Out-Law Analysis 3 min. read

Art collector's court case signals potential legal and contractual issues with NFTs

Liverpool-based art collector and computer programmer Amir Soleymani has recently filed a High Court claim against non-fungible token (NFT) marketplace Nifty Gateway, concerning the auction terms relating to his $650,000 third-place bid for digital artist Beeple’s ‘Abundance’ NFT.

Although Soleymani’s claim represents one of the first legal cases in the UK concerning the sale of NFTs it certainly will not be the last.

The Abundance auction

Bidders for Abundance entered into a “ranked auction” on Nifty Gateway between 30 April and 2 May 2021 where the top 100 bidders each “won” a numbered edition of Abundance – the number corresponding to the position of their respective bids. The top bid was made by Ethereum’s co-founder Taylor Gerring, who received the first edition for $1.2 million.

When the auction closed, Soleymani was the third-highest bidder and was asked by Nifty Gateway to pay the value of his bid for a second edition of the Beeple work. However, claiming that he had only bid on the piece with the intention of acquiring the original artwork offered for sale and not any other edition, Soleymani refused to pay Nifty Gateway the value of his third-place bid.

It is widely acknowledged that NFTs that are not 'first edition' carry significantly lower value than an “original” first edition. Therefore if Soleymani were to re-auction the second edition ‘Abundance’ NFT as an individual lot, he would be very unlikely to attract a bid anywhere close his $650,000 bid for the first edition.

In response Nifty Gateway froze Soleymani’s account and access to his collection of around 100 NFTs on its site, understood to be worth millions of dollars, and filed arbitration proceedings in New York in July against Soleymani to seek payment of the outstanding amount.

Since then, Soleymani has instigated legal proceedings in the UK and a counter-suit in the US, where Nifty Gateway is based.

In the UK lawsuit Soleymani claims that the online auction terms he signed up to in February were changed in April and contests the validity of the ranked auction format. He is alleging that the true nature of the auction format was “unfair” and that the rules and procedures of the classified ranked auction were not properly communicated to bidders prior to the sale. It is understood that Soleymani also claims that the Consumer Rights Act 2015 exempts UK residents from the terms of use for Nifty Gateway.

Why have NFTs taken off?

An NFT is a unique and non-divisible digital asset that, unlike “fungible tokens” or fiat currency – government issued currency which is not backed by a commodity – does not have an interchangeable value. NFTs are verified and powered using blockchain, technology in which a network of computers records transactions and gives buyers proof of authenticity and ownership.

NFT owners have the ability to upload and “mint” the NFT with metadata or other related facets, such as images, 3D animations, video clips, and music. This process codifies the work, establishing a permanent record of price, authorship, and provenance, and prevents the file from being digitally counterfeited, modified or deleted. As a result, no two NFTs are exactly the same, since each work contains unique digital properties.

Digital artists are therefore drawn to the technology’s ability to embed uniqueness, scarcity, proof of provenance, and even functionality related to future sales of the work. For example, with NFTs, artists can embed code in the form of “smart contracts” to ensure certain benefits, such as an ongoing share of royalties from all sales on the secondary market.

The popularity, value and significance of NFTs within the international art market has surged recently, with another of Beeple’s works – ‘Everydays: the First 5,000 Days’ – smashing records when it fetched $69.3m at a Christie’s sale earlier this year. This was the third highest price achieved by any living artist to date.

According to the NFT Report 2020, published by L’Atelier BNP Paribas and Nonfungible.com, the value of the NFT market grew by 299% in 2020. Nonfungible.com also said more than $2 billion was spent on NFTs during the first quarter of 2021 alone.

While NFT creators and other “cryptoart” advocates are excited by the huge sums poured into this emerging market for digital goods, some critics are put off by the speculative craze surrounding NFTs and the resale market that has driven prices up, as well as the unique legal and regulatory issues that NFTs may give rise to.        

Future issues

The Soleymani case illustrates the types of contractual disputes related to the sale of NFTs that may arise, but it remains to be seen how existing laws – for example related to copyright, anti-money laundering and cyber security – will interact with the emerging digital asset class.

Copyright issues, for example, have arisen where artists have had their work copied and sold as an NFT without their permission.

Recently, 27-year-old digital artist Ludwig Holmen discovered that an anonymous person had defrauded more than 2,000 people in an auction presale by creating NFTs supposedly for a collection of Holmen’s photographs of digital figurines. The presale fetched $138,000 from the bidders, who received nothing but images of emoticons in exchange for their bids.

It is not yet clear whether NFTs represent the future of the art market or a much-hyped bubble. Either way, as the nascent NFT market continues to grow and evolve, so too will the legal and regulatory issues that surrounds it.

Written by Oliver Tapper, a litigation expert in Pinsent Masons' art and cultural property law team.

You can contact Oliver by email at: [email protected].

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