New property rights relevant to ‘data objects’ proposed

Establishing such a right would “allow for a nuanced and idiosyncratic approach to the legal characterisation of new things”, according to the body, which has considered its specific application to digital assets – from digital files, domain names, email accounts, in-game digital assets and carbon credits, to cryptoassets and non-fungible tokens (NFTs).

Reform, it said, would “help to provide a strong conceptual foundation from which other, more complex legal issues in relation to new types of thing (including new digital assets) can be determined”.

Options for reform are set out in a lengthy, detailed and technical consultation paper (549-page / 17.9MB PDF), though a summary of what is provisionally proposed (20-page / 17.8MB PDF) has also been published.

The new property right proposed would be distinct from the two existing personal property rights that exist in English law, which apply to ‘things in possession’ and ‘things in action’.

Things in possession are tangible objects considered to be capable of possession – this is, as the Law Commission puts it, “regardless of whether anyone lays claim to them, and regardless of whether any legal system recognises or is available to enforce such claims”. The example the Law Commission gave is a bag of gold, as possession of a bag of gold gives its possessor enforceable property rights.

Things in action are described by the Law Commission as things that have no independent, tangible form and exist only if there is another party against whom the right can be enforced and there is a legal system in which that right can be enforced. Examples include debts, rights to sue for breach of contract, and shares in a company.

The Law Commission said the existing law on personal property rights of England and Wales has shown itself to be flexible in relation to moving with the times. However, it highlighted that the courts have considered that the concept of things in possession does not extend to things in electronic or digital form and added that “some digital assets do not sit comfortably with the traditional meaning of a thing in action” either, since “there is no obvious obligor against whom a right in relation to some digital assets can be enforced”.

The Law Commission has therefore identified a gap in the law which it thinks would merit the establishment of a new concept of ‘things’ – data objects – and considers that the law should recognise control over those data objects.

Under its proposals, a thing would need to satisfy three criteria to qualify as a ‘data object’. First, it would need to be data represented in an electronic medium. Second, it would need to exist independently of other objects, persons or legal system. Third, it would need to be rivalrous, which the Law Commission said means that if one person is using the resource in question, it “necessarily prejudices the ability of others to make equivalent use of it at the same time”.

Mark Marfé of Pinsent Masons, who specialises in helping businesses protect information, said: “Rivalrousness is an important criterion as it has long been recognised that under English law there is no property in information which could be created simultaneously by multiple sources – such as weather data. The same is true even if the information is confidential where a claim against a third party for misuse of the information requires a pre-existing duty to keep the information confidential. The rivalrous requirement distinguishes the data object from information per se which lacks this characteristic.”

The Law Commission’s proposal that a data object must exist independently of the legal system means intellectual property (IP) rights would be excluded from the new category of property right that has been proposed. IP rights expert Gill Dennis of Pinsent Masons explained why.

“IP rights are mostly created by statute, although some are judge-made, and give creators or registered owners rights to use the underlying work, mark or invention and to exclude others from doing so, with a view to encouraging innovation,” Dennis said. “IP rights are artificial legal creations that dictate who is permitted to do what with an underlying thing. They depend wholly on the legal system for their existence.”

“IP rights are things in themselves and fall within the current category of ‘things in action’ – in other words, IP rights have the status of intangible personal property that can only be claimed or enforced through legal action,” she said.

Dennis said, though, that NFTs appear to satisfy the criteria for the new category of property rights applicable to ‘data objects’ and explained why this is so despite the fact IP rights do not.

“There is some misconception around the connection between NFTs and IP rights,” she said. “It is frequently believed that if you acquire an NFT of, say, a famous piece of art you are acquiring the IP rights in the original piece of art itself. Usually that will not be the case and the NFT will merely grant a licence permitting the NFT owner to use the image for certain restricted purposes and no more.”

“NFTs could shake up how the market operates and transacts with regard IP rights. For example, the owner of an NFT may sometimes acquire IP rights in an underlying asset but more usually a licence to use the asset for certain defined purposes. The NFT is not an IP right in itself but a crypto token that can confer certain IP rights. The IP rights sit outside the crypto token system and, unlike NFTs, depend on the law for their existence, which makes them unsuitable for protection as a data object,” she said.

Civil fraud and asset recovery specialist Jennifer Craven of Pinsent Masons said the Law Commission’s proposals build on work previously undertaken by The LawTech Delivery Panel's UK Jurisdiction Taskforce (UKJT), which considered, among other things, that cryptoassets should be treated as property.

Craven said: “Since the UKJT’s statement, there have been a flurry of cases brought by victims of fraud before the High Court in England and Wales who wish to make use of powerful proprietary and common law interim remedies, such as injunctions and other ancillary orders such as disclosure orders, to trace and recover cryptoassets across the globe. The English courts have even adopted novel and innovative approaches to the tracing and recovery of NFTs, permitting service of notice of proceedings by ‘air drop’.”

“Whether such interim remedies are granted often depends on crypto being identifiable as property. In light of the Taskforce’s conclusion that they are property, and the English Court’s eagerness to be innovative and flexible to the plight of victims of crypto fraud, England is rapidly becoming the choice of forum in which to bring these complicated and high value claims,” she said.

“Happily, the Law Commission’s consultation on digital assets proposes that no reform is needed in relation to proprietary injunctions and worldwide freezing orders. If this is the conclusion of the consultation, it will be welcome news to legal practitioners and victims of crypto fraud, and we will likely see the current trend for commencement of these types of fraud claims before the English High Court increase,” Craven said.

Technology law expert Sarah Cameron, also of Pinsent Masons, said the Law Commission’s proposals should also be viewed in its wider context – the push to bring legal clarity and confidence around the digital landscape and remove legal impediments to the use of new technologies.

“This agenda is being pushed to demonstrate that the UK is progressive and pro innovation, to create the opportunity for the use of English law as a foundation to transactions undertaken digitally, and to demonstrate that it is a jurisdiction where you can seek legal remedies and judicial resolution,” Cameron said.

According to Cameron, the value of English law and the English legal system to the UK economy in relation to the development of new technologies like blockchain and digital assets has been “most powerfully and eloquently championed” for a number of years by Sir Geoffrey Vos, Master of the Rolls and head of civil justice in England and Wales, alongside the work of the Law Commission and UKJT on cryptoassets and smart contracts.

Cameron said that work done on enabling digital trade, culminating in the Electronic Trade Documents Bill now before parliament, is closely linked to the Law Commission’s proposals too.

“As these various endeavours come together, the technology, legislation and English legal system jigsaw is falling into place,” Cameron said. “The UK should take advantage of the opportunity to position itself as the candidate of choice to provide the legal foundation for the use of distributed ledger technology and cryptoassets internationally, with the significant economic benefits that would ensue.”