NFTs in the music industry and your intellectual property

The recent notoriety of HitPiece’s website, positioning itself as a new platform for the trading of music related NFTs, caused outrage from artists and labels in the music industry, who claimed the organisation was using their music, artwork and branding without permission.

Hitpiece claimed that: “Each Hitpiece NFT is a one of one NFT for each unique song recording.”

The intention and actions of HitPiece are somewhat unclear, particularly as their website has since been shut down and now only contains the wording ‘We Started The Conversation And We’re Listening’, however it did highlight a number of factors with respect to an artist’s intellectual property rights and how they should be protected.

In this article Alice Minza-Clark explores what an NFT is, what rights artists have and what they can do to effectively manage the protection of their intellectual property rights in their songs and brand when engaging with the trading of NFTs.

What is an NFT?

NFT, stands for ‘non-fungible token’, and is a digital asset that represents the value of a unique ‘real life’ item. It is described as ‘non-fungible’ as the token is not interchangeable, unlike other assets such as money, where for example, it does not matter which pound coin you use, they still have the same value and can be used for the same purpose.

Generally speaking, one NFT relates to one work or asset (e.g. where music related, to a song or album, merchandise or artwork relating to an album). However, some artists have created or ‘minted’ a limited number of NFTs that are derived from the same work, where each token has its own unique identifying code and is owned separately.

Artists are also now combining the sale of the NFT with an offer of a physical object such as a limited edition piece of merchandise or vinyl. Kings of Leon are said to have made around $2m from the sale of NFTs relating to their album When You See Yourself (with over $500,000 of that being donated to Live Nation’s Crew Nation Fund), which combined the tokens with real merchandise such as vinyl’s and album artwork.  In attaching a physical asset to the sale, the buyer is able to receive a more tangible benefit to aid their appreciation of the value in the purchase.

Ownership of artists’ music and NFTs

A central issue with NFTs in the music industry is that the system of ownership of music is very complex. Many different individuals or entities might have a right to royalties or own a particular share of a track. Music and lyrics are protected by copyright. Copyright protects an original work once it is recorded in a permanent form and prevents third parties from being able to do certain prohibited acts in relation to the copyright work (including copying) without the permission of the copyright owner. The first owner of copyright is generally the creator in the absence of agreement to the contrary.

In addition, songs tend to have two main copyrights. Firstly for the composition (composition copyright), and secondly for the specific song recording that is released (master copyright). The master copyright is often owned by a record label and/or the recording artist, and the composition rights are frequently owned by the songwriter or publishing company. If an artist has signed to a record label, they may not own the copyright in their music. In the first instance it is therefore vital for artists to be able to recognise their ownership rights in relation to the music, before offering to sell any rights to it.

Without any assignment or transfer of intellectual property rights, the buyer of the NFT is likely to possess only a license to use the music, and not actually acquire any of the actual ownership rights in the music, only in the NFT itself.

The need for an agreement to be in place at the point of sale of an NFT is therefore key in ensuring that the ownership of any intellectual property rights between an artist and their music representation and the buyer, are clearly set out and the terms of sale and purchase are agreed in advance. The existing contracts that are already in place with respect to the ownership of the music will also be crucial in determining how the agreement is drafted, and what (if anything) can be sold.

The contract

The terms of the agreement for the sale of the NFT will be central to establishing what the prospective buyer is purchasing, and whether there are any rights attached to it.

We have noted some of the key aspects (among others) of the contract that you may wish to consider:

• Who owns the rights to the music?
• What rights are being sold to the buyer?
• What is the value of the NFT?
• As an alternative, could the buyer purchase an NFT that holds a contract for certain rights to an interest in the income stream generated by the music recording, thus being the owner of applicable royalty payments?
• If there are to be royalty payments, state clearly whether these relate to the artist’s own royalties, or to the total royalties relating to a song and whether there are any restrictions in relation to these (such as a certain time frame, or the song reaching a certain number of streams).
• Does the contract align with any existing agreements in place with respect to an artist’s music?
• What is the date of payment for the NFT?

It is fundamental that the creator of the NFT fully understands the ownership rights to the music to which the NFT relates. As we have seen with the outraged response of artists and the music community to HitPiece’s movements, without such an understanding, misleading and false statements made can result in legal action.

Summary

Although it is not a new concept, the NFT market appears to be gaining popularity and seemingly NFTs may provide another channel for promoting music, building a fan base and potentially opening new revenue streams – including new ways for unsigned artists to finance and sell music. However NFTs and the digital market in general can be quite volatile and particularly where an artist’s intellectual property and other legal rights are concerned.

Taking advice before engaging in these areas is advised, as it is vital that clear terms are agreed between the contracting parties from the outset to ensure that both the artists, rights owners and the buyer acknowledge and understand the implications of each transaction, in what can be quite a complex area of law. If you have any questions relating to the above article please do get in touch.