Kyle Lawrence [00:00:00]:
The weather cools off, but the crypto markets are heating up. Professor Ed Lee stops by to talk about NFTs and a whole lot more. Coming up on Block & Order. Welcome to Block & Order, the show that explores the legal issues facing the world of web3 and beyond. I am an ailing Kyle Lawrence, but here to balance the scales, the beacon of health himself, Mr. Moish Peltz.

Moish Peltz [00:00:26]:
That's what I do. I pick up when you're down and sick, Kyle. I'm here to pick you up, so hope you feel better soon, buddy.

Kyle Lawrence [00:00:32]:
You do indeed. Thank you. You are indeed. You're the right man to have in a foxhole. Well, we have a very special episode coming up on Block & Order today. Professor Ed Lee stopped by to talk about his book Creators Take Control, which is a fascinating read. We highly recommend it for anybody. I will admit that when I was reading it, I got a little PTSD when he talks at length about the other side min and how I and everybody else.

Kyle Lawrence [00:01:00]:
I remember in the moment I thought I was so crafty. I was so much smarter than everybody else is. Like, I'm going to have an extra ETH in my wallet and I will pay up to one ETH in gas fees and no one else is going to do that and I'm going to get one. And I failed miserably as the.

Moish Peltz [00:01:13]:
Oh, no.

Kyle Lawrence [00:01:14]:
A lot of other people couldn't believe how lucky I was.

Moish Peltz [00:01:17]:
But yeah, I did have some extra ETH and I did like send it through and remember, that's when the entire Ethereum blockchain was down for how many hours? Yeah, it was, it was several. Yeah, look, I. Ed was great. It's great to have him on the show. I've been following his authorship for, for years now. He was one of the, the people that I really looked up to when I first started writing about a lot of the stuff back in 2020, 2021. But he's just amazing. His authorship is prolific.

Moish Peltz [00:01:50]:
We referenced several of his law review articles in addition to his book that he's published this year that just really makes some astounding points both on the NFT and IP overlap. And then, and then as we talked about later in the show, AI and copyright, which is this huge emerging issue where the copyright's taking a really strong stance and it's unclear if that's the right stance and it's unclear how that's going to be challenged. So we talk about all that and I think he makes some really great points and I think some of the stuff that's just like this is up in the air and we don't know where it's going to land. And we're talking about it now because NFTs are back, baby. But I think we still got a long way to go on the legal side.

Kyle Lawrence [00:02:31]:
Yeah, they do. And he was extremely gracious with his time, had some really salient points about the state of the markets, where they were, where they are and where they look to go in 2025. And with his background in intellectual property in your insights in that space as well. It was a really fascinating conversation for someone like me who, yeah, I know the crypto and corporate side of things, but IP is a little it out of my wheelhouse. So really fascinating stuff for both of you. Really excellent.

Moish Peltz [00:02:55]:
Yeah, but I think that's really like when you talk about like creators and, and larger, both small and medium sized large businesses really adopting NFTs and using that as a consumer facing, you know, whether it's, it's they're just selling NFTs or there's something kind of secondary that the NFTs are used to for some further commercial purpose. And what we talked about in the episode is like how do we solve that? If when one it's like, well, NFTs are back, that's just an economy thing. But from a regulatory legal perspective, what are the barriers to success for those large enterprises? And we really get into that and I think that was fascinating. It'll be interesting to see if that starts happening that businesses like we talked about Nike kicking Artifact into the dustbin, you know, if that reverses or if that's kind of like where we're at right now in 2024.

Kyle Lawrence [00:03:47]:
Yeah, it's good stuff. We'll see. Well, we'll kick it over to our conversation with Professor Ed Lee. Right. Well, very special guest today as season two continues on. Professor Ed Lee from Santa Clara Law is joining us. Professor Lee is a legal scholar whose research focuses on the ways in which the Internet disruptive technologies and globalization challenges existing legal paradigms. He teaches copyright law, design law, international intellectual property law and torts and his co authored casebooks in the latter three subjects.

Kyle Lawrence [00:04:15]:
Professor, thank you so much for joining us today on Block & Order.

Ed Lee [00:04:18]:
Kyle, thank you for having me. It's a pleasure to be here.

Kyle Lawrence [00:04:22]:
It's a pleasure to have you. And what timing. Because if we had reached out to you a couple months ago to talk about NFTs and intellectual property law, I wonder if you would have even responded. But now here we are and the sun is shining.

Ed Lee [00:04:36]:
Yeah, I mean it's booming right now along with crypto. So it is perfect timing. And I'm excited to have this conversation with you since both of you follow this sector and practice in this sector. So I'm curious to get your input as well.

Moish Peltz [00:04:53]:
Well, I have a question for you, Ed, because I get this question now probably three times a week and I wonder how you answer it, which is when you're at a dinner party and someone says, oh, NFTs, is, is that still a thing? What's, what's your response?

Ed Lee [00:05:09]:
Well, I think I still stick with the position that I have in the book, which I think it is a technology that certainly has filled a need, especially with digital artists who Kyle just referred to the boom. We're seeing a resurgence in the traditional art market and also in the digital art market with NFTs. So I'm still confident in the position that I took with respect to digital art and the utility that NFTs have provided to create a new market for digital art. I think your question kind of refers to the greater challenges, I think especially with NFT projects, not individual artists, but NFT projects that have faced, I think really challenging sort of markets and business challenges to, you know, for some of them basically to survive, to figure out how to survive during the so called crypto winter.

Moish Peltz [00:06:20]:
Well, to follow up on that, I agree with you. I think there's been a resurgence in perhaps Artifacts from 2021 or prior than in this past, kind of along with the rise of Bitcoin and Ethereum and all the other major cryptos. But then a counterbalance to that is Artifact, which was the project that Nike purchased just announced that they're ceasing operations. So from a art perspective, from a collector's perspective, maybe that's one category. But from a commercial business perspective, it does seem to be that larger organizations and perhaps even the Mindshare are still finding difficulty like, well, how do I implement this as part of a consumer program and actually make money off of it? I'm curious what your take on that.

Ed Lee [00:07:15]:
Yeah, I think that is a huge question that NFT, the so called utility projects face to the extent that there are a bunch still around and trying to I think build their business. Artifact. I discussed in my book and I think their decision to unwind their project after having been acquired by Nike is sort of a Sad Day for web3 and they were a trailblazer and being acquired by Nike was to me a sign of great promise. On the other hand, I'm not too surprised of Nike. I'm inferring that Nike made the decision since they own Artifact and Nike missed its earnings just this quarter. And so there's a new CEO coming in. So it's not too surprising that one of the projects that might be eliminated would be something that is kind of more cutting edge, innovative, that potentially is not making huge amounts of revenue for them. You know, we saw that with Starbucks.

Ed Lee [00:08:42]:
They cut out their odyssey NFT program. Anheuser Busch sort of scaled back its NFT initiatives after other business waves diverted their attention to concentrate on core business projects. So in that respect, I think kind of the traditional big corporate ownership of NFT projects, maybe it's not too surprising we're seeing that one of the first things to go would be NFTs. The other thing I would add, the other company I would add is Disney. I mean, Disney had plans of incorporating NFTs into some of its content that it was developing. But once the CEO was changed, that was another division that was completely eliminated. Now having said that, I have to say with Artifact, what is so intriguing to me, and this is something that I think is a part of the challenge, Artifact stood in this really good position of having fashion where web3 kind of digital, digital works, fashion is definitely still a thing. And also it intersected with the athletic world.

Ed Lee [00:10:14]:
And I think there are many professional athletes who are very big into crypto and some were big into NFTs. Steph Curry. So like that, like kind of head start that Artifact had, you know, with the sort of the tailwinds gave it, I think a very good position to potentially capitalize on the demand among sort of like fashion world and also the athletic world for crypto related collectibles. Now maybe that is something that, you know, Artifact won't be around to build. But I think with the resurgence of cryptocurrency and bitcoin, you know, that is potentially an opening that in the next round of kind of startups or web3 businesses maybe they can capitalize on. Because I think when crypto booms, we may see some kind of trickle down into the NFT market. Now the other, I think ingredient that we didn't have nearly as much, if at all in 2021 are the memecoins. So the memecoins have sort of provided competition for NFTs and some may be more into the memecoins than they would be with NFTs.

Ed Lee [00:11:59]:
So it's, it's a very competitive market right now, if you're thinking about.

Moish Peltz [00:12:04]:
So you're saying memecoins killed the NFT Star.

Ed Lee [00:12:07]:
Yeah, well, I mean, I, I think it definitely attracted more of the kind of investor, the traders who wanted a quicker return than the kind of art NFTs did.

Kyle Lawrence [00:12:27]:
It's interesting to talk about Artifact and, and the decision that was made. So we're recording this just for context on Wednesday, December 4th. Decision came out on Monday, just two days ago. You would think that they've come so far. I mean, I know when it was launched, the tokens were trading at, you know, $60,000 worth of ETH at the time and now they're a third of an ETH or something like that. So obviously you can see why the decision was made other than just not wanting to fall into a sunk cost policy. It seems like right now would be the one time we say we've come this far, let's stick it out and see what Q1 holds. I mean, we're entering a much more regulatory favorable framework.

Kyle Lawrence [00:13:05]:
And also just for context, I apologize, my flu brain, I forgot to introduce the book that you're referencing for everybody watching creators take control. It's fascinating stuff, but that's the book we're talking about here. It's just curious to me, the timing of it. You know, corporate. Listen, I represent corporations all over and sometimes they don't make sound decisions. They, they are myopic in their thinking. But I just found it curious as I don't know what your take is on that.

Ed Lee [00:13:29]:
Well, what can I, I can glean from X or Twitter? You know, the, the source for NFT information is that this may have been a decision that was made much earlier by Nike. There's the, the crypto influencer Nick, I forgot his last name, but he, he actually had a video earlier this year saying that Artifact would be shut down. And yeah, that was, that was being replayed. You know, who is dancing around on Twitter would be, it was, you know, sort of revived that tweet just when the announcement was made as being, you know, on point, so to speak. But to go to your, you know, comment, I mean, Kyle, it would be interesting to see what would happen, what would have happened if they had not, they had not made that announcement. Because you're right, I would suspect that they, along with other blue chip NFT projects would have seen the same resurgence of like 100% increase in value this week. And as we just discussed with the resurgence in crypto and bitcoin and President Elect Trump's more sort of supportive view of cryptocurrencies and you referred to Kyle, the probable more hospitable regulatory environment which happy to get into further for NFTs and cryptocurrency. And I'm sure you're referring to the SEC as the primary sort of agency that was involved in regulation during the Biden administration.

Ed Lee [00:15:30]:
In any event, it would be very interesting had they not made an announcement, even if it were just like a mistake and they just had waited to see like, you know, certainly I think some of the owners of the clone X Artifacts NFTs, you know, would have appreciated that because after that announcement was made I saw like the floor price had dropped, which you would expect.

Kyle Lawrence [00:15:57]:
In your book, you go, you discuss at length Yuga Labs, Bored Ape Yacht Club CryptoPunks, some of these higher blue chip type NFT projects. Where do you think Yuga Labs goes now that there's going to be more of an open space? Obviously I don't, you know, you don't have a crystal ball but you know, where do you think they're going to go? Because they're always viewed as the preeminent NFT creators as, as they should be. I'm just look at their track record. It's unparalleled. What do you think happens to them? What do you think of some of these other higher profile projects? Doodles, Pudgy Penguins, those kinds of things. What are your thoughts on those?

Ed Lee [00:16:35]:
Yeah, that's I think a big question mark for all of them, especially for Board Ape Yacht Club, which as you mentioned was considered to be like the premier or leading NFT utility project that had the huge backing of venture capital, a lot of momentum, you know, Rolling Stone previews, you know, sort of great PR. But you know, I think currently they do face some, I think pretty considerable challenges in terms of their ambition to create the other side kind of gaming platform, which in my view has taken far too long and it's far too difficult, it must be far too difficult to carry out. They were working with, and they still may be working with Improbable, the technology company to build out this metaverse, so to speak. And the former CEO Daniel Allegra had experience in the gaming world business and he was I think brought in to implement the other side. And as I think everyone who follows this space knows, he lasted a year and the original founders returned in Yuga, returned to be the CEO. So I mean, I think they're still doing a lot of interesting things. And one of the things that I talk about in my book is this notion of decentralized collaboration. There are some number of like 400 or so Bored Ape Yacht Club, owner of the NFTs who have built various commercialization of their NFT Bored Ape and nicely Yuga Lab set up a platform where they can essentially establish a directory where you can find all these businesses like the.

Ed Lee [00:19:03]:
I forgot the exact name of it, but the Bored Ape Yacht Burger joint that is in several countries. Yeah, so that was one example.

Moish Peltz [00:19:12]:
But full disclosure is that our firm is a member of the Made by Apes program. So this podcast being under that umbrella.

Kyle Lawrence [00:19:22]:
Yeah.

Ed Lee [00:19:23]:
Oh great.

Moish Peltz [00:19:23]:
We actually have on the intro of each podcast on the. The fade. The fade in screen, the Made by Apes badge.

Ed Lee [00:19:31]:
Well, that's terrific. And that shows you the potential of this sort of giving commercial IP rights to the NFT owners for a particular project. I do think the other side is a big question mark and you know, whether at some point, you know, you might have to cut bait on that if it is technologically just too challenging and the whole like notion. The concept of the metaverse was very popular in 2021, but it seems like maybe it is not essential to the success of Yuga Labs or the Bored Ape Yacht Club and they could do something that sort of might have greater demand in today's kind of post pandemic marketplace.

Kyle Lawrence [00:20:31]:
That's a good point.

Ed Lee [00:20:32]:
Now, the other two projects that you mentioned, I, I do want to speak briefly about them because I'm quite fascinated by what they're doing as well. And that's the Pudgy Penguins, Luca Netz's project revived from the dead. I mean they were thrown to the side and they were revived and you know, doing a lot of interesting things with selling toys in Walmart as one example. And the Doodles project, which has Pharrell Williams as a director or an advisor of some sort, you know, giving them guidance on potentially, you know, some, you know, it could be a movie or some, you know, particular Disney like, you know, sort of creations. I think those two definitely are ones to watch as well for what they try to do. And then just to tie this into the discussion about the regulatory environment, once we get the change in the SEC chair under the Trump administration, I think NFTs will be sort of far less on the radar of anybody in the SEC for potential enforcement actions. And maybe that kind of frees up greater sort of risk taking with the use of NFTs by businesses so they don't have the fear that they are going to be subject to a Wells Notice or be subject to an investigation by the sec. And I listened to your podcast with Commissioner Peirce and you got into this topic.

Ed Lee [00:22:28]:
And I think, you know, we cannot under sort of underscore how big an ingredient that is in terms of a business if what they're planning on doing is going to subject to them to this investigation by the SEC. And I think it also ties into another component that we've seen a dramatic change from 2021, 2022 is once the lawsuits for alleged unregistered securities were filed against celebrities. Well, all the celebrities except for Snoop Dogg and maybe Anthony Hopkins, all of them left, right, like Reese Witherspoon and Paris Hilton even, you know, became, you know, far more conservative even though she was really a vocal advocate for adoption of NFTs. Now I don't know if that ever comes back. It could be that the celebrities who were interested in it just have moved on. But it's sort of a shame because I think maybe it's a misnomer to call them celebrities. They're creators. Anthony Hopkins is a creator.

Ed Lee [00:23:57]:
Snoop Dogg is a creator. Reese Witherspoon creator and what was so attractive about the potential intersection of kind of like the traditional world of creators and now these upcoming web3 creators, I think was the possibility of collaborations. And Snoop Dogg was like the perfect example of it. I mean, if there was any vocal spokesperson for adoption of NFT, NFTs for kind of Hollywood or music, Snoop Dogg was out there. But even he has, I think downplayed or not really talked about the NFT side of his, you know, Death Row Records, his, his label, he wanted that to be like the label for the Metaverse. But you know, I, I think the uncertainty with the regulatory side plus the challenging NFT market probably was a deterrent for a lot of, of the more kind of traditional celebrity creators.

Moish Peltz [00:25:15]:
So, so Ed, for, for that question though, from a regulatory perspective, what do you suggest and what do you think we as the legal community should be advocating for in terms of a regulatory approach that would enable creators to be more confident in selling and doing quasi fundraising type activities using NFTs you mentioned? Well, maybe the new SEC chair will take a more hands off approach. But is the SEC kind of just getting out of the way enough or is there something more proactive in terms of specific guidance they could issue or taking a different approach on the legislative front that we as practitioners, people in this community could advocate for? How do you think this problem gets solved? Is it just the regulators kind of taking a hands off approach or is there something more proactive that we can and should be looking for?

Ed Lee [00:26:20]:
Well, I think the first ingredient is there needs to be greater clarity in the legal rules and the whole approach of regulation by enforcement actions of the SEC during the Bush administration, excuse me, the Biden administration. I'm dating myself, was I think really bad for businesses to try to and artists to try to navigate because there was great uncertainty. There was nothing clear now specifically as to how the Securities Act should apply to NFTs that involve artwork, digital art. I have a law review article coming out this month in the UC Davis Law Review that takes the position that it would be unconstitutional, a violation of the First Amendment to require digital artwork NFTs to be registered before they could be distributed to the public. Which is essentially the position that the SEC was taking in the two enforcement actions against the Stoner Cats and Impact Theory. I believe that position creates a prior restraint. A prior restraint means before you publish speech, expression, you have to get clearance from the government. That is precisely what securities registration would require an artist to do if it was subject or classified as the so called investment contract.

Ed Lee [00:28:10]:
So I believe that is unconstitutional and I propose in my article, my low review article, that the proper interpretation of the Securities Act of 1933 should be its original public meaning which the term investment contract. This may be surprising, but it's actually not a legal term of art. Investment contract was developed by laypeople trying to sell investments in specific contracts. And I lay out, I did the historical research based on various advertisements for investment contracts where they actually say investment contract. You can invest in this contract we're offering and get a return of, let's say, 5% profits that we make from our real estate venture. Now of course we all know like the Supreme Court has interpreted the Securities Act in the famous case SEC vs. Howey Co. And it has, you know, courts have interpreted the Supreme Court's interpretation to set forth, you know, as multi part test, the Howey Test.

Ed Lee [00:29:30]:
And I try to lay out how I think all of the Supreme Court cases that have come after Howey and Howey itself have all involved an investment that has a offering of a contractual right to a return of profits made by the offeror for the those who engage in the offering. So what I'm proposing is that the Supreme Court, the lower courts, adhere to the Supreme Court's interpretation which the other interesting part about how the Supreme Court and how he interpreted investment contract is it actually relied upon the Minnesota Supreme Court's interpretation of the same term in state law. And explicitly the Minnesota Supreme Court had said this is the ordinary understanding of the word investment. And also I think it's the ordinary understanding of the word contract, other interpretations that basically read out of the statute the Securities Act of 1933, the word contract to make it simply a contract where you get an expectation, excuse me, an investment, any investment, where you expect a profit. That reads the word contract out of the statute, which we know according to Supreme Court precedent, is sort of like a disfavored way to interpret a statute. You know, we need, we need to give meaning to the words in a statute. And, you know, I think a fair characterization of some of the application of the word invest, the words investment contract by the SEC and also by even some lower courts is they're completely ignoring the word contract. Now, my position is not, just to be clear, my position is not there needs to be a contract.

Ed Lee [00:31:52]:
My position is there needs to be an offering of an investment that has a component that if you agree to it, it would be a contractual right to get money back from the offeror. It's as simple as that. I don't think it. We can get, you know, sort of more complicated. It is just looking at the words of the statute and saying, what was the meaning that Congress had in mind.

Kyle Lawrence [00:32:19]:
Anyway and what did the parties intend? I completely agree with you. As somebody who practices securities law and have for, you know, almost 20 years, I completely agree with that. And one of the things that we've seen that we've talked about on the show, Moish and I have talked about it in various articles that we've written, is that the SEC, when trying to apply the Howey test, if they can't directly apply it, they'll say, well, the totality of the circumstances clearly suggests that this was an investment contract here. This person tweeted the other day, come join us and buy the Lambo that you wanted. Boom. That's an investment contract. Right. And it's very tenuous.

Kyle Lawrence [00:32:56]:
Now, I think that where there could be danger coming in 2025, and Moish and I have had some of these calls already, it's, it's great. There's going to be a new regime. We can do anything we want, and everything is fair game. So the pendulum can't swing too far in the opposite direction. But I think you're right. There needs to be a little bit more common sense application of what these rules are hinge upon the intent of the parties, not just a random tweet amidst thousands of other indicia of evidence to the contrary. So I think your point is exactly right.

Ed Lee [00:33:29]:
Yeah. My quick reaction is we already have existing laws that can deal with fraudulent inducement for example, or other kinds of fraud with rug pulls in the NFT sector under the Federal Wire Fraud statute. Also, Tort law can be applied in those. To some of those circumstances where there are bad actors trying to defraud people and take advantage of them. And then I would say that there also can be consideration of federal legislation that deals with digital assets and NFTs as a component that tries to regulate in more of an ex post fashion, not a prior restraint fashion, unsavory or deceptive practices engaged in by those who are offering NFTs to kind of scam people. Also, like wash trading could be like explicitly related to digital assets that could be clarified. So I think those are things that Congress can certainly consider. And I would recommend as a part of a larger sort of bill to consider digital assets, cryptocurrency and a kind of more comprehensive framework to address some of the sort of questionable practices that people have seen during, especially the boom periods when times when it's easy to sort of fall prey to some project that looks so good, you have to invest in it.

Kyle Lawrence [00:35:30]:
Yeah, we've definitely seen a lot of those. And obviously the market is not one of the things when the bear market came and we would always talk about is. The good thing about the bear market is it weeds out the riffraff. It eliminates a lot of that. And now we're gonna enter back into a pretty prominent bull market and we're already kind of there. So you hope that you don't get those. You know, we're gonna, we're gonna sell a 10,000 PFP project to make 5 million bucks, and then we'll figure out what it is we're gonna do. We hope we don't get there because that's no good comes from that.

Kyle Lawrence [00:35:58]:
And you know, Ed, I'd like to be cognizant of your time. I know that, you know, you talk a lot about, a lot in your book about intellectual property protection. You know, the creator economy. You know, Moish is an IP lawyer. You know, what are your thoughts? What do you think? What do you see as the biggest threat from an intellectual property protection standpoint in this new creator economy? How do we combat theft and protection and all those kinds of things? As somebody who doesn't practice IP law, I'm just always fascinated when Moish talks about. He's smiling.

Ed Lee [00:36:32]:
Yeah, I guess this intertwines with the market for NFTs and also the previously and maybe still to some extent now, the lack of clarity in terms of securities regulation. My sense of the kind of current state of the NFT market is that there are far fewer artists and startups and projects kind of even contemplating sort of NFTs as a way to share or sell their works. So like the IP component of it, from an NFT standpoint, kind of only sort of occurs once you get adoption by creators. So if we're thinking about the creator of a creator economy, we. What we do need is a greater supply of creators, so to speak, who are willing to consider or reconsider using NFTs as a part of their distribution and sale of their works. And, you know, I think some of the more novel approaches that we did see in 2021 and 2022, with what we talked about before, if you're the creator, you can grant commercial rights to buyers of your NFTs to exploit it. You know, that is certainly a very interesting business model, and I hope that it is not completely dismissed or rejected without having greater testing of it as a business proposition. And certainly like Doodles and Bored Ape Yacht Club and Pudgy Penguins, they do have licenses, commercial licenses for their owners.

Ed Lee [00:38:49]:
So in the web3 space, I think the IP protection issue is kind of more novel. It's more of a kind of a different approach from the traditional IP protection where you're always concerned about copies, you know, unauthorized copies being made. What was quite interesting to me is that in the web3 space, the copy became sort of less of a concern of the creator because they had now this unique token that was more valuable than any, you know, single digital copy of the artwork. So if you can say I own the singular NFT of this particular Pudgy Penguin, the fact that maybe hundreds of people had distributed digital copies of it really didn't diminish the NFT value. And some would argue potentially it helps to promote it so more people know my Pudgy Penguin looks like this, then that brings brand recognition, and I potentially can profit from it that way. But to go back to the question, I think the biggest uncertainty is whether we get this influx of creators to use NFTs, and I hope we do, especially if the regulatory environment becomes more hospitable, something that Commissioner Peirce talked about. You do want these really creative, innovative people to be able to try to develop ways to monetize their creations and potentially using NFTs. But my sense right now is that in part because of the kind of crypto winter, in part because of the actions brought by the SEC, there were good reasons to be scared off from adopting NFTs.

Ed Lee [00:41:10]:
As a creator. And then on top of that, I think the crypto winter, unfortunately it also scared away some of these platforms that had plans on deploying NFTs like Twitter at one point. Right. Twitter had tried to incorporate NFTs into the PFP, the profile picture and to be able to use that. And it would be nice to be able to have NFTs to serve as an ID on the Internet. One of the things that I think that is interesting that we haven't even mentioned yet is AI. Right, AI and how AI. A lot of the concern today is with is my data or content being used to train AI.

Ed Lee [00:42:07]:
One potential use of NFTs that I'm not sure if people have discussed, that seems kind of implicit in some of the goals of web3 to begin with is this notion of self sovereignty and identity. So you could imagine building an NFT for your identity online that also was coded to tell whichever platform you used your NFT profile with. To don't use my content or data for AI training. Whereas now.

Moish Peltz [00:42:52]:
Or to pay a slice of a royalty for that.

Ed Lee [00:42:55]:
Yes, exactly, exactly. Yeah, that could be fulfillment of an aspiration of web3. But you know, that that would would take more kind of support from users or creators and to try to convince, you know, the Facebooks of the world like, you know, this is what we want. And that seemed to me to be like a very positive direction that web3 was trying to advance the Internet with sort of greater user control with their identity and data. But when the crypto winter hit, a lot of these, I think ideals were shelved or fell by the wayside.

Moish Peltz [00:43:52]:
Sorry, we just don't have the money for that. Well, it's interesting because you mentioned the other side and the difficulties of the metaverse and I almost see a parallel there with the downstream creator economy trying to find a way to use web3 tools for monetization of intellectual properties. Well, it's a very difficult problem. There's all these regulatory hurdles, there's all these problems that just like a AAA game takes three to five years to develop. And so that's just, there's this fundamental, like it just takes time that also kind of happening with the downstream use and monetization of IP in a web3 economy and then, and then leading into the, the AI usage, which I think is an incredible point and a very timely issue. I know you, you recently published in the UF Law Journal, which is my, my hometown law journal from. I graduated from the University of Florida Law School. Article titled Prompting Progress Authorship in The Age of AI.

Moish Peltz [00:44:54]:
And so there's all these challenges. And I wanted to follow up and ask you about that article because you said something there which resonated with me, which is you really critiqued the Copyright Offices. They had guidance last year on AI generated works and the stance that basically a work that's AI generated has no human authorship element and is not protectable. And you, you critiqued that, that stance. And I, I think when we talk about the monetization of intellectual property leading into an AI, NFT economy and then that, that being the, the gate for autonomous payments and royalties, I, I think this is also a fundamental challenge to, to the expansion of that. So I'm curious what your thought process was on disagreeing with the Copyright Office on their stance and perhaps how that gets resolved from here.

Ed Lee [00:45:49]:
Yeah, I mean, first of all, let me just say I think the Copyright Office does incredible work. They're engaged in an AI study right now and I applaud them for their initiative. I think they try to get ahead of the curve on this one. But the position that they had in their AI guidance and in several of their decisions, rejecting the copyrightability of prompt engineered AI works, we're putting aside the autonomously generated works where there's no claim of human authorship. I'm focusing on where humans are using prompts to generate an image or generate a song or generate a video, putting aside kind of literary works, which I think presents a separate set of issues. So my reaction when the Copyright Office started rejecting prompt engineered images was that the position that it was advancing was just simply not supported by the Copyright Clause or the progress clause of the Constitution, which grants Congress the power to give exclusive rights to authors for their writings. And the Copyright Office was interpreting authors to implicitly have a requirement of so called traditional elements of authorship. That's a term that no federal court has ever used in describing a requirement of authorship.

Ed Lee [00:47:31]:
It's a creation of the Register of Copyrights, Kamenstein, back in 1965 in an annual address. And it was more of a tentative comment about computer generated works. And then suddenly the Copyright Office has revived it with AI. And even if this were sort of had a more solid pedigree of where it came from, I think on the substance it is just wrong because the Constitution, the Progress clause or Copyright Clause is meant to. Congress has the power to promote progress, which is progress is like a forward looking thing in the future. We want advancement of knowledge and creation of works to advance that knowledge. And the word author is general, it's not limited and one of the things I point out in my article, the Florida Law Review article is the Framers actually had a choice. Madison proposed literary authors, Edmund Pinckney proposed authors.

Ed Lee [00:48:46]:
And Pinckney also proposed a different clause for seminaries that had a more capacious goal of promoting science and the arts and literature in the Copyright Clause or in the Progress Clause, it's to promote the progress of science and the useful arts. So given the more kind of broad or general terms that the Framers ultimately adopt in the Constitution, I think it's completely incorrect or wrong as a constitutional matter to impose traditional restrictions on authors. By contrast, by comparison, no court has imposed traditional requirements on inventors in that very same clause. In fact, the Federal Circuit has taken the position that it doesn't matter what the process the inventor used, as long as they invent a patentable invention, the process is irrelevant to whether the invention is patentable. And I think ultimately the copyright side of the Progress Clause should be interpreted in a parallel manner so that all that is required for a copyrightable work is it was independently created by the putative author, and it has this modicum of creativity which can be simply in the selection and arrangement of elements. And I think with prompt engineering, by engaging with the AI generator and using prompts, a human is using their brain to make selections and arrangements and sort of come up with a composition that they want, whether it's an image, song, or video. And I think that's enough, you know, that's what we want. And then to tie this into, like the compensation part or the promotion of the creator economy, if we look at this from a national perspective and the creator economy we do not want, it would be, I think, sort of going against progress to eliminate the ability for humans using AI generators and engaging in prompt engineering to automatically forfeit the potential of getting a copyright for those creations.

Ed Lee [00:51:35]:
So.

Moish Peltz [00:51:36]:
It seems crazy and I know you mentioned in the article and you referenced the Supreme Court case Feist, and the low level, like the threshold is extremely low for creativity. And just. I agree with you, the Copyright Office is great. They do a lot of great work. But it feels like this is just such a. Like, just throw out the baby with the bathwater type approach that there's just no wiggle room for any copyrightability and anything that's AI generated, which I know the rule is a little bit more nuanced than that, but that's what it feels like. And so I'm with you, and I'm curious to see how this gets resolved and how. Whether it just requires someone to take a litigation up to an appellate court.

Moish Peltz [00:52:22]:
And to have, I don't think we've seen a lot of, I know you track the plaintiffs cases against OpenAI and other AI platforms. I don't know that we've seen a lot of cases that are specifically challenging the lack of copyright. Aside from the, you know, I know there's the Kris Kashtanova and there's some of those decisions. I don't know that we're seeing appellate decisions on this particular issue.

Ed Lee [00:52:47]:
Is that, well, there's one case in Colorado, Jason Allen, who was denied registration of a Prompt Engineered image that won a state fair award. He has filed a declaratory judgment action in the District of Colorado to challenge the legal ruling of the Copyright Office. So that is in the works. That's the sole case that I know for Prompt Engineered Works. The Thaler case deals with autonomously generated work.

Moish Peltz [00:53:23]:
Which I think that's, sorry Dr. Thaler, but I don't think.

Ed Lee [00:53:24]:
Yeah, yeah. The D.C. circuit, based on the oral argument, it sounds like they will simply affirm. The other thing I'll mention is to go back to what I said at the outset, having great respect for the Copyright Office, they are in the midst of finalizing a report that may come out by the end of the year and might spill over to next year in which they have revisited this issue, among other issues, that they asked for comments from the public. They received 10,000 comments from the public, really a large amount. You know, I submitted a comment on this issue, but more importantly, the Motion Picture Association submitted a comment disagreeing with the approach of the Copyright Office as too restrictive and inflexible and not sort of similar to what I had said, not recognizing that there is like this human involvement in the creation of a work which should be considered, you know, we believe should be considered an act of authorship. It's the origination of a work using a machine, somewhat similar to the use of a camera to take a photograph of things in the world. So it's possible the Copyright Office modifies its position and the technology of AI generators has certainly advanced a lot more since their AI guidance.

Ed Lee [00:55:03]:
And the Kashtanova decision that you referred to, where they first articulated this notion of traditional elements of authorship. The Motion Picture Association of America, or the Motion Picture Association, they've removed the word of America now. Is that true? Yeah, they're a global. Yeah, they're global. They're global now.

Kyle Lawrence [00:55:26]:
Mr. Worldwide, like the World Series.

Ed Lee [00:55:33]:
The Copyright Office will not ignore the, the comment of one of the biggest stakeholder copyright industries in the United States. That doesn't mean they're going to change, but they certainly will read very carefully the view of the Motion Picture Association. I hope they read my comment closely as well. Certainly have no skin in the game other than to hopefully advance what I consider to be the proper understanding of authorship based on the Constitution and based on Supreme Court precedent. So that is possible. And then as Moish you just referred to, the courts are still there and whatever happens in the 10th Circuit is one thing. Ideally we get other circuits involved. This is not something that well, as I say my argument, I think this is like the most important issue presented by AI and copyright, even more important than the fair use and the AI training issue.

Ed Lee [00:56:49]:
I think if the position is you never can get a copyright from prompt engineered AI works that does affect what is created. So if you are a professional and musician, let's say you're a professional musician, you're a movie studio, you want to use AI generator for at least some aspect of the creation. Are you risking your copyright by utilizing such tools? And you know, it shouldn't be. I think that kind of choice, it just puts the movie studio this is the MPA's position. It puts the movie studio in a very precarious position. It's like it's a very difficult choice to try to make that just by using AI, it is potentially creates a cloud over your copyright status. Instead, I think we want kind of similar to the securities issue, we do want clearer rules that help creators make decisions on whether to use NFTs, use AI tools without exposing themselves to a lawsuit or sort of loss of their intellectual property rights.

Moish Peltz [00:58:25]:
Well Ed, we're at the end of our time here. We want to thank you very much for joining us on Block & Order again for you know, I want to, you know, promote the book you sent us a few of your law articles that we discussed today and we'll put those in the show notes. Where else can our audience follow you and learn more about your prolific authorship and commentary which we appreciate we follow. We learn a lot from so where else can our audience find you?

Ed Lee [00:58:56]:
Well, probably the most direct channel is from my Santa Clara Law Profile page. I also for those interested in AI, I also follow most of the IP disputes related to AI and AI generated works, especially from the copyright angle on my website called chatgptiseatingtheworld.com so you can for those interested in AI, I write there pretty much daily so to talk about the ongoing controversies raised by AI.

Moish Peltz [00:59:41]:
Wow. Between you and Eric, your department does such amazing prolific. It's like so frequent publication, and then the quality is so high and so interesting. It's really impressive. So whatever they're putting in the water over there, I love it.

Ed Lee [00:59:59]:
Well, there's so many interesting controversies happening. It's just crypto, AI, NFTs. There's so much disruption right now that we are living in exciting times.

Kyle Lawrence [01:00:16]:
It's a treasure trove of fodder for content, for sure. And we applaud your efforts and thank you for everything you've contributed. And as Moish said, really thank you for your time and your insights. This was really wonderful. Really appreciate it.

Ed Lee [01:00:28]:
Well, thank you for having me. I had so much fun.

Kyle Lawrence [01:00:30]:
Professor Ed Lee, thanks for stopping by Block & Order. We hope to see you again soon, and we'll see you on the conference circuit.