Two inter-connected lawsuits about the recent sale of a non-fungible token (NFT) representing a born-digital artwork were filed in July and September 2021, in the US and UK respectively. Both suits concern US-based artist Beeple’s Abundance, 2021, and have the same litigants: the US-based online auction platform Nifty Gateway, claimant in the US case against UK-based digital art collector Amir Soleymani, claimant in the UK case against Nifty Gateway.
Abundance NFT was offered for auction sale by Nifty Gateway in May 2021, and sold to the highest bidder for US$1.2 million. One of the highest losing underbidders was Soleymani, who was then required by Nifty Gateway to pay US$650,000 for a numbered ‘second edition’ of five Abundance NFTs – as were nine other top underbidders. Soleymani was unaware that his initial registration for the auction had included his committing to such a ‘second edition’ purchase, which he did not want, and refused to pay. Nifty Gateway insisted that Soleymani had contracted to his being a participant in a ‘ranked auction’ whereby each of the top losing underbidders for Abundance NFT were obliged by its online terms and conditions (T&Cs) to pay for its ‘second edition’.
Soleymani’s continuing refusal to pay triggered Nifty Gateway’s next steps: it blocked Soleymani’s access to his Nifty Gateway account, containing digital assets said to be worth ‘hundreds of thousands’ of US dollars; and it filed the lawsuit in New York State claiming full payment for the ‘second edition’ required by the T&Cs of Soleymani’s auction contract. In response, Soleymani filed the lawsuit in London making two claims, that: ‘certain of Nifty Gateway’s Terms of Use are unfair pursuant to the Consumer Rights Act 2015 and therefore not binding on him; any contract between Nifty Gateway and Mr Soleymani is illegal under the Gambling Act 2005 and therefore void’.
When art auction businesses worldwide invite bids for lots consigned for sale to the highest bidder, it is customary to do so by publishing written sale T&Cs that would-be bidders accept would apply to them (if successful) when they register for an auction sale. In other words, published T&Cs are included as fundamental elements of the sale contract with the highest bidder, which sale is sealed when the auctioneer accepts the offer of the highest bid.
In this context it is important to note that, before registration, would-be bidders have no opportunity to negotiate or amend or reject any of the published T&Cs unilaterally written and imposed by the auction business: would-be bidders have no choice but to ‘take them or leave them’. In many countries such ‘non-negotiable’ T&Cs create so-called ‘adhesion contracts’, which may be unenforceable by law if courts judged any or all such T&Cs to be, say, unreasonably one-sided.
In the Abundance NFT dispute Nifty Gateway evidently relies on its T&Cs obliging Soleymani to participate in a ‘ranked auction’ and pay for the numbered ‘second edition’. Soleymani evidently rejects the legal validity of such T&Cs, claiming that they are ‘unfair’ to him as a ‘consumer’ under the 2015 UK law. ‘Consumer’ means ‘an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession’. A consumer’s legal rights apply ‘to a contract for a trader to supply digital content to a consumer, if it is supplied or to be supplied for a price paid by the consumer’.
The 2015 law defines unfairness: ‘an unfair term of a consumer contract is not binding on the consumer’ and ‘a term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.’ Soleymani’s unfairness claim appears to be that the auction T&Cs as a whole were non-negotiable and unilaterally imposed in him; as he recently said, ‘Imagine bidding to win an item, ending up in second place and getting almost the same thing.’
Soleymani’s second claim under UK’s 2005 gambling law is imaginative and intriguing: he contends that the whole auction contract with Nifty Gateway was illegal and therefore null and void. The framework of the 2005 gambling law essentially outlaws businesses that conduct gambling activity without an ‘operating licence’ required under the overall authority of the UK’s Gambling Commission. By this law ‘gambling’ includes betting via ‘remote communication’ such as the internet. Could this framework apply to the Abundance NFT online ‘ranked auction’?
By the 2005 law ‘betting’ includes ‘making or accepting a bet on … the outcome of a race, competition or other event or process’, and covers so-called ‘prize competitions’, namely: ‘a person makes a bet (despite the fact that he does not deposit a stake in the normal way of betting) if he participates in an arrangement in the course of which participants are required to guess … the outcome of a competition or other event or process … and he is required to pay to participate … and if his guess is accurate or more accurate than other guesses, he is to win a prize or enter a class among whom one or more prizes are to be allocated (whether or not wholly by chance).’ And ‘prize’ includes ‘any money, articles or services … whether or not described as a prize, and whether or not consisting wholly or partly of money paid, or articles or services provided, by the members of the class among whom the prizes are allocated.’
Arguably the ‘ranked auction’ element of the Abundance NFT online auction sale may in law be a bet, whereby the bidders compete with each other to achieve a higher rank and prize. In which case, could the 2005 law render such activity illegal?
Something is illegal if it contravenes the criminal law, and is as an offence for which sentence includes punishment. The 2005 law enacts that ‘a person commits an offence if he provides facilities for betting … unless he holds an operating licence authorising the activity … and a person guilty of an offence … shall be liable … to imprisonment for a term not exceeding 51 weeks [six months in Scotland] … a fine not exceeding £5,000 … or both.’ And for this offence, it is immaterial whether facilities are provided ‘wholly or partly by means of remote communication’ inside or outside the UK, or partly inside and partly outside. Further, an offence may be committed by a body of persons corporate. Nifty Gateway is a US company facilitating internet art trading worldwide.
This niche artlaw wrangle may be just the tip of an iceberg of NFT art law and business uncertainties currently hidden from plain view.
© Henry Lydiate 2021