How to apply the resale right, a rule created in 1920 to the very modern art market assets that are NFTs (non-fungible tokens)? Attempt to answer.
The concept of resale right
The resale right codified in article L. 122-8 of the CPI consists of a percentage paid to artists and their assignees on the occasion of each subsequent resale of their works, whenever a seller, buyer or intermediary, a professional of the market art, when the sale of the work is carried out on French territory or is subject to value added tax. The resale right is transmitted after the author’s death to his heirs and remains in favor of the latter during the current calendar year and the following 70 years. This resale right applies to sales of works when the price achieved is greater than or equal to 750 euros excluding taxes, with the exception of works which the seller acquired directly from the author or his assignees before resale and whose price sale is less than 10,000 euros. The rate of the resale right decreases according to the amount of the sale price of the work, therefore it is 4% for the sale price range between €750 and €50,000 and 0.25% for higher sales. at €500,000. The amount of the resale right is now limited to €12,500.
NFTs, a new asset class
The NFT is a non-fungible data file located on a blockchain (“blockchain ”) and intended to guarantee the authenticity of an original work or its reproduction, or even to constitute the original work itself. Indeed, it can refer to a single digital creation or constitute a “tokenized” version of pre-existing creations, whatever their genre. NTFs in the art sector raise a number of specific issues, in particular as regards the ownership and management of the patrimonial rights attached to a work of art or the tax regime applicable to them. For the Superior Council of Literary and Artistic Property (CSPLA), “this phenomenon poses important and new legal questions relating to both intellectual property and the technology used, relating to the originality of the work. management methods, the application of this technology to public collections which are characterized by their inalienability, the financial framework to be recommended to manage/limit the risks of speculation and money laundering, the applicable taxation, or again the traceability of the work and the applicability of private copying fee or resale right, the use of a system of smart contract on blockchain to manage the resale right and the conditions of resale, the risk of possible confusion over time with intellectual property or fraudulent reuse”.
A booming market
NFTs have boosted market growth in 2021. While the recent collapse in cryptocurrencies may worry art market investors and downgrade these assets, since the rise of these assets is tied to that of cryptocurrencies, they have recorded some good performances in recent months. According to the latest 2022 Ultra Contemporary Art Market Report released last October, 50 NFT lots were sold for $3.2 million in the first half of 2022. A year earlier, about 30 lots had been sold for $107 million, a figure largely due to the March 2021 sale of the work of an unknown artist, an American graphic designer known as Beeple, which fetched $69.3 million . In 2022 we are still recording record prices, albeit more modest, as evidenced by the sale of Living architecture Casa Batlló (2022) by Refik Anadol, at Christie’s in New York on May 10, 2022, for $1.38 million. Considering the amounts at stake, the subject of the resale right is therefore fraught with economic risks for the sector.
To what extent can the resale right be extended to NFT? What is the value of inserting NFT in the smart contracts ? It is in particular to answer these questions that the work mission launched by the CSPLA set itself, which issued its conclusions in July 2022 in the context of a report drawn up by the president of the mission, the lawyer.And Jean Martin and the rapporteur of the mission, Pauline Hot, teacher of requests to the State Council. In fact, the subsequent resales of NFTs raise the question of the resale right, which allows the author or his successors in title to benefit from a fee on the occasion of the sale of his work. However, the collection of the resale right is subject to a number of conditions within the framework of article L. 122-8 of the Intellectual Property Code. This text defines the resale right as “ an inalienable right to participate in the proceeds of any sale of a work after the first transfer made by the author or his assignees, when an art market professional acts as seller, buyer or intermediary”. The application of the legal resale right therefore assumes that several conditions are met: an art market professional must be involved in the resale of the work (as a seller, buyer or intermediary), the work – unique or in a limited number of copies – must have been created by the artist himself or under his responsibility, the sale must be made on French territory or be subject to value added tax.
The limit of twelve copies
First issue raised by the report: NFTs fall within the scope of Article R.122-3 of the Intellectual Property Code, which specifies that plastic creations on audiovisual or digital media must be designed within the limit of 12 copies per fall within the scope of the resale right? The works mentioned in article R. 122-2 are original graphic or plastic works created by the author himself, such as paintings, collages, paintings, drawings, etchings, prints, lithographs, sculptures, tapestries, ceramics, glass, photographs and plastic creations on audiovisual or digital media. The works produced in a limited number of copies and under the author’s responsibility are considered original works of art within the meaning of the previous paragraph if numbered or signed or duly otherwise authorized by the author. The mission provides a positive answer to this question, concluding that “there is really no reason to categorically exclude JNF or files associated with them from the scope of this article.” If some NFTs were to be considered, exceptionally, as digital media for plastic creations in themselves, in case the NFT incorporates the work, the possibility of payment of the resale right would be limited to such NFTs designed exclusively within the limit of twelve copies. The digital files associated with the NFT must, for their part, exist only in a limited number of copies to give rise to the resale right. Therefore, the Mission considers that the resale right can apply to digital files associated with NFTs, only when they are produced in a limited number of twelve copies. “The legal enforceability of the resale right raises technical questions in this context, relating to the very possibility of evaluating the limited number of these files, which does not necessarily correspond to the number of (NFT)s in circulation,” the report points out. .
The existence of NFT royalties
Second question raised by the mission: NFTs can be a tool for the effective implementation of the resale right. Indeed, the smart contracts set up for the sale of NFTs can provide for and automate the collection and payment of commissions on each sale, NFT royalties “which could be similar or even similar to remuneration for copyright and related rights”, analyzes the mission. The collection and payment of these NFT royalties are mainly handled by the NFT sales platforms. These NFT royalties cannot be assimilated to the resale right which only applies under certain specific conditions, in particular the intervention of an art market professional, where the “royalties” or commissions that can be paid by an JNF exchange apply regardless of the terms of sale of the work, concludes the report. “Furthermore, the resale right is inalienable: it belongs to public policy, and therefore cannot be the subject of a contractualisation which entails its reduction or questioning. Under these conditions, royalties improperly classified as resale right but which do not meet the legal conditions of its implementation can in no way replace the legal resale right, which will always apply as soon as the conditions set out in article L are met. 122-8 of the Intellectual Property Code are respected”, analyzes the mission. On the other hand, the NFT royalties provided by NFT marketplaces may very well coexist with the statutory resale right, the report concludes, adding that ‘one can well imagine that the holder of the resale right decides, when he ‘issues the resale right not fungible token associated with a file to which it holds the rights, provide for a 4% commission on each resale”. On the other hand, blurring the mission, as regards their current characteristics, it is not obvious that all platforms can be grasped trading NFTs as art market professionals, making sales with legal resale rights.”However, one might later imagine, subject to the development of standards and protocols, that the smart contract integrates the automatic application not only of the commissions or royalties currently paid by the platforms, but also of the legal right of continuation, through the insertion of a clause relating to the conditions of sale (presence or absence of a professional from an art market, advertising or not) which could, for example, be declared by subsequent purchasers, which would make it a real tool to consolidate the effectiveness of the resale right”, concludes the mission.