Archive for the ‘Cybersecurity’ Category

Tokens, Branding and Digital Assets

June 19, 2017

“Art loves Chance, Chance loves Art”
Agathon

This article is about how content access cryptocurrency tokens may help diversify an artist’s branding portfolio and also raises some legal issues to consider before an artist takes the leap.

What is a token?

For purposes of this discussion, I am not going to address how people are raising money selling tokens as a crowdfunding venture (like an initial coin offering or ICO). Rather, I am going to address how artists can use tokens to sell and market existing art and music. In addition, I am going to limit my points to using a token as a “key” which permits users to access often exclusive digital content and assets.

According to Balaji S. Srinivasan, CEO of 21.co:

“[A] token is a digital asset that can be transferred (not simply copied) between two parties over the internet without requiring the consent of any other party.”

Mr. Srinivasan goes on to explain that when people purchase tokens they are purchasing the equivalent of private keys which can permit access to specified digital assets.

Private keys are part of an encryption or cryptographic strategy to ensure that information is only made available to those who have established a particular identity or permission to access that information. Private keys are intended to remain confidential to its owner. A public key is one that can be viewed on a directory or repository which lists public keys.

An application programming interface or API can be used by web developers to control an interface between an application and an operating system. As an example, mobile phone use is supported by APIs most commonly in the form of Java programming language. If you use an Android phone, you are using Java APIs. [See recent case Oracle v. Google, where a jury found that Google’s use of Java APIs was fair use under Copyright law.] Using a token can, therefore, be likened to an API when the token is designed for access to digital assets.

So what do you get when you buy a token? What your token can and cannot do is often unclear. The reason for this is because the technology and its uses are evolving minute-by-minute. How the token can be used may be defined by the platform on which it is being used. It may be defined by the artist or musician. The rights to use certain content is often fluid. The content to which the token is associated may vary from day to day.

In addition, access to particular content may not be guaranteed since it depends on the arrangements with the token issuer and the artist or musician. It could be possible, for example, that a content owner could add or remove content, block individual or blanket access to content as well as delete the content entirely.

In other words, it is an ongoing and living experiment.

I can’t emphasize enough that artists, musicians and fans understand the relationships between the art, the technology, and the token terms. There are powerful uses for this technology and it could bring significant income to artists as well as developers.

But first, it is necessary to look at the kind of assets an artist is likely to use in a token-enabled environment and how to incorporate those assets into a brand.

Branding

Brands are comprised of reputation, trademarks, copyrights, and other elements of “goodwill” that are often difficult to define. Most brands are recognizable due to their trademarks which are:

“[A]ny word, name, symbol or device or any combination of them that serves to identify and distinguish the source of one party’s goods or services from those of another party.”

Trademarks can be brand names, such as Coca-Cola® brand soft drink, a service mark, a certification mark or a collective mark. Superman® is a registered trademark of DC Comics covering several goods and services.

Several million dollars in revenue come from licensing brands in the form of trademarks. Trademarks rights are the exclusive rights to use a mark in commerce to distinguish your goods and services from another. Whether a product can be protected depends on whether the work has the qualities that would entitle it to trademark protection. However, you will not obtain trademark protection is your mark is “generic” or incapable of becoming a trademark.

Copyrights and trademarks are distinct intellectual property types, even though there are often design or illustrative elements in each. Copyrights protect original work of authorship that are:

“[F]ixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.”

So, even a work in digital or electronic form which can be communicated via a machine or device would qualify as being “fixed in any tangible medium of expression” and potentially entitled to copyright protection. A scanned image of your work or a digital rendering of any component, would be a sufficiently tangible medium if it can be communicated with the aid of a machine and otherwise capable of being protected by copyright laws.

The works which could be potentially covered by copyright include: literary, musical and dramatic works; pantomimes and choreographic works’ pictorial, graphic and sculptural works; motion pictures; computer programs and compilations of works or derivative works.

What is crucial to remember is that copyright only protects the expression of ideas – not the ideas themselves – this is called the idea-expression dichotomy. Why is this important to understand? Because perhaps the most litigated aspect of copyright law is determining whether an author is trying to protect the expression of an idea (a thing fixed) or the idea itself.

The rights received, once copyright has been asserted, include the exclusive rights to reproduce, prepare derivative works, distribute, display and perform publicly and authorize others to do these things.

Once you have created and fixed a work in a tangible medium of expression, the work you created automatically enjoys federal copyright protection. If you register (submit an application) your work with the Copyright Office, in the event of an infringement on your work, you will be able to ask for actual damages, statutory damages, treble damages, profit, attorneys’ fees, and an injunction. If the work is not registered, and your work has been infringed upon, you will only be able to seek actual damages, which are those losses you can prove were the result of an infringement.

Another element of personal branding is the “right of publicity” which may be the subject of trademark protection, but usually is a right enforced by state courts where misuse of someone’s identity is an unfair trade practice or fraud. According to International Trademark Association (INTA):

“The “right of publicity” is a form of intellectual property right that protects against the misappropriation of a person’s name, likeness and perhaps other indicia of personal identity for commercial benefit. In the United States, the right of publicity has not been recognized at the federal level by statute or case law, although a related statutory right to protection against false endorsement, association or affiliation is recognized under federal unfair competition law.”

 The combination of intellectual property types, as well as the right of publicity, form the elements of successful personal and corporate branding. Below is a discussion combining tokens and copyrights as digital asset forms.

First Sale Doctrine and Digital Assets

In a nutshell, in order to prevent copyright owners from having an interest in subsequent sales of physical objects where the copyright is manifested, and where the rights holders could control all secondary markets of these goods, the first sale doctrine was adopted. This doctrine was originally explained in the Supreme Court case Bobbs-Merrill Co. v. Straus, 210 US 339 (1908) and was later codified in the Copyright Act of 1909 which said:

“[T]he copyright is distinct from the property in the material object copyrighted, and the sale or conveyance, by gift or otherwise, of the material object shall not of itself constitute a transfer of the copyright, … but nothing in this Act shall be deemed to forbid, prevent, or restrict the transfer of any of a copyrighted work the possession of which has been lawfully obtained.”

Under the first sale doctrine, when a consumer buys a physical book, for example, the consumer cannot copy the book and sell the copies without violating U.S. copyright laws. [See the recent Supreme Court case Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. ____ (2017) regarding “patent exhaustion” and compare the similarities to the “first sale doctrine” for copyrights which may be instructive:  “The Patent Act grants patentees the “right to exclude others from making, using, offering for sale, or selling [their] invention[s].” 35 U. S. C. §154(a). For over 160 years, the doctrine of patent exhaustion has imposed a limit on that right to exclude: When a patentee sells an item, that product “is no longer within the limits of the [patent] monopoly” and instead becomes the “private, individual property” of the purchaser. Bloomer v. McQuewan, 14 How. 539. If the patentee negotiates a contract restricting the purchaser’s right to use or resell the item, it may be able to enforce that restriction as a matter of contract law, but may not do so through a patent infringement lawsuit.” [Emphasis added.] Syllabus] However, the consumer has a personal property interest in the book itself and can sell the physical copy without worrying about the copyright owner alleging that the consumer has violated the author’s rights to the book.

Once computer programs were covered under copyright law in 1980 and where those who bought physical copies of computer programs could make an archival or electronic copy of the program without violating copyright law, an unanticipated problem of digital downloads was ushered into the music industry as well as the software industry.

The most recent version of the Copyright Act under 17 USC 109 (b)(1)(A) says:

“[U]nless authorized by the owners of copyright in the sound recording or the owner of copyright in a computer program (including any tape, disk, or other medium embodying such program), and in the case of a sound recording in the musical works embodied therein, neither the owner of a particular phonorecord nor any person in possession of a particular copy of a computer program (including any tape, disk, or other medium embodying such program), may, for the purposes of direct or indirect commercial advantage, dispose of, or authorize the disposal of, the possession of that phonorecord or computer program (including any tape, disk, or other medium embodying such program) by rental, lease, or lending, or by any other act or practice in the nature of rental, lease, or lending. Nothing in the preceding sentence shall apply to the rental, lease, or lending of a phonorecord for nonprofit purposes by a nonprofit library or nonprofit educational institution… .”

As a result, rights owners have updated the terms and conditions related to digital downloads and sales (whether music or software) and called such sales “licenses to use” which circumvents the first sale doctrine permitted for physical personal property. In this way, most rights to downloaded digital assets are retained by the copyright owner, since consumers are buying licenses.

Licenses are personal property under U.S. law, but the license terms are usually unknown or unread by consumers. As compared to the Napster days when peer-to-peer distribution was frowned upon, successful and legitimate business models have been built around licensing instead of sales, which is reflected in the proliferation of music streaming services. Unknown to most users is the multi-layered licensing terms services such as Spotify and iTunes have to navigate before music or podcasts reach consumer eyes and ears.  According to Anthony C. Eichler:

“Most people probably assume that when they “purchase” a song on iTunes, they “own” it. Of the roughly 800 Million iTunes accounts, it is likely that very few consumers actually took the time to sit down and read the daunting and lengthy Terms & Conditions that they agree to with the click of a button. [Footnote omitted.] This agreement, however, states that they do not actually own anything they pay for via iTunes. [Footnote omitted.]  To the contrary, they have been granted a limited license to access the digital asset only on their account, and only on a limited number of devices linked to the account. [Footnote omitted.] Further, the limited license granted by the User Agreement is non-transferrable in nature.”

Any consumer transparency in this industry is an astounding marketing and sales feat. For a typical song advertised, sold and performed on a music website, there are publicity rights (if you use a photo of an artist, for example, you have to have permission from the photographer as well as the artist to post the artist’s image); music rights (both performing and mechanical licensing rights have to be negotiated); cross-platform playing permissions if the player is using proprietary technology; the list goes on.

Although there is no nationwide definition of a digital asset, for purposes of comparison, here is the Delaware Code’s definition:

(7) “Digital asset” means data, text, emails, documents, audio, video, images, sounds, social media content, social networking content, codes, health care records, health insurance records, computer source codes, computer programs, software, software licenses, databases, or the like, including the usernames and passwords, created, generated, sent, communicated, shared, received, or stored by electronic means on a digital device. “Digital asset” does not include an underlying asset or liability that is governed under other provisions of this title.

Unfortunately, the Delaware Code’s definition appears under Title 12, Decedents’ Estates and Fiduciary Relations, Chapter 50. Fiduciary Access to Digital Assets and Digital Accounts. In other words, the definition only applies if the digital asset owner is dead.

In the case Capitol Records v. ReDigi, the court made it clear that the first sale doctrine does not include digital assets when a company is attempting to purchase and resell them on a digital domain. In its conclusion, the United States District Court for the Southern District of New York said:

“At base, ReDigi seeks judicial amendment of the Copyright Act to reach its desired policy outcome. However, ‘[s]ound policy, as well as history, supports [the Court’s] consistent deference to Congress when major technological innovations alter the market for copyrighted materials. Congress has the constitutional authority and the institutional ability to accommodate fully the varied permutations of competing interests that are inevitably implicated by such new technology.’ Sony, 464 U.S. at 431, 104 S.Ct. 774. Such defense often counsels for a limited interpretation of copyright protection. However, here, the Court cannot of its own accord condone the wholesale application of the first sale defense to the digital sphere, particularly when Congress itself has declined to take that step.”

It may be worth considering a few things regarding artists using tokens for branding and work distribution. Specifically, whether:

  1. The token itself, if used to access existing content, may be considered a digital asset;
  2. If token access is to copyright protected material, whether that copyright protected material may be sold depends on how and what rights the artist chooses to sell, e.g., whether the artist is granting rights to use in the form of a license; and
  3. Whether the token or key can be sold or made available separately from the copyright or other intellectual property protected work.

To be a successful artist, whether a visual artist or a musician, requires an increasingly complex array of knowledge that was just not the case when you had a friend design your mixtape sleeve to sell at shows.

My prediction:  Token use as described above may become a threshold test case for establishing digital assets as a federally permitted statutory exception to the “first sale” doctrine under copyright law.

Thank you for reading.

[This article is derived in substantial part from a booklet prepared for an “Art on the Blockchain” MeetUp event I co-hosted with Jeff Clarkin held on June 13, 2017 at The Black Cat in Washington, DC. It is intended for educational and informational purposes only and is not intended to substitute for legal advice.]

Marriage in Ethereum – A Cautionary Tale

June 24, 2016

In May 2016, a couple who intend to get married in December 2016 created a prenuptial smart contract agreement on Ethereum in blockchain. Ethereum is not a honeymoon resort, but provides a unique way to create, enter into, execute, pay for, secure, and enforce, contracts. The preparation of a prenuptial agreement in this manner heralds an evolution of contracts and contract management. What follows is my take on the legal intersection of autonomous contracting software and human relationships – specifically, a self-executing prenuptial agreement.

Prenuptial agreements are nothing new. Neither are virtual contracts. What is new is how this contracting process runs without human intervention based on a sequence of coded events monitored and executed by a virtual distributed transaction-based and encrypted system. What began as a transparent and public peer-to-peer financial ledger using bitcoin cryptocurrency, is now on the verge of managing personal lives as well.

I have watched bitcoin cryptocurrency and the underlying transaction software which supports the blockchain infrastructure for some time. Cryptocurrency evolved from the current fiat monetary system and has been compared to the gold standard. These monetary forms rely on a belief that the currency (in whatever form) has an agreed upon, or market created, value. Similarly, consideration, a necessary legal contract element, relies upon the parties agreeing that the value exchanged (the consideration – whether money or promises) is sufficient for an enforceable contract.

Blockchain is often described as an online decentralized ledger of financial transactions, the nature of which is transparent to others on the blockchain.  Ethereum is a blockchain platform over which cryptocurrency can be exchanged as well as smart contracts formed.

Co-founder, Vitalik Buterin, described Ethereum as “a “world computer”: a place where anyone can upload and run programs that are guaranteed to be executed exactly as written on a highly robust and decentralized consensus network consisting of thousands of computers around the world.” The Ethereum platform uses “ether” cryptocurrency, a competitor to the more familiar bitcoin. The smart contract manages a series of mini transactions (with the colloquial meaning, not the Ethereum definition), each of which build the agreement whole. Along the way, “fees” are paid for each interaction along the blockchain process. The fees pay the “miners” who process each transaction.

Now back to the marriage!

When I learned about this prenuptial agreement, I was intrigued. Initially, I wondered why anyone would want to do such a thing. Then I thought this experiment was a disaster waiting to happen. Finally, I realized that this could be awesome!

A prenuptial agreement is a promise in consideration of marriage which has to be in writing in most, if not all, 50 U.S. states and the District of Columbia. This writing requirement comes to the U.S. via the British “Act for the prevention of Frauds and Perjuryes,” which required some transactions to be in writing, whereas many oral agreements remained as enforceable as written ones. A promise in consideration of marriage is one example among many.

A case that I used in my Engineering Law class for several years was Curtis v. Anderson, where Curtis wanted Anderson to return an engagement ring when he broke off the engagement.  Anderson refused. Curtis brought a lawsuit which claimed that he gave her the ring in consideration of marriage and that she agreed to return the ring if they did not get married. In the alternative, the ring was a conditional gift.

If the ring was a promise in consideration of marriage, the promise would have to be writing under the statute of frauds.

If a ring is presented upon acceptance of a marriage proposal (the promises have already been exchanged in advance of the ring giving), it may be viewed as a conditional gift under Texas law. As a conditional gift, the gift’s terms don’t have to be in writing. The conditional gift rule only works, however, if the person who accepted the ring/gift broke the engagement.

Did Curtis get back the ring?

The court determined that the statutes related to prenuptial agreements and the statute of frauds applied. There was no writing, so whatever the parties said either before or after the engagement, did not create an enforceable prenuptial agreement. In addition, since Curtis broke off the engagement, the ring did not qualify as a conditional gift. Therefore, Anderson didn’t have to return the ring.

For my students, this was a much discussed result. Happily for me, the case was an opportunity to talk about the difference between ethics and law, as well as the difference between an engagement (which does not have to be in writing) and a promise in consideration of marriage (which does).

Which leads to the Ethereum prenuptial agreement and whether its terms would be enforceable. Generally, a contract in the U.S. is enforceable if: 1) the parties can legally enter into the contract; 2) there is an offer and acceptance; 3) there is consideration; and 4) the subject matter/form is legal.

Let’s look at each contract element in the Ethereum prenuptial agreement.

Parties and legality.  I don’t know how old the parties are or whether they may legally agree to marry. But, there is a clue – the prenuptial agreement is related to an anticipated marriage in India. If the parties entered into this agreement in India, it may not stand. Nonetheless, a dispute involving the prenuptial agreement may be resolved based on British common law which may apply in India via the Indian Contract Act of 1872.

Offer and acceptance. The parties’ acceptance may be indicated by their seemingly independent interactions with the smart contract.

Consideration.  The consideration in the prenuptial agreement is the exchange of promises to do or not do an enumerated list of things. In addition, there is consideration in the form of ether, which pays for the transactions in blockchain and which, in turn, creates the prenuptial agreement. The fees appear to have been paid and the parties appear to have agreed to its value and therefore have agreed to the prenuptial agreement’s terms.

Subject matter/form.  Let’s assume there are no statutory impediments to prenuptial agreements – could this version be enforceable if the parties live and marry in the U.S.? Prenuptial agreements are legal in the U.S. In the agreement, the magic words required for an enforceable prenuptial agreement are in writing: “in consideration of the marriage about to be solemnized between the parties.” The agreement also makes references to date nights, television viewing rules, insult restraint, etc. But to qualify as enforceable agreement, there would have to be acts that the parties have the legal rights to do, and in exchange for not exercising those rights, agree to be bound by the contract.

An example is the “dollar bill” clause of the prenuptial agreement, where the parties agree that “shopping sprees” are only permitted every fortnight, with the exception of food purchases, which have no monetary limit. If the parties do marry and one of the parties violates the $$ clause with daily shopping sprees using a joint bank account from which the shopping sprees are financed, could this violation be used as a reason to file for divorce? Maybe. Would it matter that the contract was entered into on the Ethereum platform? I do not believe so. The final written document can presumably be understood by both parties, even if they did not write the underlying code responsible for its formation. In addition, each phase of the transaction may be considered a separate agreement and further evidence of the parties’ consent to its terms. Absent fraud or duress, the agreement may be enforceable in the U.S.

There have been posts that say that smart contracts may not be legally enforceable. I was unable to discern the single element that would render them illegal. There are contracts that are illegal because of its purpose, e.g., a smart contract to commit fraud is illegal, and therefore unenforceable. Ultimately, the legal problems may be based on the blockchain code itself. If that is the case, I would suggest that each step be analyzed as a separate contract (because consideration is exchanged at every stage in Ethereum) to determine whether each transaction is legally enforceable, e.g., is there offer and acceptance? consideration? legal parties? proper form/legal? All would have to exist for a legally enforceable contract in the U.S.

This troubling issue was explained further in an article by an attorney, Stephen D. Palley. In summary, he suggests that since the nodes through which transactions pass are decentralized, there is no one entity responsible when the transaction fails due to a problem with the software. Once launched, a smart contract does not require or rely on human intervention and is managed by a decentralized autonomous organization or “DAO.” The inevitable legal problem a DAO faces, however, is who to sue if something goes wrong.

This issue is precisely what arose recently when unknown (as of June 23, 2016) Ethereum developers siphoned money from one decentralized autonomous organization’s (called The DAO) account. That smart contract was created using the Solidity programming language which operates in the Ethereum environment. The DAO was recently formed as a business entity similar to an LLC in Switzerland, perhaps in response to Mr. Palley’s articles and other calls to create a formal business entity. Within a year, liability risk went from non-existent to reality for The DAO investors.

Thus, there are two legal landscapes over which a potential user must navigate – the umbrella contract itself as well as the individual transactions over the blockchain.

Where do I see additional problems? The Ethereum platform uses language that is defined differently from legal terms of art. There are centuries of legal precedent that will not be overturned by code. That fact, however, does not mean that such a lexicon cannot be developed. Indeed, PAX has come up with a legal scripting language for Ethereum.

Upon my cursory review of this subject and applying it to a prenuptial agreement, Ethereum or something similar may make legal contractual transactions streamlined, transparent, and verifiable, especially with regard to simple purchases and template driven services.

Also, promoting something similar to a prenuptial agreement that is available for anyone to use without a disclaimer – e.g., this agreement may not be valid in your jurisdiction, or please consult local laws or we are not providing legal advice – should not be encouraged, even if intended to be humorous.

It is with both enthusiasm and caution that I look forward to what smart contracting, DAO, and cryptocurrency will become. I hope that the programmers recognize that the people with whom these systems interact are rarely streamlined, transparent or verifiable. I also hope that ethical, fiduciary, and social concerns are not abandoned as developers design automated contracts for some of the most intimate of human relationships.

Nothing in this article is purported to be legal advice. You can contact me via email at cynthia.gayton@gayton-law.com.