Kevin McCoy, the artist who is widely credited with creating the first NFT, and auction house Sotheby’s have won a legal victory in a lawsuit that challenged the terms and propriety of a 2021 sale at which the token sold for $1.47 million.

U.S. Magistrate Judge James L. Cott dismissed a lawsuit, in a detailed 43-page decision issued March 17 that marks one of the first important tests surrounding NFT ownership and is likely to set a precedent going forward.

The plaintiff in the case, filed in U.S. District Court, Southern District of New York was anonymous and sued through Free Holdings, a Canadian holding company. The claims centered on the fact that McCoy, in 2014, had created Quantum, his first NFT, using a blockchain known as Namecoin. McCoy later chose to preserve his original metadata using a token on a different and more modern blockchain, Ethereum. McCoy’s sale of Quantum at Sotheby’s in 2021 included the Ethereum token.

“Roughly a month before the sale, Free Holdings created a new NFT on the Namecoin blockchain, using the same namespace that McCoy had used seven years earlier and duplicating McCoy’s original metadata. Free Holdings then alleged that it was actually the owner of the ‘first-ever NFT,’” according to a statement shared with Artnet News from McCoy’s attorneys at Pryor Cashman.

“The court rejected that position and awarded judgment to McCoy and co-defendant Sotheby’s,” the statement continued.

Asked for comment, a Sotheby’s representative said via email: “The complete dismissal of this case is a full vindication of Sotheby’s position. We are pleased with the victory and its significant impact for digital artists and marketplaces.”

Kevin McCoy’s Quantum (2014) at Sotheby’s. Photo: Tristan Fewings/Getty Images for Sotheby’s.

“We are disappointed by the court’s decision. We are evaluating all of our options including appeal,” said Moish E. Peltz, the attorney for Free Holdings, in an email to Artnet News.

Despite wading into some very detailed and technical territory where NFTs and blockchain are concerned, the ruling was comparatively simple in deciding the issues and heavily favored both the fact of McCoy’s creation of the NFT and the manner in which it was marketed and sold via Sotheby’s innovative “Natively Digital” sale held in June 2021.

Judge Cott cited several key grounds proposed by McCoy and Sotheby’s as rational for granting dismissal such as “failure to state a claim upon which relief can be granted,” as well as the fact that the court lacked subject matter jurisdiction over the claims.

He went on on to write: “Free Holdings has 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. Free Holdings has thus failed to plausibly allege that unjust enrichment occurred in these circumstances.”

The Pryor Cashman team was led by litigation partner William Charron, who co-chairs Pryor Cashman’s Art Law practice, with support from partners Robert deBrauwere and Megan Noh (who co-chairs the Art Law practice with a focus on NFT issues), and litigation associates Nicholas Saady and Maya Katalan. Sotheby’s was represented by Arnold & Porter.