V1 CryptoPunks Legal Talking Points March 2022 Some Basic Facts About the Original V1 CryptoPunks The V1 CryptoPunks (or ‘V1 Punks’) are a collection of 10,000 unique digital characters, and are one of the earliest PFP (profile picture) NFTs with proof of ownership stored on the Ethereum blockchain. When LarvaLabs released the original V1 Punks on June 9, 2017, they kept 1,000 for themselves, and made the rest available to the public for only the cost of the transaction fee. After launch of the original V1 CryptoPunks and the commencement of trade, users quickly discovered a bug in the smart contract which allowed for a buyer to receive not only the NFT but also to reclaim the purchase cost. The seller was left with no NFT and no ETH. LarvaLabs set about re-writing the CryptoPunks smart contract, and after the exploit was fixed, the original versions were deemed the ‘Version One’ collection. Two weeks later, on June 23 2017, LarvaLabs airdropped the newly-minted V2 CryptoPunks to all of the V1 CryptoPunks minters, bearing the same ID. The V1 NFTs and the V2 NFTs each contain a hash pointing to the same CryptoPunk image on the LarvaLabs server. Neither the V1 nor the V2 CryptoPunks were issued with a formal, written license; but they were designed for resale. That much is clear. The ability to buy and sell every CryptoPunk NFT is hard coded into its smart contract. These NFT’s were literally made for selling and that was the clear intent of LarvaLabs, as expressed on many occasions over the years. After all, the V2 CryptoPunks Smart Contract was created specifically to improve the marketability of the V1s. Since the V1s and V2s were each issued within a couple of weeks of each other, presumably the same terms, whatever they were, applied to each collection. Over the next several years, as the V2 CryptoPunks gradually increased in value, few people thought much about the original V1s. After all, if you sold one you might not get paid. And who needs that? It goes without saying that you can’t force new license terms onto an NFT, or any other good, that was released into the stream of commerce years ago. Think about that for a second. “Sorry, you can no longer sell your prize 1972 ABBA record on e-Bay. The Swedish musical geniuses have changed their mind. Oh, and you can’t listen to it either. That might cut into new streaming revenue.” No… you bought your record fair and square. It's real, not a counterfeit. Nobody can come along later and tell you that you can’t sell it or listen to it. Nonetheless, facing growing concern about how broad the rights of a CryptoPunk holder might be, LarvaLabs noodled on trying to establish various licensing standards they hoped would clarify what CryptoPunk holders could and couldn’t do with their NFTs. For example, LarvaLabs co-founder John Watkinson posted a May 17, 2019 Discord chat stating: “to clear up any license confusion, we are going to adopt the standard NFT License for CryptoPunks and Autoglyphs, detailed here: https://niftylicense.org”. That license would have allowed for unrestricted purchase, sale and display of a Punk along with a limited commercial right authorizing the owner to earn up to $100,000 per year in merchandising revenue. There were other LarvaLabs musings on potential license terms for the CryptoPunks. None of them were ever implemented, but there is one thing all of the prospective license agreements had in common: they all expressly allowed for the purchase, sale and display of every CryptoPunk NFT. By 2020, the V1 CryptoPunks had largely become an afterthought. But then, in 2021, something happened that revitalized interest in the V1 collection. Certain V1 CryptoPunks began being reissued as ERC-721 tokens, via a community-made smart contract (“wrapper”), fixing the bug in the original smart contract and making it possible to resell the V1 Punks on platforms such as OpenSea. This development was met with mixed reviews. Many in the NFT community welcomed the advance, as did some holders of V2 Punks. After all, quite a few of them still owned their V1s. However, the more recent purchasers of V2Punks were largely aghast. What would this mean for the value of their NFT? They demanded action from LarvaLabs – and action they got, just not what they were expecting. In January 2022, LarvaLabs took some of the V1 CryptoPunks they still owned and wrapped them in the ERC-721 smart contract. (So far so good…) Then they offered the wrapped V1 CryptoPunks for sale on OpenSea in the V1 Punks (Wrapped) collection right next to all of the other V1 Punks listed for sale there. (An unusual form of protest, but OK…) LarvaLabs sold about forty of their V1 Punks for a combined value of 270 ETH. (Not bad… but here comes the good part). After selling the V1 CryptoPunks to unsuspecting buyers on OpenSea, LarvaLabs turned around on February 5, 2022 and sent OpenSea a DMCA takedown notice resulting in the delisting of all the V1 Punks, including those they had just sold. LarvaLabs thumbed its nose at the people who had just purchased their V1 Punks saying in effect, “Ha Ha. I’m going to claim the NFT I just sold you cannot be resold and has no commercial value. And by the way, I’m keeping your money.” There are a variety of terms to describe that sort of conduct, none of which are repeatable here. Well, to their credit, LarvaLabs admitted their error, stating “We made a mistake… That was a bad decision. We regret it and we apologize to the community.” To make it right they promised to donate 210 ETH to the Rainforest Alliance. (Wait, what?) Of course, this is laudable in and of itself. The Rainforest Alliance does great work. But the promised donation did nothing to address the grievances of the V1 Punk owners, either new or old. The V1 Punks (Wrapped) have served OpenSea with their own DMCA Counter-Notice stating that the V1 CryptoPunks are legitimate, authentic Punks that do not infringe on whatever rights LarvaLabs thinks it might have. On 12 March 2022, Yuga Labs announced they had acquired the IP for the CryptoPunks collection from LarvaLabs. Moderators on their official Discord channel have repeatedly advised they would not follow up on the DMCA lodged by LarvaLabs against V1 CryptoPunks on Opensea. FAQ’s Are the V1s real CryptoPunks? Yes, absolutely. They are the originals, created by LarvaLabs itself and intentionally released to the public. They are not derivatives and not fakes. They were released prior to the V2 CryptoPunks. Can I use the name “V1 CryptoPunks” to describe my NFT? Yes, you have a genuine, authentic CryptoPunk NFT. It was created and issued by LarvaLabs, just like the V2s. Although “CryptoPunks” is a trademark owned by LarvaLabs, keep in mind that anyone is allowed to use a trademark to sell authentic goods. If you want to sell a bottle of Coke, you can and should call it Coke so long as it’s the real deal. Now, if you made some homebrew in your garage and are calling it Coke, that’s misleading and a different story… Can LarvaLabs or Yuga Labs stop me from selling my V1? No. The ability to buy and sell a V1 CryptoPunk is hard coded into its smart contract, just like a V2. Can LarvaLabs or Yuga Labs sue me if I buy, sell or display a V1? LarvaLabs has never sued any holder of a CryptoPunks NFT, V1 or V2. They don’t have a viable legal claim. By the way, filing a lawsuit would open up a whole can of worms and raise some awkward questions for Larva/Yuga Labs, like: “Do they actually own any legally recognized interest in the CryptoPunks?” They might not like the answer. Are the CryptoPunks copyrighted? It’s an open question – one that probably would require a court to decide. While LarvaLabs was issued a copyright certificate for the V1 CryptoPunks collection, that certificate was based on a single submission of all 10,000 CryptoPunks collectively in one image, not for any single CryptoPunk. In order to receive copyright protection, you have to show a certain amount of human creativity. Putting 10,000 images in a matrix probably counts. However, it’s a different story when it comes to any single CryptoPunk NFT. In creating the CyrptoPunks, LarvaLabs established 98 individual graphic elements in 8-bit-style pixel art. Then they ran a software program to randomly generate the images that would become the individual CryptoPunks. Each CryptoPunk is just a machine-generated amalgamation of certain individual elements. Few, if any, of the individual pixel art elements contain sufficient creative expression to qualify as being copyrightable. Randomly mixing uncopyrightable elements does not necessarily create copyrightable expression, particularly without human involvement. Larva/Yuga Labs probably don’t want a court making that determination for them. If a V1 CryptoPunk turns out to be copyrighted, who owns the copyright? This was an easy question to answer before the recent acquisition of CryptoPunks by Yuga Labs. LarvaLabs, as the original creators, would have been the owners. We don’t, however, know if the ownership of the Copyright for V1 CryptoPunks was transferred to Yuga Labs in the recent acquisition. It must have been, though, right? Copyright ownership can only be transferred in a writing signed by the owner. There has been no such writing associated with the issue of the CryptoPunks, either V1 of V2, until now with the acquisition by Yuga Labs. Given the uncertainty, does copyright law have anything useful to say about my V1 CryptoPunk? Well yes, actually. Even if Larva/Yuga Labs holds a valid copyright interest in your V1 CryptoPunk, that doesn’t mean you can’t use your Punk in certain ways. Of course you can. Think about buying a vinyl album from a record store. Did you have a written agreement with the record store when you bought the album? No. Does the album contain copyrighted music? It sure does. Did you acquire the copyright in that music when you bought the album? No. But can you use the album in certain ways? Absolutely. You can play it, sell it, and display it for sale. In copyright law, that’s called the First Sale Doctrine. At a minimum, you can do the same with your NFT. Tell me more about the First Sale Doctrine (I’m thinking about going to law school). If you want to get technical, under 17 U.S.C. § 109, an individual who purchases a copy of a copyrighted work from the copyright holder receives the right, without the copyright owner’s authority, to sell, display or otherwise dispose of that particular copy. Once the copyright owner consents to the sale of particular copies of its work, it may not thereafter exercise the distribution right with respect to those copies. Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 988-89 (9th Cir. 2008). Does using the V1 CryptoPunks wrapper create a legal problem? No, the wrapper just allows the old ERC 20-based V1 Punk to conform to the current ERC 721 standard so it can be sold on OpenSea and similar platforms. This doesn’t raise any legal issues. Is there a license agreement covering the CryptoPunks? There was no traditional, written license agreement associated with the issuance of the CryptoPunks. That much is clear. But does that mean you don’t have a license to use your CryptoPunk? Not so fast… Don’t forget about the smart contract, which in many ways defines the existence of your NFT. That ERC-20 contract specifically gives you permission to buy and sell your CryptoPunk. This set of rights is embedded in the code. The ability to offer your CryoptoPunk for sale is part of its digital DNA and can’t be revoked. But apart from the smart contract itself, there is something called an “implied in fact license.” Copyright law provides that in the absence of a written license agreement, the purchaser of a tangible asset reflecting intellectual property rights has the right to use the asset in a “normal and natural manner” that may be deduced from the nature of the asset. In the case of your NFT, that would mean at least the right to buy it, sell it and display it for sale. How broad is my fancy, implied-in-fact license to use my V1Punk? We’re so glad you asked. When determining the scope of an implied license, courts consider whether approving the activity in question is vital in order to give business meaning to the agreement to purchase the copy, as well as various policy considerations that are aimed at giving effect to the intent of “reasonable parties.” So, at the time the V1 CryptoPunks were issued, was it reasonable to infer that you could resell them? Absolutely, particularly given the fact that both the smart contract and the First Sale Doctrine allow it. LarvaLabs wanted the V1 Punks to be resold. They made that clear. Good luck claiming that’s not what they intended back when the V1s were first issued. And by the way, who ever heard of issuing an NFT that can’t be bought, sold or displayed? What would be the point? You kind of need those minimum functions in order to give reasonable “business meaning” to the transaction, right?
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