AI & NFTs: Key Legal Developments & Litigation Scorecard (3/20/23)

Major AI & NFT Developments, Where Key AI & NFT Litigation Stands, and Why You Should Care (Including Detailed Analysis of the Current State of Play)

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Welcome to Creative Media’s “AI & NFT Legal Update” newsletter, which focuses on the always-evolving, and frequently perplexing, legal and litigation landscape that surrounds AI, Web3 and NFTs - with a particular focus on the impact of these transformational technologies on the creative community. For those of you who’d rather listen than read, catch all the AI and NFT headline stories and my “Quick Takes” on the key business and legal developments via this link to my Fearless Media podcast.

My firm and I advise and collaborate with leading companies and players in these worlds (check out our impressive clients). Creative Media is a leading media, entertainment & tech law and business advisory firm. Think of us as your external General Counsel, business development experts, and trusted advisors. Reach out to me, Peter Csathy, at peter@creativemedia.biz to explore how my firm and I can help you. Now with that promo out of the way, let’s do this!

I. HEADLINE AI & NFT STORIES OF THE PAST 2 WEEKS

(1) OPENAI LAUNCHES GPT-4

Yes, just about 4 months after its “shock and awe”-inducing ChatGPT launch, OpenAi, together with bestie Microsoft, launched GPT-4. This The New York Times piece perhaps sums it up best in its “taste test” via GPT classic. In its words, the new edition is “exciting and scary.” “Exciting” because it passed the legal bar exam in the top 10% (ChatGPT classic finished in the bottom 10%). “Scary” because it lied - yes, actually lied, to testers. The Washington Post, not to be outdone, gave its own review, saying the latest model “will blow ChatGPT out of the water.”

And check this out. Netflix founder and tech icon Reid Hoffman just posted a book he wrote 100% with GPT-4 (he had early access to it, shocking I know!). You can find his book available for free via this link.

Meanwhile, the AI arms race accelerates - without any regulation whatsoever - and only reliance upon corporate self-imposed guardrails. Case in point Anthropic, which not only raised $300 million (with a $4.1 billion valuation) in the past two weeks, but also launched its ChatGPT rival “Claude.” And you thought you had a busy week! Nervous about the pace of it all? Maybe just a little bit? I’ll admit it. I am. We think we understand the implications of AI - and the speed at which it will evolve - but as The New York Times Ezra Klein points out, we, as humans, simply can’t fathom future possibilities. This is his “must read” article.

(2) ICYMI: COPYRIGHT OFFICE JOINS THE US PATENT OFFICE & REJECTS PROTECTION FOR PURELY AI-GENERATED WORKS

As reported last time, now both the U.S. patent and copyright offices reject protection for AI-only generated works. My bet is that these policies will change over time as AI impacts all aspects of our lives (including creative endeavors).

II. AI & WEB3/NFT “QUICK HITS” (KEY DEVELOPMENTS)

Here are some of the key and most interesting AI, Web3, NFT-related news hits of the past two weeks.

AI Quick Hits

(1) Content creators and distributors, beware! AI reportedly is now capable of reaching behind newspaper and content paywalls. Read this from The Economist. Speaking of - and this is real - I asked ChatGPT to give me a dad joke about the media business in the voice of a Wall Street lawyer. And this was its response:

Why did the media executive cross the road? To get to the other side of the paywall!

(2) Mega talent agency WME just signed AI artist Claire Silver, whose latest collection will show at the Louvre. Read about it here in Variety.

(3) Meanwhile religious leaders increasingly turn to a higher power (ChatGPT) for their weekend sermons. Read this from Axios.

(4) Speaking of philosophy and pondering our place in the world, check out philosopher king Noam Chomsky’s The New York Times guest essay, “The False Promise of ChatGPT.”

(5) Now we can all get our own personal chomp of Chomsky via Chatbot therapy. Yeah. It’s a thing. Check this out from Axios.

(6) Yes, but - some want even more right now. AI chat companions and paramours? It’s already happening. Within two months of downloading AI “friend” Replika, Denise Valenciano, a 30-year-old woman right here in my city of San Diego, left her boyfriend and is now “happily retired from human relationships,” New York magazine reports

(7) Bringing things down to earth and business, ChatGPT is coming to Slack - because, well, of course it is! Check it out here.

(8) Journalists, stay calm and carry on! After opportunistically boosting BuzzFeed’s stock price by promising to significantly use AI to write its news stories, CEO Jonah Peretti “promises” that AI won’t replace human writers. Sounds a bit like SVB’s CEO when he essentially said, “nothing to worry about here” before the melt-down. Check out Peretti’s recent interview here in TheWrap.

(9) ICYMI - check out The New York Times recent article titled, “As A.I. Booms, Lawmakers Struggle to Understand the Technology.”If we find it challenging to keep up - and all of you reading this are savvy and tech-forward - then imagine how hard it is for George Santos? Oh yes, I forgot. Of course he can! (He just assured me.)

(10) Track generative AI investment and M&A activity here - Check this out.

WEB3/NFT Quick Hits

(1) Outer Edge LA (formerly NFT LA) - the largest Web3 gathering on the West Coast - STARTS TODAY! Reach out to me at peter@creativemedia.biz to lock down a time to talk.

(2) One Web3 hand giveth, the other hand taketh away! As reported last time, many of the biggest brands in the world are now experimenting with “the artist formerly known as NFTs” (those are now being re-branded “digital tickets” or “digital collectibles”). But Meta-challenged Instagram and Facebook are abandoning NFTs. Zuck’s latest Web3 business experiment was half-hearted and simply didn’t hold up. Read more about it here.

(3) Meanwhile, while Getty Images tries to taketh from interlopers (see the AI litigation update below in Section III.), it concurrently giveth to itself by unveiling its first NFT drop (featuring mega artists David Bowie, Stevie Nicks and others). Read about it here.

(4) Let’s get physical! Web3 mega-player Animoca will soon launch CLUB3 in partnership with Planet Hollywood - IRL private clubs with exclusive perks and experiential programming for Web3’ers only. Will the crypto bros give Soho House a run for their Bitcoin? And will these new IRL clubs be limited to “bros” only? Inquiring minds want to know.

(5) Amazon certainly is getting NFT “Phygital”! Amazon’s upcoming NFTs reportedly will be tied to real world assets. What does that even mean? Not necessarily clear the giant even knows. But it just can’t let go of its quest to dominate everything. And it hopes to do it in typical Bezos style - onboarding 167 million users to Web3 overnight. Read about it here - and also here via Web3 Daily (a double shot of news here for you!).

(6) Like I said, just don’t call them NFTs! Starbucks prefers the term “digital collectibles.” And Starbucks isn’t alone. Those “in the know” have essentially discarded the geekier “NFT” moniker (which has received an underserved “Scarlet Letter” treatment due to too many “pump and dump” schemes and unfair associations with FTX and crypto). But I, for one, am not changing the name of my newsletter (call me a purist!). Read Fast Company’s interview here with Starbucks’ Adam Brotman.

(7) Of course Snoop Dogg is launching a Web3-powered livestream app. It’s called “Shiller” for Shizzle! Learn more here.

(8) If you’ve ever wondered what Web3 NFT ticketing can do that Web2 ticketing can’t, you’re not alone. But smart contracts crack down on fraud and empower new fan experiences. Check out a nice overview here.

(9) Relatedly, why are Starbucks and other major brands moving to Web3 loyalty/rewards programs? Because they can do these things that traditional customer rewards programs can’t! Here’s why via Web3 Daily.

(10) ICYMI - and worth repeating - leading marketplace OpenSea drops “off chain” enforcement of ongoing resale royalties for Creators. Read my recent newsletter headline story to understand why this is a big deal - a very big deal. Bottom line: OpenSea, rocked by waves of competitive pressures (mostly 0% fee marketplace Blur) essentially abandoned Creator ships, just when those Creators needed them most.

(11) Track Web3 and NFT investment and M&A activity here - Check this out.

III. AI & NFT CASE TRACKER & STATUS REPORT

Here are the headline updates on the most important cases in the last two weeks. Dig in much more deeply into the background of each case in Section IV. below - and read my analysis of each one (including predictions of how some of them are likely to end).

(1) AI CASE TRACKER

Infringement Cases

Andersen, et al. v. Stability AI, Midjourney, and DeviantArt. On January 13th, 2023, several artists filed a class action copyright infringement lawsuit against generative AI art platforms Stable Diffusion, Midjourney and DeviantArt. The lawsuit’s primary is generative AI’s ability to create art “in the style of” specific artists based on their works being included in its training data set (in other words, unlicensed derivative works). Read a great and extremely thorough analysis of it all by IP attorney Michael Kasdan (you can download his full article here).No major updates to report during the past two weeks. The court has scheduled a case management conference for May 2nd.

Getty Images v. Stability AI. The iconic photo library filed its own major lawsuit on February 2nd, 2023, accusing Stability AI of “scraping” and infringing Getty’s content on a massive scale (training its AI on 12 million of its images). Read about it here from The Verge. No major updates to report during the past two weeks. On February 24th, the court agreed to extend the time for Stability AI to answer Getty’s complaint to April 18th.

ML Genius Holdings v. Google. While this is not really and AI case, it tackles the issues of “scraping” and the extent companies can control access to their content via contract law and website terms and conditions. Lyrics posting company Rap Genius sued Google for scraping and featuring its lyrics in search results. Google counters by arguing that there can be no infringement because Rap Genius doesn’t own the copyrights to the underlying lyrics. Kasdan (mentioned above in the Andersen v. Stability AI overview ) reports in his analysis that this case may come before the U.S. Supreme Court.

OpenAI Looks to Dismiss DMCA Lawsuit Over its AI Tool Copilot. For now, read this smart and thorough overview from The Fashion Law.

More cases to be tracked in coming editions, but these are the most closely watched.

(2) NFT CASE TRACKER

Securities Cases

Friel v. Dapper Labs. As reported in my last newsletter, just recently there was a MASSIVE ruling in the closely watched NBA Top Shots NFT case that holds potentially significant impact across the Web3 world. Buyers of NBA Top Shots had sued Dapper for allegedly selling unregistered securities. And for months we’ve been waiting for the court’s ruling on Dapper’s motion to dismiss on the basis that its NFTs were were simply collectibles - not securities. The court rejected Dapper’s arguments - and seemed very sympathetic to plaintiff’s claims. Read a great full analysis here. Most recently, on March 15th, Dapper filed its formal Answer to Friel’s Amended Complaint. The next day, the court ordered the parties to file a joint letter that, among other things, discusses the prospects for settlement.

The SEC also continues to investigate Yuga Labs to determine whether Yuga’s Bored Ape NFTs are akin to stocks that should be subject to SEC disclosure rules. This too may impact a broad swath of NFTs.

Infringement Cases

Nike v. StockX. Nike is the most successful apparel/fashion brand in the NFT world. In this case, trademark likelihood of confusion butts up against “fair use.” Significant discovery-related actions during the past two weeks. And, the next case status conference is April 7th.

Yuga Labs v. Ryder Ripp. Yuga is creator of Bored Apes and CryptoPunks. Yet another “infringement meets fair use” case. Just like the rains fell in California, a flurry of activity fell upon this case in the past two weeks, ranging from a denial by the court of a request for attorney sanctions - to the granting, in part, of Yuga’s motion to dismiss several of Ripp’s counterclaims. Major summary judgment motions are scheduled for oral argument before the court on April 17th.

Breach of Contract Cases

Luna Aura LLC v. 3LAU Entertainment. Plaintiff sued DJ and producer 3LAU for breach of contract in connection with the song “Walk Away” - related to Blau’s NFT auction that generated $11.7 million. No major updates for the past two weeks. On February 23rd, the court issued several discovery orders and set the case for a jury trial most likely in Q4 of this year.

Criminal Insider Trading Cases

U.S. v. Chastain. The DOJ indicted a former OpenSea employee for wire fraud and money laundering in what the Feds call the first NFT insider trading case. No major updates for the past several months since the court rejected Chastain’s motion to dismiss in October.

Key NFT Cases Outside the U.S.

Check out my previous newsletter for summaries of key cases to track from the U.K., Singapore and China.

IV. THE FULL AI & NFT LITIGATION BRIEFING, ANALYSIS & SCORECARD

Here’s the full context of, and my full analysis for, the major AI and NFT cases tracked above.

(1) SECURITIES CASES

(i) Friel v. Dapper Labs

Buyers of NBA Top Shot “Moments” sued NFT minter Dapper Labs for selling unregistered securities. Dapper claims that its NFTs are not “securities” under the SEC’s relevant “Howey Test,” because its NFTs were “objects of play and not for investment or speculative purposes.” In other words, there was no reasonable expectation of profit. The core securities issues here could impact a broad swath of NFTs.

Current Status. See Section III. above.

My Thoughts.

Buyers of these NFTs had no issues with “Moments” when NFT prices were going one direction only - i.e., upward. But now that reality has set in, speculators (most of whom are young, unsophisticated investors) feel cheated in what they had essentially viewed as a lucrative “sure thing.” And now, the court apparently agrees. Things now don’t look too good for Dapper Labs.

(2) INFRINGEMENT CASES

(i) Nike v. StockX

StockX operates an online resale platform that sells NFT pictures of actual Nike shoes. Nike claims infringement and asserts that StockX is intentionally deceiving buyers into believing that its NFTs are authorized by Nike. But StockX raises a first sale doctrine defense, claiming that each NFT merely functions as a “claim ticket” for actual physical Nike shoes that are stored inside an actual vault. In its words, its NFTs “are absolutely not ‘virtual products’ or digital sneakers” - but rather its use of Nike’s trademarks are for descriptive purposes only (i.e., fair use).

Current Status. See Section III. above.

My Thoughts.

Nike has solid arguments that StockX intentionally misled its customers into believing that Nike was somehow involved, trading off the famed brand. StockX should “just do it” and try to settle.

(ii) Yuga Labs v. Ryder Ripp

Creators of Bored Apes sued a self-proclaimed “satirist” who created and sold digital replicas of Yuga’s same Bored Apes (but with a stylized disclaimer that purportedly made it clear to buyers that his were not the real deal). Yuga argues that Ripp made millions stealing its IP and trading off its Bored Apes brand (primarily trademark-related arguments). Ripp, like Rothschild in the Hermes Metabirkin case, invokes the First Amendment and “fair use” (satire and protest). He also counter-sued and now seeks to dismiss Yuga’s copyright claims based on the argument that the U.S. Copyright office does not grant copyright protection to AI-only generative art - which is true (as indicated in the “Headline Stories” above).

Current Status. See Section III. above.

My Thoughts.

Ripp’s Bored Apes are essentially exact replicas. Given this reality, it’s likely that the jury will find infringement and not allow a First Amendment satire defense swallow up the entire doctrine of trademark. But Ripp’s pending motion to dismiss Yuga’s copyright claims on the basis of the U.S. Copyright’s ruling (that AI-only generative art is incapable of copyright protection) has a shot. If the court rules that Yuga’s Bored Apes were 100% generated by AI, then they have no copyright protection.

(3) BREACH OF CONTRACT CASES

Luna Aura LLC v. 3LAU Entertainment

Plaintiff Anne Flores sued DJ and producer 3LAU (Justin Blau) in connection with the song “Walk Away” that she co-wrote. Flores claims breach of contract and unjust enrichment - that she is owed royalties. All this stems from an NFT auction by Blau that generated $11.7 million

Current Status. See Section III. above.

My Thoughts.

Music NFTs represent one of the biggest categories in the world of Web3 - and already show themselves to be a major market opportunity (as is entertainment in general). So are the complexities, however, given all of the fractionalized and complex intellectual property and music licensing issues involved. When IP is involved - which is always the case - get the best lawyers you can!

(4) CRIMINAL INSIDER TRADING CASES

U.S. v. Chastain

In May 2022, the Department of Justice indicted former OpenSea employee Nathanial Chastain and charged him with wire fraud and money laundering in what the Feds call the first NFT-focused insider trading scheme. Chastain, a product manager, was responsible for choosing which NFTs OpenSea would highlight on its homepage. He is alleged to have “exploited his advanced knowledge of what NFTs would be featured … for his personal financial gain” by secretly purchasing soon-to-be-featured NFTs and selling them at significant profit after OpenSea did, in fact, feature them.

Current Status. See Section III. above.

My Thoughts.

It’s never great to be the first insider trading defendant. The Feds have too much to lose if they don’t win. Chastain will plead guilty in advance of trial to avoid the book being thrown at him. But the case has been quiet now for several months.

V. IMPORTANT RESOLVED CASES & WHAT THEY REPRESENT

Check out recently resolved major NFT cases via this link to my last newsletter (Section VI.) to see how they ended - and what they continue to represent.

VI. CLIENT SPOTLIGHT: OP3N WORLD (& ITS EXCLUSIVE MARCH 22nd SIMON FULLER FILM RELEASE)

Check out spotlight client, OP3N World (op3n.world) - a Web3/NFT platform that enables Creators to easily develop, distribute and monetize their creative works. This week, on March 22nd, entertainment mogul Simon Fuller (creator of “American Idol”) releases his new feature film exclusively on OP3N’s “Super App.” Fuller’s film stars global pop supergroup Now United. Ticket buyers can choose from 3 different tiers - each with different bundles of value/utility. It’s a major new token-gated development for both Creators and their audiences, and Creative Media is proud to serve as OP3N’s external General Counsel and business development arm.

VII. CLOSING THOUGHTS

If you like this newsletter, support it, subscribe to it and share it! Industry expert Jim Louderback calls this newsletter “a must read” and “fascinating look at how these new technologies are being hashed out in court.”