Judge Dismisses Lawsuit Over Ownership of $1.47 Million NFT

A federal court last Friday dismissed a lawsuit that questioned the ownership rules around an NFT called “Quantum,” which Sotheby’s sold for $1.47 million in 2021 as the first of its kind. The legal battle had become part of a larger effort to define rules of ownership for digital artworks.

A Canadian company named Free Holdings brought the complaint last year against the auction house and the artist, Kevin McCoy, who created the artwork in 2014 as a demonstration of the blockchain’s potential to register artworks on a digital ledger system. The artwork itself looks like something from a science-fiction movie, as if it were an alien wormhole pulsing with neon colors.

The dispute arose because the blockchain system that McCoy used for “Quantum” also required him to periodically renew his ownership rights. (Most web domains operate by similar rules.) But the artist neglected to renew terms of ownership, which allowed Free Holdings to purchase the registration and assert ownership over the work itself. The company subsequently accused Sotheby’s and McCoy of slander and commercial disparagement.

James Cott, a magistrate judge for the U.S. District Court for the Southern District of New York, dismissed the case and wrote that Free Holdings had failed to establish its claims of ownership and injury.

“Free Holdings has demonstrated nothing more than an attempt to exploit open questions of ownership in the still-developing NFT field to lay claim to the profits of a legitimate artist,” Judge Cott said in his dismissal.

William Charron, an attorney representing McCoy, said in an email that he believed the judge’s decision would clear some confusion in the market. “The significance of this case is that it prevented a party from using somewhat obscure blockchain usage rules to appropriate the work-product of an artist,” Charron explained.

During a phone interview, McCoy said that his court victory “showed that blockchain technology protects artists’ rights.”

Derek Parsons, a spokesman for the auction house, said in a statement that the dismissal of the case “is a full vindication of Sotheby’s position.” He added, “We are pleased with the victory and its significant impact for digital artists and marketplaces.”

Moish Peltz, who argued on behalf of Free Holdings, said that the company’s legal team is “evaluating its options.” He declined to identify the corporation’s owners, who remain anonymous.

The bull market responsible for the bidding war that produced such a high auction price for “Quantum” no longer exists, and the broader market for NFTs, or non-fungible tokens, has experienced a 97 percent decline in sales. But that hasn’t stopped the industry from turning a profit, nor has it discouraged creators from using NFTs as ownership records for their digital artworks.

There was a setback for the NFT industry in February when the fashion brand Hermès won its trademark lawsuit against the artist Mason Rothschild and his NFT project parodying the company’s Birkin handbags. Rothschild is in the process of appealing that decision, which had classified his NFTs as more similar to commodities than artworks.

By comparison, some legal experts view the “Quantum” decision as empowering digital artists.

“It’s a window into challenges that might be coming for the NFT industry,” said Nelson Rosario, an intellectual property lawyer in Chicago who is unaffiliated with the McCoy case. “An artist needs to understand how to make the rules of ownership clear so that a federal judge can recognize them in the event of a dispute.”