From SheppardMullin By Brittany Walter & James Gatto Posted in Digital Assets, NFTs

Introduced in response to certain digital media sellers (e.g., game publishers) revoking consumer access to purchases with little to no recourse, AB 2426 forces sellers of “digital goods,” such as movies, apps, games, books and music to clarify what a consumer is actually receiving in connection with their “purchase.” Often companies refer to the “purchase” or “sale” of digital goods, yet the associated terms of service make clear that the buyer only receives a revocable license to such goods. In some cases, if a buyer violates the terms of service, the license is revoked, and the user is denied further access to the digital goods. In other cases, a buyer may be denied access to digital goods it has “purchased” if the digital media platform shuts down.

In an attempt to remedy any misunderstanding about this, under the new law, unless the buyer is getting an unrestricted ownership interest in the item, the law prohibits a seller of a digital good from advertising or offering such item for sale using terms like “buy” or “purchase” unless it satisfies one of two conditions:

The law excludes subscription-based services that advertise or offer for sale access to any digital good solely for the duration of the subscription, free digital content and other digital goods that the seller cannot revoke access to after the transaction (including by making the digital good available for permanent offline download)

The legislative history for AB 2426 is silent on non-fungible tokens (“NFTs”) and other blockchain-based digital assets, so it is unclear whether the law was intended to apply to such assets. Yet, although the purchaser of an NFT typically acquires a full ownership interest in and to the token itself, the purchaser generally receives only a limited license to any digital asset associated with such NFT, unless otherwise specified. So, to the extent that the digital asset associated with the NFT falls within the definition of a “digital good,” it arguably could fall within the purview of the law.

Often NFTs are sold via one platform (e.g., an NFT marketplace), yet the purchaser can use the associated digital asset elsewhere. Unlike most games, where players assets are managed by the game company via a centralized asset management system, with NFTs, the ownership of the token is typically managed via a decentralized blockchain. The ownership of the NFT is associated with a digital wallet belonging to the purchaser. This enables the purchaser to control the NFT and resell it, even if the first seller of the NFT ceases operation.

However, it is possible that one or more of AB 2426’s exclusions may apply to NFTs (e.g., digital goods the seller cannot revoke access to after the transaction). Whether this is true for any NFT will be fact dependent. For example, with NFTs, often the token ownership is recorded on the blockchain, but the associated digital asset is stored elsewhere. In some cases, the digital asset may be stored on a proprietary server of the seller. In such situations, the “seller cannot revoke access” exclusion may not apply. In other cases, the digital asset may be stored on a decentralized storage system (e.g., IPFS). In this case, it is unlikely the seller can revoke access and the exclusion may apply.

Interestingly, as currently written, the term “digital good” does not appear to specifically cover static images.

The law defines “digital good” to include the following:

Arguably, none of these expressly cover static digital images.

Further, the law specifically excludes the following from the definition of a digital good: a cable television service, satellite relay television service, or any other distribution of television, video, or radio service.

The law includes some details on how the disclosure must be made. For example, the requirement referenced above that the disclosure be “clear and conspicuous” requires that the disclosure be “in a manner that clearly calls attention to the language, such as in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks.”

Additionally, any affirmative acknowledgment from the purchaser or clear and conspicuous statement must be “distinct and separate from any other terms and conditions of the transaction that the purchaser acknowledges or agrees to.”

Putting it into practice: In order to avoid regulatory penalties or a claim for false advertising, sellers of digital goods should carefully evaluate how their digital goods are advertised and ensure they have proper procedure in place to comply with these new requirements before the law goes into effect on January 1, 2025. The Sheppard Mullin team is uniquely positioned to assist clients across multiple industries navigate these new compliance obligations.