NFT Marketplaces and Secondary Sale Royalties: Smart Contracts, Copyright, and Contractual Expectations

Legal Frameworks for Creator Compensation in Digital Asset Transactions

Category: Intellectual Property | Subcategory: Digital Assets

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Introduction: The Broken Promise of Perpetual Royalties

In the heady days of 2021, as digital artists watched their work sell for unprecedented sums—Beeple's "Everydays: The First 5000 Days" fetched $69 million at Christie's, making it the third-highest auction price ever achieved by a living artist—a revolution in creator compensation seemed at hand. The promise was elegant and unprecedented: through non-fungible tokens (NFTs) and the smart contracts that governed them, artists could receive automatic royalty payments every time their work changed hands on secondary markets. A painter who sells a canvas receives nothing when that painting later sells at Sotheby's for ten times the original price; an NFT creator, the pitch went, would receive 5%, 10%, or whatever percentage they specified on every resale, in perpetuity, automatically enforced by immutable code.

This promise attracted thousands of artists to NFT platforms. Many structured their businesses around expected royalty income, pricing initial sales lower in anticipation of ongoing secondary market revenue. The vision aligned with longstanding artist advocacy for resale royalty rights—droit de suite—that had achieved statutory recognition in the European Union and, briefly and narrowly, in California, but had never gained traction in federal U.S. copyright law.

But the promise was built on foundations that proved far weaker than advertised. Smart contract royalty provisions, it turned out, were not self-enforcing in any meaningful legal sense. They depended entirely on the voluntary cooperation of secondary marketplaces—cooperation that evaporated when competitive pressures made royalty-free trading commercially advantageous. Beginning in late 2022 and accelerating through 2023, major NFT marketplaces either eliminated creator royalties entirely or made them optional, allowing buyers to pay zero royalties regardless of the creator's stated expectations. Blur, an aggressive new marketplace, built its entire competitive strategy around royalty elimination. OpenSea, long the dominant platform, eventually capitulated to competitive pressure and made royalties optional.

The collapse of enforceable secondary sale royalties raises profound questions at the intersection of intellectual property law, contract law, and emerging digital asset regulation. Do creators have any legally enforceable right to royalties that smart contract mechanisms can no longer deliver? Can copyright law's limited resale royalty provisions be extended to digital assets? Do contractual theories—breach of contract, tortious interference, unjust enrichment—provide viable claims against marketplaces that circumvent royalty expectations? And what legislative reforms might establish legal backing for creator compensation mechanisms that technology alone cannot guarantee?

This article examines these questions and provides practical guidance for creators navigating the current landscape. We analyze the technical mechanics of smart contract royalties, their legal limitations, and the marketplace dynamics that led to their erosion. We assess potential legal theories for enforcing royalty expectations and consider legislative proposals that could establish more durable frameworks for creator compensation. For creators structuring new NFT projects, we offer guidance on maximizing protection within current constraints. For related discussion of intellectual property challenges in digital environments, see our analysis of trademark challenges in the metaverse and virtual goods.

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Understanding NFTs: A Brief Technical and Legal Primer

What NFTs Are and Are Not

A non-fungible token is a unique digital identifier recorded on a blockchain—typically Ethereum, though other blockchains support NFTs as well—that can be associated with a particular digital or physical asset. The "non-fungible" designation distinguishes NFTs from cryptocurrencies like Bitcoin or Ether, where each unit is interchangeable with any other unit of the same type. Each NFT, by contrast, is unique and distinguishable from every other NFT.

What an NFT actually represents—legally and practically—is far more limited than popular understanding suggests. An NFT is not the artwork itself. The digital artwork (image, video, audio, or other content) typically exists as a file stored elsewhere—on a centralized server, on decentralized storage like IPFS, or sometimes on the blockchain itself. The NFT contains metadata that points to this file, but the NFT and the artwork are separate things.

More importantly, acquiring an NFT does not automatically transfer any intellectual property rights in the associated artwork. Copyright in the artwork remains with the creator unless explicitly assigned, and assignment of copyright requires a written instrument under 17 U.S.C. § 204(a). Most NFT transactions do not include such assignments; buyers acquire the NFT—a digital token—not the copyright in the underlying work.

What NFT buyers typically receive, then, is: (1) ownership of the unique token itself, recorded on the blockchain; (2) some form of license to display or use the associated artwork, the scope of which varies dramatically depending on the NFT project's terms; and (3) whatever additional rights the creator chooses to convey, which might include commercial use rights, physical items, access to communities or events, or nothing beyond basic display rights.

The Smart Contract Layer

NFTs are created ("minted") and transferred through smart contracts—self-executing programs stored on the blockchain that automatically perform specified functions when triggered by defined conditions. When someone purchases an NFT on a marketplace like OpenSea, they are not simply transferring a digital file; they are calling functions in a smart contract that update the blockchain's record of ownership.

Smart contracts can include logic specifying that a percentage of each transaction should be directed to a particular wallet address—the creator's royalty mechanism. When a smart contract includes such logic, any transaction processed through that contract can automatically route the specified percentage to the creator's wallet.

The critical limitation, however, is that smart contract execution depends on how the transaction is processed. Smart contract royalty provisions are not self-enforcing against the world; they execute only when a transaction goes through a pathway that calls the relevant smart contract functions. Transactions can be structured to avoid triggering royalty provisions—through direct peer-to-peer transfers, through marketplaces that choose not to honor royalty specifications, or through "wrapper" contracts that obscure the underlying transfer mechanics.

This technical reality—that smart contract royalties depend on voluntary ecosystem cooperation rather than immutable enforcement—became devastatingly apparent when marketplace incentives changed.

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The Rise and Fall of NFT Royalties

The Original Vision: Creator-Centric Economics

The original NFT marketplace ecosystem was built around creator royalties as a core value proposition. OpenSea, which dominated the market through 2022, enforced creator-specified royalties on all transactions conducted through its platform. Creators could set royalty percentages—typically 5% to 10%—that would be automatically collected on secondary sales and distributed to specified wallet addresses. Other major marketplaces adopted similar approaches.

This system worked not because smart contracts compelled it, but because marketplace operators chose to honor royalty specifications. The technical mechanism varied: some marketplaces queried on-chain royalty registries; others maintained off-chain databases of creator royalty preferences; still others checked royalty information embedded in the NFT's smart contract metadata. But all approaches shared a common characteristic—they depended on marketplace cooperation.

The ecosystem's cooperation reflected both ideological alignment (many early NFT participants genuinely supported creator compensation) and competitive equilibrium (when all major marketplaces enforced royalties, no competitive advantage existed in avoiding them). Creators priced initial sales assuming ongoing royalty income; collectors accepted royalty payments as standard transaction costs; marketplaces competed on other dimensions.

The Competitive Dynamics of Royalty Erosion

The equilibrium shattered when new marketplaces discovered competitive advantage in royalty circumvention. In late 2022, Blur launched with an aggressive strategy explicitly designed to capture market share from OpenSea. Among Blur's competitive weapons was a royalty policy that made creator royalties optional—allowing buyers to pay reduced or zero royalties at their discretion.

The competitive dynamics were predictable and devastating. Buyers prefer paying less to paying more; given the choice between purchasing an NFT with a 10% royalty or purchasing the same NFT with zero royalty, economically rational buyers choose zero royalty. Sellers, who want to attract buyers, gravitate toward platforms where buyers prefer to transact. Marketplaces, competing for transaction volume and the fees it generates, face pressure to match competitors' royalty policies.

Blur's strategy succeeded dramatically. Within months of launch, Blur captured substantial market share from OpenSea. In February 2023, OpenSea responded by making royalties optional on its platform—abandoning the creator-centric policy it had championed. Other marketplaces followed. By mid-2023, the ecosystem had largely shifted to optional royalties, with many transactions occurring at zero royalty rates.

The technical mechanisms creators had relied upon—smart contract royalty specifications, on-chain royalty registries like the EIP-2981 standard—remained functional. But their functionality was irrelevant without marketplace cooperation. Royalty provisions that marketplaces ignored were royalty provisions that did not execute.

The Scale of Creator Losses

The financial impact on creators has been substantial, though difficult to quantify precisely. Galaxy Digital estimated that NFT creators lost over $1.8 billion in royalties during 2023 due to royalty circumvention. Individual creators who had structured their businesses around royalty income found that revenue stream eliminated virtually overnight.

The following table illustrates the royalty policy evolution at major marketplaces:

| Marketplace | Original Policy | Current Policy | Effective Date | |-------------|-----------------|----------------|----------------| | OpenSea | Mandatory creator-set royalties | Optional; creator's choice whether to block zero-royalty sales | February 2023 | | Blur | Optional from launch | Optional; minimum 0.5% for some collections | October 2022 | | LooksRare | Mandatory royalties | Optional | January 2023 | | X2Y2 | Optional | Optional | August 2022 | | Magic Eden | Mandatory royalties | Optional with some enforcement tools | October 2022 |

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Copyright Law and Resale Royalties

The Droit de Suite Tradition

The concept of artist resale royalties—known internationally as droit de suite (French for "right to follow")—has a century-long history in intellectual property law. The basic principle holds that visual artists should share in the appreciation of their works by receiving a percentage of resale prices when works are sold on secondary markets.

France pioneered droit de suite in 1920; the right has since been adopted throughout the European Union (mandated by the 2001 Artist's Resale Right Directive, 2001/84/EC), in the United Kingdom (though Brexit has raised questions about its continuation), and in numerous other countries. The European regime typically provides for royalties of 0.25% to 4% on qualifying resales, subject to maximum caps.

The economic rationale for droit de suite rests on observations about artistic careers and art market dynamics. Artists often sell works early in their careers at prices that do not reflect the works' eventual value. As artists become successful and their earlier works appreciate, the financial benefit accrues entirely to collectors and dealers who purchased at lower prices. Resale royalties provide artists with ongoing participation in value they create.

The United States and Resale Royalties

The United States has consistently declined to adopt federal resale royalty legislation, despite periodic advocacy and legislative proposals. The Copyright Act provides no general resale royalty right; the first sale doctrine, 17 U.S.C. § 109(a), establishes that once a copy is lawfully sold, the copyright owner's distribution right with respect to that copy is exhausted. The owner of the copy can resell it without compensating or even notifying the copyright owner.

California briefly provided state-level resale royalties under the California Resale Royalties Act (California Civil Code § 986), enacted in 1976. The statute required payment of 5% of resale prices to artists (or their estates) for sales of fine art exceeding $1,000, with the seller responsible for locating the artist and paying the royalty.

The California statute met an ignominious end. In Estate of Graham v. Sotheby's Inc., 860 F. Supp. 2d 1117 (C.D. Cal. 2012), a federal district court held that the Act was preempted by the Copyright Act's first sale doctrine to the extent it applied to sales occurring outside California. The Ninth Circuit subsequently affirmed, and in Sam Francis Foundation v. Christies, Inc., the court held that the Act's application to sales occurring outside California violated the dormant Commerce Clause. The California Legislature repealed the statute in 2012 following these adverse decisions.

No federal resale royalty legislation has been enacted, though proposals have been introduced periodically. The American Royalties Too (ART) Act was introduced in 2014 and 2015 but did not advance. More recently, the emergence of NFTs has renewed interest in legislative solutions to creator compensation.

Do Existing Copyright Provisions Apply to NFTs?

Could creators argue that existing copyright law provides resale royalty rights applicable to NFT transactions? The short answer is no—but the analysis illuminates why legislative reform would be necessary.

First Sale Doctrine: The first sale doctrine exhausts the copyright owner's distribution right upon initial authorized sale. This principle applies regardless of whether the work is physical or digital, assuming the first sale doctrine applies to digital goods at all (a contested question in its own right). Once a creator sells an NFT, the buyer's subsequent resales do not implicate the creator's distribution right in a way that would support royalty claims.

Reproduction Right: Secondary NFT sales typically do not involve reproduction of the underlying artwork in a manner that would implicate the reproduction right. The NFT itself—the token—is transferred; the artwork file remains wherever it was stored. Unless the transaction involves copying the artwork file, no reproduction occurs.

Visual Artists Rights Act (VARA): VARA, 17 U.S.C. § 106A, provides certain moral rights for visual artists, including rights of attribution and integrity. VARA does not provide resale royalty rights. Its protections apply only to "works of visual art" as defined in the statute, a category that likely excludes most digital works and certainly excludes the NFT tokens themselves.

Termination Rights: The Copyright Act's termination provisions, 17 U.S.C. §§ 203, 304, allow authors to terminate transfers of copyright after specified periods. These provisions would not support ongoing royalty claims; they address copyright assignment, not compensation for resales of individual copies.

The conclusion is clear: current U.S. copyright law does not provide resale royalty rights that could be applied to NFT secondary sales. Creators who believed that copyright law backed their royalty expectations were mistaken; their expectations rested entirely on smart contract mechanics and marketplace cooperation.

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Contractual Theories for Royalty Enforcement

The Contract Formation Challenge

If copyright law does not support resale royalties, might contract law provide a basis for enforcement? The answer depends on whether valid contracts exist that obligate relevant parties to pay or honor royalties—a question that proves surprisingly difficult.

For a contract claim to succeed, there must be: (1) a valid agreement between the parties; (2) consideration; (3) breach of the agreement by the defendant; and (4) damages resulting from the breach. NFT royalty claims face obstacles at nearly every step.

Who Are the Contracting Parties?: When a creator mints an NFT and a buyer purchases it, is there a contract between creator and buyer? The transaction occurs through marketplace intermediation—the buyer interacts with the marketplace's interface, which calls smart contract functions. The creator may never interact directly with the buyer. Whether a direct contractual relationship exists between creator and buyer, and what its terms would be, is often unclear.

What Are the Contract Terms?: Even if a contract exists, its terms may be ambiguous or nonexistent regarding royalties. The smart contract code specifies royalty parameters, but code is not necessarily contract. Many NFT projects include "terms and conditions" or license agreements, but their enforceability against subsequent purchasers raises significant questions (see Enforceability Against Subsequent Purchasers below).

Is There Consideration?: For a promise to be enforceable, it typically requires consideration. What consideration flows from the buyer to the creator in exchange for any royalty-related promise? The purchase price might constitute consideration for promises regarding the initial sale, but whether it supports ongoing obligations is less clear.

Enforceability Against Subsequent Purchasers

A fundamental challenge for royalty enforcement is that subsequent purchasers—the parties who would pay secondary sale royalties—may not be bound by any contract with the creator.

Contract law generally applies only to contracting parties ("privity"). If Alice creates an NFT, sells it to Bob, and Bob later sells it to Carol, any contract between Alice and Bob does not automatically bind Carol. For Alice to have a royalty claim against Carol, there must be some basis for Carol's obligation.

Potential theories include:

Covenants Running with the Land (by Analogy): Real property law recognizes covenants that "run with the land"—obligations that bind subsequent property owners. Could similar principles apply to digital assets? The analogy is imperfect: covenants running with the land require "privity of estate" and typically must "touch and concern" the land. Whether these concepts translate to NFTs is untested and doubtful.

Equitable Servitudes: Equity may enforce restrictions on property use even without strict privity if subsequent purchasers have notice. NFT royalty specifications might be analogized to equitable servitudes binding buyers who have notice (through on-chain metadata or marketplace disclosures) of the creator's royalty expectations. This theory is creative but lacks precedential support.

License Terms Binding Subsequent Holders: Many NFT projects include license agreements purporting to bind all holders. The enforceability of such "downstream" license provisions is uncertain. Shrinkwrap and clickwrap licenses have achieved recognition in software contexts, but NFT transfers often occur without any affirmative acceptance of license terms by the buyer.

Claims Against Marketplaces

If claims against individual buyers face privity obstacles, what about claims against marketplaces that facilitate royalty-free transactions?

Tortious Interference: Tortious interference with contract requires: (1) a valid contract; (2) defendant's knowledge of the contract; (3) intentional interference causing breach; and (4) damages. If creators can establish contracts with buyers requiring royalty payments, marketplaces that knowingly facilitate royalty-free transactions might face tortious interference claims. The weakness is the first element—establishing that enforceable contracts exist requiring royalties.

Tortious Interference with Prospective Economic Advantage: This theory does not require an existing contract but requires showing that the defendant interfered with a prospective economic relationship through improper means. Marketplaces might argue that competition through lower prices (royalty-free transactions) is not "improper means" but legitimate business conduct.

Unjust Enrichment: Creators might argue that marketplaces are unjustly enriched by transaction fees on royalty-free sales that divert value from creators. Unjust enrichment claims require showing that the defendant received a benefit that would be unjust to retain. Whether marketplace transaction fees constitute benefits "unjustly" retained at creators' expense is debatable—marketplaces provide transaction facilitation services that arguably justify their fees regardless of royalty policy.

Consumer Protection Statutes: Some creators have explored claims under state consumer protection statutes, arguing that marketplaces that originally enforced royalties and then eliminated them engaged in deceptive trade practices. These claims face challenges including standing (creators may not be "consumers" within statutory definitions) and the difficulty of establishing that marketplaces made enforceable promises regarding perpetual royalty enforcement.

The Practical Reality

No successful legal action has established that NFT creators have enforceable rights to secondary sale royalties against buyers who transact through royalty-optional marketplaces. While various legal theories exist, none has been tested in court, and all face significant obstacles. Creators relying on legal enforcement of royalty expectations are pursuing an uncertain strategy.

The following table summarizes potential legal theories and their challenges:

| Legal Theory | Potential Basis | Key Challenges | |-------------|-----------------|----------------| | Breach of Contract (vs. Buyers) | Terms of sale, license agreements | Privity with subsequent purchasers; unclear contract formation | | Covenants/Servitudes | Analogy to real property | No precedent for digital assets; conceptual mismatch | | Tortious Interference (vs. Marketplaces) | Interference with creator-buyer contracts | Must establish underlying enforceable contracts | | Unjust Enrichment | Marketplace benefits from royalty-free trading | Marketplaces provide services justifying fees | | Consumer Protection | Deceptive practices in changing royalty policies | Standing issues; unclear statutory application |

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Legislative and Regulatory Proposals

Federal Legislative Efforts

The erosion of NFT royalties has renewed interest in federal resale royalty legislation. Proposals have taken several forms:

Traditional Resale Royalty Rights: Legislation modeled on European droit de suite would establish statutory rights for visual artists to receive royalties on qualifying resales. Such legislation could be drafted to cover digital works including NFTs. The American Royalties Too (ART) Act, though it did not advance, provided a template that could be updated for the digital asset context.

NFT-Specific Legislation: Some proposals focus specifically on NFTs and digital assets, requiring platforms facilitating secondary sales to honor creator-specified royalty terms or face liability. This approach addresses the specific problem of marketplace circumvention but may raise questions about technological neutrality and adaptation to future technologies.

Smart Contract Recognition: Other proposals would establish legal recognition of smart contract terms, making royalty specifications in NFT smart contracts legally enforceable rather than merely technically executable. This approach treats smart contract code as expressing contractual intent that law should honor.

Each approach faces practical and political obstacles. The Copyright Office has studied resale royalty rights and expressed skepticism about their adoption. Industry opposition from auction houses, dealers, and collectors has historically blocked resale royalty legislation. Whether the NFT creator community can mobilize sufficient support to overcome this opposition remains to be seen.

SEC and Commodities Regulation

The regulatory status of NFTs under securities and commodities laws creates additional complexity for royalty enforcement. The SEC has signaled that some NFTs—particularly those sold with expectations of profit based on the efforts of others—may constitute securities subject to registration requirements. Royalty mechanisms that tie creator compensation to secondary market activity might strengthen arguments that NFTs are investment contracts under the Howey test.

This regulatory uncertainty creates a dilemma for creators. Emphasizing royalty rights and ongoing creator involvement in NFT value may support legal arguments for royalty enforcement but simultaneously strengthen SEC arguments that NFTs are securities. Creators must navigate this tension carefully.

Industry Self-Regulation

Some marketplace participants have advocated for industry self-regulation through standards bodies or trade associations. Proposals include:

Royalty Enforcement Standards: Industry standards that participating marketplaces would commit to honor, potentially with certification or compliance verification mechanisms.

Blocklists and Allowlists: Technical mechanisms allowing creators to restrict trading of their NFTs to marketplaces that honor royalties. OpenSea's "Operator Filter Registry" attempted this approach, allowing creators to block transfers to non-compliant marketplaces. The effectiveness was limited by easy circumvention and competitive pressure.

Marketplace Interoperability Agreements: Agreements among major marketplaces to honor creator royalty specifications, restoring the pre-competitive-pressure equilibrium. Such agreements might face antitrust scrutiny as horizontal coordination among competitors.

Industry self-regulation has thus far failed to restore meaningful royalty enforcement, as competitive pressures overwhelm cooperative incentives.

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Technical Approaches to Royalty Enforcement

On-Chain Enforcement Mechanisms

Recognizing that off-chain marketplace cooperation cannot be relied upon, developers have explored technical mechanisms that would enforce royalties at the smart contract level:

Transfer Restrictions: Smart contracts can restrict transfer functions to approved addresses (operator allowlists) or block transfers to disapproved addresses (operator blocklists). By restricting transfers to royalty-honoring marketplaces, creators can theoretically enforce royalties. However, these restrictions are easily circumvented: "wrapper" contracts, escrow arrangements, and off-chain agreements can transfer economic ownership without triggering on-chain transfer restrictions.

Escrow-Based Royalties: More sophisticated approaches incorporate royalties directly into transfer mechanics, requiring royalty payment as a condition of transfer completion. These approaches face similar circumvention risks through wrapper contracts and off-chain coordination.

Soul-Bound Restrictions: Some projects have experimented with non-transferable or semi-transferable tokens that cannot be freely traded, eliminating the secondary market royalty problem by eliminating secondary markets. This approach fundamentally changes the value proposition of NFTs and is not suitable for projects that rely on secondary market liquidity.

The Fundamental Technical Limitation

The fundamental limitation of technical enforcement is that blockchain transactions can always be structured to avoid triggering specific smart contract functions. If an NFT transfer function includes royalty logic, parties can arrange the economic equivalent of a transfer—through wrapper contracts, lending protocols, or off-chain agreements—without calling the transfer function that would trigger royalties.

Technical enforcement might raise the costs and complexity of royalty circumvention, but cannot eliminate it. Some creators may find that increased friction is sufficient deterrence for most secondary transactions; others will find that sophisticated traders easily circumvent any technical barriers.

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Practical Guidance for Creators

Structuring NFT Projects in the Current Environment

Given the limitations of both legal and technical royalty enforcement, how should creators approach NFT projects?

Price Initial Sales to Reflect Full Value: Creators should not assume secondary sale royalty income when pricing initial sales. If royalties cannot be reliably enforced, initial sale prices should reflect the full value creators seek to extract. This approach shifts risk from creators to primary buyers (who pay higher prices with uncertain resale prospects) but protects creators from royalty shortfalls.

Consider Alternative Revenue Models: Beyond initial sales and secondary royalties, NFT projects can generate revenue through other mechanisms: - Exclusive access or membership benefits that do not depend on secondary transfers - Physical merchandise or experiences bundled with NFT ownership - Periodic "airdrops" of additional content to NFT holders that drive primary market demand - Licensing revenue from commercial uses of associated IP - Community treasury mechanisms funded by initial sales rather than secondary royalties

Choose Marketplaces Strategically: Not all marketplaces have abandoned royalty enforcement. Some platforms, particularly those serving specific artist communities, maintain mandatory royalties. Creators can direct initial sales to royalty-enforcing platforms and use technical measures (operator restrictions) to limit secondary trading to those platforms. This approach trades liquidity for royalty enforcement; fewer marketplace options may reduce secondary market activity.

Communicate Clearly with Collectors: Creators should communicate clearly about royalty expectations and limitations. Collectors who understand that purchasing through royalty-optional channels harms creators they support may voluntarily choose royalty-honoring options. Community norms and social pressure can substitute partially for legal enforcement, particularly in tight-knit collector communities.

Document Contract Terms Explicitly: To the extent contract-based enforcement remains possible, creators should document contract terms explicitly. License agreements should be clearly presented and accepted (not merely referenced in metadata). Terms should specify royalty obligations and potentially include liquidated damages provisions for circumvention. While enforceability remains uncertain, explicit documentation improves any future legal position.

Due Diligence for NFT Platforms

Creators evaluating NFT platforms should assess royalty policies carefully:

| Factor | What to Look For | |--------|------------------| | Royalty Enforcement Policy | Is the platform's stated policy mandatory enforcement, optional enforcement, or no enforcement? | | Technical Implementation | How does the platform implement royalty collection? Does it query on-chain registries, maintain off-chain databases, or rely on honor system? | | Policy Stability | What is the platform's history of policy changes? Has it previously abandoned or weakened royalty enforcement? | | Competitive Position | What competitive pressures does the platform face? Is its royalty policy sustainable against competitors? | | Community Alignment | Does the platform's user base value creator royalties? Are collectors likely to honor royalties voluntarily? | | Contract Terms | What do the platform's terms of service say about royalty enforcement? Does the platform disclaim any obligation to enforce creator royalties? |

Drafting Effective License Terms

For creators who wish to maximize the possibility of contractual enforcement, careful drafting of license terms is essential:

Clear Acceptance Mechanisms: Ensure that buyers affirmatively accept license terms through click-through agreements or other documented acceptance, not merely passive exposure to terms posted elsewhere. The clearer the acceptance mechanism, the stronger the argument that a binding contract exists.

Royalty Specification: State royalty obligations clearly, including the percentage, the calculation method (percentage of sale price, with or without fees), and the payment mechanism. Ambiguity in royalty terms weakens enforcement arguments.

Binding Subsequent Holders: Include provisions stating that acceptance of the NFT constitutes acceptance of license terms, and that subsequent transferees are bound by these terms. While enforceability against subsequent purchasers remains uncertain, explicit provisions improve the legal position.

Remedies and Damages: Specify remedies for breach, potentially including liquidated damages provisions establishing the consequences of royalty circumvention. Liquidated damages must be reasonable estimates of actual harm to be enforceable; excessive provisions may be struck down as penalties.

Choice of Law and Forum: Specify governing law and dispute resolution forum. Choose jurisdictions with favorable precedent or statutory frameworks where possible.

Severability: Include severability provisions so that if specific terms are found unenforceable, the remainder of the agreement survives.

Long-Term Strategic Considerations

The NFT royalty situation illustrates broader lessons about reliance on intermediary cooperation for creator compensation:

Technology Cannot Substitute for Law: Smart contracts were promoted as trustless enforcement mechanisms that did not require legal backing. The royalty collapse demonstrates that technical mechanisms depend on ecosystem cooperation that legal frameworks traditionally provide. Creators seeking durable compensation rights should advocate for legal reform rather than relying solely on technical solutions.

Competitive Dynamics Override Cooperation: When cooperative arrangements are not legally mandated, competitive pressures can destroy them. The marketplace race to offer lower costs (by eliminating royalties) was predictable; creators who assumed perpetual cooperation miscalculated.

Diversification Reduces Risk: Creators whose income depends entirely on any single mechanism—whether royalties, primary sales, or other sources—face concentrated risk. Diversified revenue models provide resilience against failures in any single channel.

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The Path Forward: Reform Possibilities

Legislative Action

The most durable solution to the NFT royalty problem would be federal legislation establishing enforceable resale royalty rights for digital works. Such legislation could:

• Establish statutory royalty rates (or rate ranges) applicable to qualifying secondary sales
• Define "qualifying works" to include NFTs and other digital assets
• Create enforcement mechanisms including private rights of action and platform liability
• Preempt inconsistent state law while establishing a national standard
• Address jurisdictional issues for cross-border transactions

Whether such legislation can overcome historical opposition to resale royalties, combined with skepticism about NFTs specifically, remains uncertain. Creator advocacy and coalition-building with sympathetic legislators would be necessary.

Judicial Interpretation

Even absent new legislation, judicial decisions could clarify the legal status of NFT royalty provisions. Test cases challenging marketplace royalty elimination—whether on contract, tort, or other theories—would generate precedent that either supports or forecloses creator claims. Adverse decisions would at least provide clarity; favorable decisions could establish enforceable rights.

The challenge is finding appropriate test cases. Creators with strong facts, sufficient resources for litigation, and willingness to accept adverse precedent risk would need to bring claims. Class action mechanisms might aggregate claims across many affected creators.

Industry Evolution

Market dynamics may also shift. If creators collectively refuse to create for platforms that do not enforce royalties, platform incentives could change. If collectors develop norms favoring royalty payment—treating royalty circumvention as ethically problematic—social enforcement might substitute partially for legal or technical enforcement.

The emergence of creator-owned platforms, cooperatives, or decentralized marketplace protocols with governance mechanisms favoring creators could provide alternatives to investor-owned platforms whose competitive dynamics drove royalty elimination.

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Conclusion: Expectation and Reality in Digital Asset Markets

The NFT royalty story is a cautionary tale about the gap between technological promise and legal reality. Creators were told that blockchain technology and smart contracts would guarantee perpetual royalty income—a revolutionary advance in creator compensation that would finally deliver the resale rights artists had sought for decades. The reality proved far different: smart contract royalties depended on marketplace cooperation that evaporated under competitive pressure, leaving creators with neither technological enforcement nor legal recourse.

The lesson is not that NFTs or blockchain technology are worthless—they provide genuine capabilities for digital scarcity, provenance tracking, and programmable ownership that physical media cannot match. The lesson is that technology alone cannot establish rights. Rights require legal frameworks: statutes that define entitlements, contracts that create enforceable obligations, and courts that remedy violations. Smart contracts can execute code, but code is not law.

For creators, the practical implications are clear. Royalty expectations should not drive business decisions unless legal enforceability can be established. Initial sales should be priced to reflect full value extraction. Revenue models should diversify beyond royalty dependence. And creators who value resale royalties should advocate for the legal reforms necessary to make such royalties reliably enforceable.

For the broader NFT ecosystem, the royalty collapse has damaged creator trust at a moment when creator participation is essential for the space's development. Restoring that trust will require either legal reform establishing enforceable rights, industry coordination restoring voluntary enforcement, or new technical mechanisms that survive competitive pressure. None of these solutions is easily achieved—but without some solution, the promise of NFT creator economics will remain unfulfilled.

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This article is intended for informational purposes only and does not constitute legal advice. Readers should consult with qualified intellectual property and digital asset counsel regarding their specific circumstances.

Practice Contacts:
[Partner Name], Intellectual Property Practice Chair — [email]
[Partner Name], Digital Assets & Blockchain — [email]
[Associate Name], Copyright & Licensing — [email]