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NFT Litigation Update & Key Legal Developments (as of 10/17/22)
Major NFT Legal Developments, Where Key NFT Litigation Stands, and Why You Should Care (Including Detailed Analysis of the Current State of Play)
Today’s major NFT legal developments and litigation will have outsized effects on establishing NFT-related “rules of the game” that will impact your strategies, development and execution. And, in this “crypto winter” - when times are tough - there will be more litigation, not less. Angst fuels disputes. That’s why you should care and keep tabs on what’s going on. That’s where my weekly always-updated newsletter comes in.
(NOTE: I am a licensed intellectual property and business attorney and work deeply in the world of NFTs [my full bio is below]; but this newsletter expresses my opinions only. Check out my firm Creative Media and reach out to me at email@example.com for a private consultation to discuss your specific media, entertainment, tech and NFT-related issues.)
I. LAST WEEK’S BIG SUPREME COURT “FAIR USE” ARGUMENT
Last Wednesday, October 12th, the U.S. Supreme heard oral arguments in the case of The Andy Warhol Foundation for the Visual Arts, Inc. v. Goldsmith - a case that addresses the scope of the Copyright Act’s “fair use” exemption in the context of art - a decision that has potentially far-reaching impact into the world of NFTs (including some of the key NFT cases highlighted in this newsletter). Remember, the Supreme Court in the 2021 case Google v. Oracle just addressed fair use - but in the fundamentally different context of Google’s admitted copying of computer code. In that case, the Supremes held for Google - fair use. Last week’s Warhol case is the first since Google to decide the scope of fair use outside the realm of software (in fact, the last time the Supremes touched fair use in the arts was almost 30 years ago in 1994 when it ruled that it was a fair use when rap group 2 Live Crew “parodied” Roy Orbison’s classic song “Oh Pretty Woman”).
In this new Warhol case, a photographer (Goldsmith) sued Andy Warhol’s Foundation for infringement based on Warhol’s series of artworks based on one of Goldsmith’s photographs of the artist Prince. The fundamental question is whether Warhol’s art is a “transformative” fair use that makes it something essentially “new.” During oral arguments, Justice Elena Kagan underscored that “the purpose of all copyright law is to foster creativity.”
And what did we learn in oral arguments? Well for one thing, we learned that ultra, ultra conservative and reactionary Justice Clarence Thomas is a Prince fan (Justice Kagan ribbed him a bit about that one, clearly surprised herself.) It is also apparent that Chief Justice John Roberts will find fair use here and vote to reverse the Second Circuit’s ruling. And above all, we learned - from the questions of the Justices - that law (and not just art) is in the eye of the beholder. While the Court ultimately will cloak any decision it makes in the basis of objective reason, make no mistake. The Court’s ultimate seemingly “precise” language will mask tremendous subjectivity.
So will the Supreme Court rule that Andy Warhol infringed here with his Prince series when it just recently noted in the Google case that the artist did not with his Campbell’s soup can series (you know the ones)? My bet is that this unbridled and somewhat unhinged Supreme Court will reverse the Second Circuit’s ruling - in other words, point to its recent Google v. Oracle decision and broaden the scope of “fair use” in the world of art. Some artists will cheer that kind of decision. Others won’t. But the Supreme Court’s ultimate ruling will most certainly impact the world of NFTs. As I noted last week, a ruling in favor of Warhol will give NFT minters more leeway to create NFTs based on existing copyrighted works (and then claim fair use). At the same time, however, in cases fraught with so much subjectivity, litigation certainly will continue apace.
II. LITIGATION SCORECARD: KEY ONGOING/ACTIVE LITIGATION
Here’s the latest on the key NFT litigation cases to track closely (as of today, October 17th, 2022), including those that may be profoundly impacted by the U.S. Supreme Court’s “fair use” case.
A. KEY NFT LITIGATION IN THE U.S.
(1) Hermes v. Mason Rothschild:
The U.S. Supreme Court’s Warhol fair use decision may ultimately impact this case.
High end fashion brand Hermes sued artist Mason Rothschild for infringement based on the artist’s creation of “MetaBirkins” - i.e., digital versions of their famed Birkin handbags for the metaverse. Rothschild asserts a First Amendment “artistic relevance” fair use defense that comes from the U.S. Second Circuit Court of Appeals (the same court being reviewed in this week’s Supreme Court case). In that “artistic relevance” case, the the Second Circuit ruled that when allegedly infringing trademarks are used in an artistic context, courts need to balance the “public interest in avoiding consumer confusion” against the “public interest in free expression” (in other words, providing a fair use “out” for purported infringers).
Most recently, both sides filed additional documents supporting their pending “Motions for Summary Judgment” and discovery continues. But trial courts typically do no like to end litigation via summary judgment - which are requests for the trial court to grant judgment in their favor based on their pleadings and on documentary evidence (i.e., before an actual trial itself). They prefer to allow cases proceed toward trial (and hope that the parties themselves settle pre-trial).
Applying the U.S. Supreme Court’s analysis in the Google v. Oracle case - and specifically its reference to Warhol’s Campbell’s soup cans as being an example of non-infringing fair use - it would seem that Rothschild may have a credible defense (and last week’s Supreme Court case may seemingly bolster that defense). And, in fact, the trial court in this Hermes case did dismiss some of Hermes’ copyright infringement claims. But even with respect to those dismissed claims, the court also indicated that its decision might have been different if Rothschild’s MetaBirkens had some kind of utilitarian value - for example, if avatars in the metaverse could actually carry or otherwise use those virtual bags (rather than Rothschild just creating images of handbags).
Importantly, the court also permitted the case to continue to explore whether consumers were actively misled to believe that Hermes had expressly endorsed or supported Rothschild’s artwork. And ultimately I believe the court’s answer here will be “yes” - and will find infringement.
(2) Yuga Labs v. Ryder Ripp:
Here’s another key case that may be impacted by the U.S. Supreme Court’s ultimate fair use decision in the Warhol case.
Creators of Bored Apes (Yuga Labs) sued a self-proclaimed “satirist” who created and sold virtual exact digital replicas of the same Bored Apes (but under a stylized designation that purportedly made it clear to buyers that they were not the real deal). Yuga Labs argues that Ripp has made millions essentially by stealing its intellectual property and trading off its Bored Apes name and brand. Ripp’s defense to infringement is “fair use” (satire and protest). He also counter-sued, claiming that Yuga Labs was trying to shut down his free speech.
Most recently, Ripp added new counsel. Ripp earlier filed his “Motion to Strike Certain Causes of Action, or in the Alternative, Motion to Dismiss.” Essentially, Ripp is trying to dismiss the entire case (or at least parts of it) right now based on just issues of law (not fact). But just like with “Motions for Summary Judgement,” courts typically do not like to end litigation via “Motions to Dismiss or Strike.” They only do that when the legal pleadings are essentially absent of any arguable, viable legal claims (based on the specific allegations, rather than on any evidence).
Ripp’s Bored Apes are apparently exact replicas. Given this reality, it is difficult to believe that the court will not find infringement (and not allow a satire defense swallow up the entire doctrine of copyright infringement). No matter how the U.S. Supreme Court decides the Warhol case, it is likely that even it would find no fair use here. And, it certainly doesn’t help that the trial court recently sanctioned the defendants’ counsel for misconduct. You never want to be on a judge’s bad side. That’s Rule #1 in litigation. So don’t expect any dismissals of the case anytime soon.
(3) Nike v. StockX:
Here’s yet another key case that may be impacted by the U.S. Supreme Court’s ultimate fair use decision in Warhol.
This cases pits trademark claims of likelihood of confusion against the so-called “first sale doctrine.” StockX operates an online resale platform that, among other things, sells NFT pictures of actual Nike shoes. Nike claims infringement, and also contends that StockX is intentionally deceiving unsuspecting 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 other words, its NFTs are used merely to authenticate those actual physical Nike shoes (and Nike’s trademarks are used only for descriptive purposes - in other words, a fair use). NOTICE a pattern here? Fair use used as defense once again!
Most recently, the U.S. magistrate judge ordered the parties to schedule a second settlement conference. To give them time, the court extended the deadline for completion of all discovery until January 20th, 2023 and scheduled the next pretrial conference for February 3rd, 2023. Bottom line - the court wants the parties to work it out (which is not unusual).
If I were StockX I’d settle pre-trial. Why? Because if the court concludes that StockX intentionally sought to mislead its customers into believing that Nike was involved in creating (or endorsing) these NFTs, then it would likely find some kind of infringement (a la the Hermes case discussed above).
(4) LCX AG v. John Does Nos. 1-25:
Plaintiff, a European cryptocurrency exchange, sued unknown hackers in the New York State courts for theft of assets worth approximately $8 million held in digital wallets on the Ethereum blockchain.
The court recently ordered the anonymous defendants to appear in court later this week on October 20th regarding a procedural matter known as an “Order to Show Cause.” This followed the court’s earlier grant of a preliminary injunction to prevent those unknown defendants from transferring the stolen assets. The most fascinating aspect of this case is that the court permitted the plaintiff Exchange to serve the legal documents on the anonymous defendants by airdropping them to their Ethereum accounts via “a special-purpose Ethereum-based token” (what it called a “Service Token”). The Service Token contained a hyperlink to the blockchain address, such that when the unknown person associated with that address clicked on the link, it would take them to a website that contained all the relevant court papers (that would qualify for accepting service of process).
This case is one to watch closely, because it addresses the seemingly impossible issue of “who to sue” in cases where it is impossible to identify the “bad guys” in a blockchain-based Web3 ecosystem of unidentified users (which will become increasingly commonplace). Interestingly, the airdropped service of court papers on the unknown defendants in this case worked. Attorneys for these unknown defendants showed up in court to defend the lawsuit and to oppose the Exchange’s “Motion to Compel” disclosure of their identities. We’ll see if they show up again later this week for this “Order to Show Cause” hearing.
(5) Friel v. Dapper Labs:
This is one of the most closely followed cases in the world of NFTs because its potential profound breadth of impact. Buyers of NBA Top Shot “Moments” (NFTs linked to video clips of NBA highlights) sued the maker of those NFTs (Dapper Labs), claiming that Dapper was selling unregistered securities. For its part, Dapper claims that its NFTs do not satisfy the relevant SEC “Howey Test” (the pivotal legal doctrine in purported securities cases), because its NFTs were “objects of play and not for investment or speculative purposes” (in other words, its NFTs did not come with a “reasonable” expectation of profit). Given the central securities issue involved, the potential impact of this case is far-reaching and could impact a broad swath of NFTs if the court disagrees with Dapper and sides with the plaintiffs.
No changes from last week or the week before. The most recent critical recent update was August 31st, 2022 when Dapper Labs filed a motion to dismiss the litigation, claiming that basketball cards are not securities.
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 highly lucrative “sure thing.”
B. KEY NFT LITIGATION OUTSIDE THE U.S.
(1) ENGLAND: Osbourne v. Persons Unknown:
In this case out of England, plaintiff Osbourne sought to enjoin both (1) the unidentified defendants who had stolen her two “Boss Beauties” NFTs and placed them in their OpenSea wallets and (2) the OpenSea marketplace itself - from further transferring those stolen NFTs.
The court granted the requested injunction, finding that “there is at least a realistically arguable case that such tokens are to be treated as property as a matter of English law.” Importantly, the English court also ordered OpenSea to reveal information about the unidentified wallet holders, despite the fact that OpenSea has no physical presence in England.
This one is an important case to follow, particularly because it places legal obligations and potential liability on the NFT marketplaces/exchanges themselves for the “bad acts” of users of its marketplace/exchange (as well as to reveal private information about its users). Let’s also not forget that conclusions about NFTs being property - which makes sense - also means that it is at least questionable whether industry-prevalent terms of service (TOS) that give platforms the ability to bar users for violations of those TOS are legally permissible (or rather should qualify as illegal confiscations of property).
(2) SINGAPORE: Bored Ape Yacht Club NFT #2162
In this case in the courts of Singapore, the owner of Bored Ape NFT #2162 had used his Ape as collateral to borrow cryptocurrencies from an unidentified person known only as “chefpierre.” When the Bored Ape owner defaulted on its loan, chefpierre transferred the NFT to his wallet and listed it for sale on OpenSea, even though the loan document expressly stated that chefpierre would not foreclose on the NFT.
The court, like the English court in Osbourne, recognized the Bored Ape NFT as being property. And, accordingly, it issued a worldwide injunction against chefpierre from transferring it. Interestingly - and importantly - the court permitted relevant legal documents to be served on chefpierre via his social media account and via its Etherium platform-based NFT itself.
This one is fascinating for similar reasons to the LCX AG New York state court case above - i.e., solving the issue of service of process (legal papers) on Web3 persons unknown.
(3) CHINA : The BigVerse Litigation
In this case out of China, an unknown individual minted an NFT of a cartoon tiger on NFT China, a popular Chinese NFT marketplace (a la OpenSea). The cartoon was based on the copyrights of the plaintiff, who claimed infringement and theft. Rather than sue the anonymous NFT minter, the plaintiff sued BigVerse, the parent company of the NFT platform.
The court held that the NFT platform itself (BigVerse) was liable for violating the plaintiff’s “right to disseminate works through information networks” and failing to verify that the individual who minted the NFT actually owned the requisite copyright in the artwork. The court ordered BigVerse to both pay monetary damages and remove the NFT from circulation by “burning “it (i.e., sending it to an address that cannot be accessed).
Like the Osbourne case above in the courts of England, this one is important, because it placed legal obligations and liability on the NFT marketplace itself for the “bad acts” of its users.
III. CLOSING THOUGHTS
A. PROVOCATIVE NFT QUESTION OF THE WEEK?
Does Justice Clarence Thomas really like Prince?
In last week’s oral arguments in the Warhol fair use case, he claimed to like Prince. But can we really believe him? (Hey, at least he apparently spoke up and said SOMETHING during oral arguments!).
B. CRYPTO WINTER: WHAT DOES IT MEAN FOR NFTs?
Let’s be clear. Despite today’s “crypto winter,” NFTs with continuing and lasting utility, value, experiences and real community are here to stay. I recently published an article about this in TheWrap - “NFTs Aren’t Dead - The Right Ones Will Transform Entertainment.” You can find it here.
Basically, the NFT market opportunity is massive for innovative players in the overall ecosystem - and, in particular, for creators and their fans/audiences. Yes, lots of rabid unhinged speculation and purely hype-based “pump and dumps” amidst the quality. But that doesn’t detract from the very real power and promise unique to utility/value-focused NFTs. For specific examples, refer to my article above - lots of “meat” in there.
C. IF YOU LIKE THIS NEWSLETTER, SHARE IT
Readers - I am hearing from many of you that you find real value in this newsletter. And I am gratified that industry expert Jim Louderback calls it “a must read” and “fascinating look at how these new technologies are being hashed out in court.” As you know, I don’t charge for it - it’s entirely free. But - it also takes a lot of time - researching it, analyzing the cases, and writing it. So if you like it, please share it.
And check out my media-tech focused legal services and business advisory firm Creative Media. Reach out to me at firstname.lastname@example.org to discuss your own Web3 and NFT legal and business issues - and to schedule a private consultation. We offer flat fee legal services (or if you prefer, hourly billing) to give you the most innovative and cost effective high quality legal services and solutions - and to give you the Web3/NFT experience and innovation you need.
IV. BACKGROUND ON NFTS (WHAT THEY ARE, WHAT THEY DO & OTHER RESOURCES)
To learn more about NFTs (what they are, what they can uniquely do, and how they are being used), I added a new section of resources to the NFT Legal Update website (which you can access here).
I also recommend reading this new report by McKinsey titled “Web3 beyond the hype” (which also underscores the massive NFT market opportunity: it surveyed 35,000 active Internet users between the ages 25-44 in the U.S. and other key digital asset market territories and found that “just over half” have already used NFTs).
V. ADDENDUM: RECENTLY SETTLED/RESOLVED KEY LITIGATION
(1) Miramax v. Tarantino:
The studio sued famed auteur Quentin Tarantino for selling NFTs based on his actual script pages for the iconic film “Pulp Fiction,” contending that Tarantino had granted the studio all NFT rights. Tarantino had announced plans to sell NFTs of digital scans of original handwritten pages of his screenplay. He had granted most rights to the studio, but reserved the right of “screenplay publication.” Miramax claimed copyright and trademark infringement – i.e., that his NFTs did not fall within Tarantino’s purported “narrowly-drafted” reserved rights and that, instead, it had acquired all rights - including “broad, catch-all rights” that included “all rights now or hereafter known in all media now or hereafter known.”
The parties reached a settlement in September 2022. And the court just concluded the matter with a formal order on October 2nd (with a joint stipulation agreement by the parties that followed).
Terms of the settlement are confidential. The studio wanted to make sure that no precedent was set that could be used to hurt it in future related cases where artists claim to have reserved NFT-related rights. Accordingly, the case gives no formal guidance - but, underscores the need for both sides of any IP deal to contemplate NFTs and all future possibilities (and draft their contracts as broadly as possible as a result).
(2) Halston Thayer v. Matt Furie (& Others):
Halston Thayer, an NFT buyer, filed a lawsuit against the NFT minter, crypto-artist Matt Furie, contending that Furie engaged in a “scheme to artificially inflate the value” of his FEELSGOODMAN Rare Pepe Card NFT. Thayer claimed that Furie misrepresented the number of NFTs that would be offered for sale and essentially duped him into “grossly overbidding” for his NFT. Thayer claimed that he was led to believe that there would be only 1 such NFT (and that’s why he paid $507,084 for it).
The court dismissed Thayer’s claims in August 2022 with prejudice (meaning that the lawsuit is terminated and Thayer’s claims were completely rejected).
This is yet another litigation where an NFT speculator filed a lawsuit based on the fact that his investment tanked (when speculators anticipated that prices could only go up). And there will be many more in this “crypto winter” where speculators have been brutalized by market realities. Did Furie misrepresent what he was selling? And did he fraudulently induce Thayer to buy based on those misrepresentations? The court obviously ruled that the answer was a resounding “No!” In other words, buyer beware!
AND please send me your feedback - and key NFT legal and litigation updates of your own to email@example.com.
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