Case Review: Free Holdings v. McCoy and Sotheby’s (2023)

September 12, 2023

By Natalie Grumhaus

In 2014, Kevin McCoy and Anil Dash created what is widely considered to be the world’s first non-fungible token (NFT), titled Quantum (2014). Recently, however, McCoy’s ownership of Quantum has been called into question. In Free Holdings v. McCoy and Sotheby’s, the NFT ownership dispute was brought as a case of first impression. The court held that the original creator, Kevin McCoy, did retain all ownership rights because plaintiff neither alleged an injury sufficient for standing nor made a claim for which relief could be granted.

Free Holdings, the plaintiff, was an anonymous Canadian holding company that took advantage of an ownership loophole in minting NFTs and coined a replica of McCoy’s Quantum, in the same space that had been previously occupied by McCoy’s original NFT. The original had been transferred to a different blockchain by McCoy, shortly before it was sold at auction by Sotheby’s to Alex Amsel for $1.47 million in an online auction called Natively Digital: A Curated NFT Sale.^[1] Following the Sotheby’s sale in 2021, Free Holdings brought this suit against McCoy, Sotheby’s, and Amsel, attempting to invalidate the sale and potentially cash in on some of the fame that Quantum garnered.

Facts of the Case

As discussed in this case, an NFT is a unique identifier that exists in a “blockchain,” which is a “a digital public ledger maintained on a decentralized computer system and consisting of records called blocks.”^[2] These records are used for authentication and often have digital media, such as photographs, art, videos, or written records, attached to them. There is only one owner of an NFT, and there must be exactly one owner at all times.^[3] The record of ownership of an NFT is easy to trace throughout the blockchain, and indeed, that is the purpose of the blockchain’s existence: a block is added to the chain with every transaction.^[4]

However, Quantum was minted on an early blockchain, a spin-off of Bitcoin called Namecoin, that required users to periodically re-register the “names” of their NFT in order to retain ownership – if the original owner did not renew the name, any user was allowed to re-register it.^[5] As Magistrate Judge James Cott stated, “‘there is an ongoing debate” about the status of names that expire and are then re-registered: namely, whether re-registered names become new NFTs or are the same NFTs that were previously claimed.”^[6] When a name is re-registered by a new user, the name is assigned to a new blockchain, effectively “breaking” the previous chain.

According to the court and evidence in the record, there are three primary interpretations of ownership when a new user renews a domain name on Namecoin:

1. the token is synonymous with its blockchain history and thus the re-registered name is a new token/asset and cannot claim any value of the original token;
2. the token is not the blockchain, but rather the token’s value lies in the domain name, and therefore it is considered the same as any previous token of the same name; and
3. the re-registration does create a new token, but it retains the history and provenance of the original new token of the same name.^[7]

McCoy registered Quantum on Namecoin under the name “d41b8540cbacdf1467cdc5d17316dcb672c8b43235fa16cde98e79825b68709a” on May 2, 2014.^[8] The registration included a notable disclaimer with it, distinguishing property from deed to property:

. . . A UTXO, the thing that transfers ownership [between] holders of public/private key pairs, is a DEED to property but NOT property itself. The property that the Namecoin blockchain was built to cryptographically secure ownership of, provided all recurring fees have been paid to the protocol, is a unique plot of digital space known as a Name. As such, Names, along with the history of Values associated to them, are the NFT property.^[9]

This would seem to align with the first theory of ownership described above. In accordance with Namecoin’s policy, the name providing a digital record for Quantum expired in January 2015.^[10] Although McCoy moved the chain data from Namecoin to Ethereum, to “bring this early work back into the present day” on May 28, 2021,^[11] Free Holdings had already taken advantage of the lapsed, but not destroyed, original location of Quantum and “asserted title” to the file and the accompanying chain on April 5, 2021.^[12] Free Holdings showed multiple records of attempting to contact McCoy about the ownership status of Quantum via Twitter, and Caroline Moustakis, Sotheby’s Senior Vice President, via email, but Free Holdings received no response.^[13]

Holding and Reasoning

After further extensive and careful background and discussion of technological nuances in the burgeoning field of NFTs and other digital art, the court held that Free Holdings lacked standing to bring the claims of lost opportunity and damages to the value of its property in the Namecoin title discussed.^[14] This was because the court espoused the first theory of ownership discussed above and outlined in the disclaimer attached to the NFT name. Under this theory, when Free Holdings took advantage of the lapsed name on Namecoin to “re-register” what it believed to be the original Quantum NFT, it simply created a new NFT that happened to protect the same image as McCoy’s original NFT. In short, the court held that Free Holdings simply had no proprietary interest in Quantum.^[15]

The court then considered whether, if Free Holdings had had standing, it could have alleged a sufficient claim in its complaint.^[16] Although a lack of standing precludes any need to examine the sufficiency of a claim, the court determined that here it would be beneficial to continue the analysis as this was such a novel matter. Free Holdings asserted several claims: unjust enrichment;^[17] slander of title and commercial disparagement,^[18] which require falsity in the statements made Sotheby’s and McCoy,^[19] malicious intent,^[20] and damages;^[21] deceptive and unlawful trade practices;^[22] and damages under the Lanham Act for misrepresentation.^[23] After extensive analysis, the court found that none of these claims by Free Holdings had any merit.

In its analysis of Free Holdings’ unjust enrichment claim, the court stated that it had “demonstrated nothing more than an attempt to exploit open questions of ownership in the still-developing NFT field to lay claim to the profits of a legitimate artist and creator. It does not allege that it took any part in the creation of Quantum or the blockchains used to record it.”^[24]

Conclusion

Judge Cott upheld the traditional notions of ownership in this case. Although McCoy could have avoided this litigation by properly maintaining the original blockchain on which he coined the Quantum NFT, his mistake when utilizing a new and trailblazing medium did not deprive him of the rights to the work simply because someone else was more “tech savvy”. Artists can certainly rest easier knowing that they need not be technological experts in order to maintain legal ownership over their works and contributions to society and progress, as long as they can show that they did the work and did their best to maintain ownership of it. By dismissing Free Holdings’ entire suit, Judge Cott set an important precedent for digital artists and those who may try to take advantage of loopholes in the technology to exploit them: a new millennium does not make for a new law of property.

Read Free Holdings Inc. v. McCoy et al. HERE.

About the Author

Natalie Glitz Grumhaus graduated from Michigan State University College of Law in May 2023, and previously received her B.A. in Philosophy and Fine Art from Hillsdale College in 2020. Natalie was a Spring 2023 legal intern with the Center for Art Law, and now works as the Director of Audit and Compliance with Tri-Merit LLC.

Sources and References

1. See Abby Schultz, Sotheby’s Offers Curated NFT Sale Featuring First in the Genre, Penta (May 6, 2021) https://www.barrons.com/articles/sothebys-offers-curated-nft-sale-featuring-first-in-the-genre-01620322895. ↑
2. Free Holdings, Inc. v. McCoy et al, No. 22-CV-881, 2 (S.D.N.Y. 2023). ↑
3. Ethereum, Non-Fungible Tokens (NFT), https://ethereum.org/en/nft, last visited Apr. 2, 2023. ↑
4. Id. ↑
5. See Monolithbrah.eth, et al., Defining “NFT” in Historical Context (“Defining NFT”) (Jun. 27, 2022) https://mirror.xyz/chainleft.eth/MzPWRsesC9mQflxlLo-N29oF4iwCgX3lacrvaG9Kjko. (cited in Free Holdings memorandums of law, and therefore considered “part of the record.” See Free Holdings, at fn. 1.) ↑
6. Free Holdings, at 3. ↑
7. Free Holdings, at 4-5. ↑
8. Free Holdings, at 6. ↑
9. Free Holdings, at 7. ↑
10. Id. ↑
11. Free Holdings, at 7, 13. ↑
12. Free Holdings, at 7. ↑
13. Free Holdings, at 9-11, 14. ↑
14. Free Holdings, at 24-27. ↑
15. Free Holdings, at 24. ↑
16. Free Holdings, at 27. ↑
17. Free Holdings, at 28. ↑
18. Free Holdings, at 31. ↑
19. Free Holdings, at 32. ↑
20. Free Holdings, at 35. ↑
21. Free Holdings, at 36. ↑
22. Free Holdings, at 37. ↑
23. Free Holdings, at 40. ↑
24. Free Holdings, at 30. ↑