Why is the portion payable to the creator of an NFT for secondary sales called “royalty?

In the context of NFTs, the portion payable to the creator of an NFT for secondary sales is frequently
called “royalty”. Although this is not systematic, many NFT smart contracts are coded to enable an
automatic payment of the NFT creator or artist of a proportional remuneration for each successive
resale of the NFT. This system allows NFT creators, artists, and brands to generate a potentially
perpetual source of revenue from their creations.

Traditionally, a “royalty” can be defined as a financial compensation for the use of assets protected by
intellectual property rights (including copyrighted works, trademarks, designs or patented inventions).
Royalties are the common financial counterparts within intellectual property license agreements and
can be calculated as a percentage of sales made by the licensee by using the licensed asset.

With regard to the traditional definition, the use of the term “royalty” for the remuneration of the
creator of the NFT for secondary sales is questionable for many reasons, including:
• The relationship between the parties at stake is different:

o Within traditional license agreements, there is usually a strong relationship between
the parties and agreements are often signed intuitu personae, meaning that unless
authorized, licensee cannot sub-license or transfer its rights; the licensee also needs
to comply with the often many conditions set forth in the agreement to use the
licensed asset;

o Whereas within NFT smart contracts, there is no personal link between the creator of
the NFT and the subsequent owners of the NFT; most of the time, the NFT creator
does not know who is the owner of the NFT it created (the owner is only identified
through its private key). Although some NFTs have terms of use associated to them,
this is not systematic yet and the enforceability of such terms of use are questionable.

• The calculation and meaning of the royalty are different:

o Within traditional license agreements, the royalty is based on the revenues made by
licensee in relation with the use of the licensed asset (for eg. by selling a certain
amount of t-shirts reproducing a copyrighted work). The royalty is associated to the
efforts made to produce and sell products or services using the licensed asset;

o Whereas within NFT smart contracts, the royalty is not based on the use of the NFT
while the current owner has it in its wallet; the payments only occur when the NFT is
transferred from an owner to another. The royalty is a portion of the purchase price
of the NFT by the new owner, the approach is more speculative. Therefore, in our
opinion, it would be more accurate to speak of “resale fee” rather than “royalty”.