner of an NFT is not automatically allowed to use the copyright-protected content as he pleases. Rather, the purchaser is initially only allowed to merely enjoy the work himself. Further conditions of use will depend on the scope of the transferred rights – which has to be assessed independent of the NFT transaction.

NFT platforms that link NFTs to and offer their own copyright-protected content typically grant the purchasers certain rights of use in their T&Cs. For example, the NBA Top Shot platform trades NFTs with short videos of scenes from NBA games. According to the service’s Terms of Use, purchasers of the NFTs receive a worldwide, non-exclusive and non-transferable right to use the respective content for personal, non-commercial purposes, in particular to copy and display it. Importantly, the new owner of the “exclusive” NFT acquires no exclusive rights of use to the content and may not use it for commercial purposes (with the exception of reselling the NFT to third parties). 

On NFT platforms such as twelve x twelve or HitPiece, the General T&Cs require the seller of a music NFT to grant the purchaser rights for non-commercial use. However, whether the purchaser actually receives such rights will depend on the individual circumstances of the transaction and, in particular, on whether the seller is authorised to transfer such rights. There is no bona fide acquisition of rights of use under German copyright law. Purchasers should therefore protect themselves contractually against potential claims of rightsholders if they want to use the acquired works for more than just private purposes.

Furthermore, it may be reasonable for purchasers of an NFT linked to exclusive content to ensure the permanent availability of this content. Especially if the content is only available on a specific server, the contracts should provide rules for events such as server failure or dis-continuation of the online service.

[1] CJEU, Case C-476/17 – Metall auf Metall, para. 39.

[2] Cf. Rauer/Bibi, ZUM 2022, 20, 23.

[3] BGH GRUR 2010, 62 – Nutzung von Musik für Werbezwecke.

[4] BGH GRUR 2010, 62, 63 – Nutzung von Musik für Werbezwecke.

[5] Spikowius/Rack MMR 2022, 256, 260.

[6] Rauer/Bibi ZUM 2022, 20, 28.

[7] CJEU, Cases C 682/18 and C 683/18 – Youtube/uploaded.