NFTs & AI: Key Legal Developments & Litigation Scorecard (2/6/23)
NFTs & AI: Key Legal Developments & Litigation Scorecard (2/6/23)
Major NFT & AI Developments, Where Key NFT & AI Litigation Stands, and Why You Should Care (Including Detailed Analysis of the Current State of Play)
Welcome to Creative Media’s NFT & AI Legal Update newsletter that focuses on the always-evolving, and frequently perplexing, legal and litigation landscape that surrounds Web3 and NFTs, together with a healthy dose of artificial intelligence (AI). We track key developments for you, because they define your “rules of the game” - issues that impact everyone in the overall media, entertainment and creative ecosystem. (Creative Media is a media, entertainment & tech law and business advisory firm. We work deeply in the world of Web3 with leading companies. Think of us as your external General Counsel, business advisors and business development experts. Reach out to Chairman Peter Csathy at peter@creativemedia.biz).
I. REGISTER FOR FEB. 15 VIRTUAL ROUND TABLE: AI, ENTERTAINMENT & THE ARTS (w/ Leading Artists)
Chairman Peter Csathy will host a free virtual round table with both high-profile creators and AI tech experts on February 15th at 11 am Pacific / 2 pm Eastern. We will discuss AI’s impact on media, entertainment and creativity in general - what it means for artists, creators, and all of our jobs. Guests include Grammy and Golden Globe winning recording artist Alex Ebert (“Edward Sharpe” of Edward Sharpe & The Magnetic Zeros), Metaverse creator and AI influencer Don Allen III, Digital artist and data scientist Aya, and leading AI lawyer and thought leader Michael Kasdan of Wiggin and Dana.
II. WATCH/LISTEN TO THIS AI/WEB3 PODCAST EPISODE - ELEGANT SOLUTION FOR COMPENSATING ARTISTS FOR AI “SCRAPING” THEIR COPYRIGHTED WORKS
Here’s a great intro to some of the issues Peter and his guests will be discussing at the February 15th virtual round table. Peter just joined media-tech entrepreneur Steve Stewart on his “Futureworlds” podcast, where Peter and Steve went deep into how AI and Web3/NFTs will impact entertainment and creativity in general. Peter and Steve came up with a real, elegant solution - in real time - about how artists and creators can be compensated when AI “scrapes” their copyrighted works on a mass scale. Check it out - watch and/or listen here.
III. WEB3/NFT & AI “QUICK HITS” (KEY DEVELOPMENTS)
Here are some of the key Web3, NFT and AI-related news hits since the last newsletter two weeks ago.
WEB3/NFT Quick Hits
(1) Outer Edge LA (formerly NFT LA) - the largest Web3 gathering on the West Coast - is now only 1 month away! Lock in March 20-23, 2023 in your books (and register here). You can also reach out to Peter Csathy directly at peter@creativemedia.biz to get an extra 10% off (yes, he has the secret code!). Join technology and creative leaders like Yat Siu of Animoca Brands, Shyam Nagarajan of IBM (Web3 and blockchain services lead) and William Shatner (yes Captain Kirk himself!) to explore how blockchain tech is shaking up the entertainment industry. And reach out to Creative Media Chairman Peter Csathy to schedule a meeting at peter@creativemedia.biz.
(2) Amazon reportedly is planning a major NFT initiative in the Spring, in the giant’s never-ending quest to takeover the world! One potential initiative involves Amazon customers playing NFT-powered games. Read about it here.
(3) And if Amazon is doing it, everyone is doing it and NFTs are back with a vengeance! Case in point for major brands accelerating their NFT ambitions - The Premier League (yes that Premier League that rules the world with the “real” football) struck a $150 million deal with Sorare to power NFT-fueled sports digital competitions and player cards. Read about it here.
(4) Hollywood also is now officially in the NFT game with A talent. Leading filmmaker Steven Soderbergh awards the first award to an NFT-funded film at the high-profile Sundance Film Festival. Read about it here.
AI Quick Hits
(1) ICYMI Hey AI, real Artists and Creators are watching you! A major class action copyright infringement lawsuit was filed on behalf of artists against AI creator platforms Stable Diffusion, Midjourney and DeviantArt. This case marks the beginning of how the legal system will try to define guard-rails around AI and creative works. It’s a “must know” case you can read about, together with a great analysis, in this blog post by leading attorney and AI thought leader Michael Kasdan.
(2) ICYMI Getty Images also sees AI as a fundamental threat - and this is yet another “must follow” case. The iconic photo library filed its own major lawsuit in the UK courts - Stable Diffusion is, once again, the target - accused of “scraping” Getty’s content and infringing copyrights on a massive scale. Read about it here from The Verge.
(3) In fact, the AI threat to creativity is so real that even Google is exercising some restraint! (remember, we said “some” restraint). Google has kept its MusicLM project under wraps (so far) - which program enables sophisticated music creation based only on text prompts. Read about it here. Is your mind spinning yet?
(4) At the same time, Google feels threatened by Chat GPT’s cozy relationship with Microsoft. No surprise, then, that Google just invested a cool $300 million in AI start-up Anthropic (whose founder, Dario Amodei left Chat GPT’s human creators OpenAI “after a disagreement over the company’s direction”). In other words, the battle of the titans is most definitely ON! Read about it here.
(5) From the “he says it, but does he mean it?” department. Brad Smith, President of Chat GPT’s benefactor Microsoft, is calling for governments and other “stakeholders” to have a greater dialogue about the risks and impacts of AI. But he stopped short of calling for specific regulation because, well, of course he did! Read about it here. And is this all just a reaction to the fact that Microsoft, OpenAI and others were recently sued for violating the Digital Millennium Copyright Act (DMCA)? Read about it here.
(6) Meanwhile struggling tech-infused media company BuzzFeed rides the AI wave and Chat GPT hype to an investor windfall, as its shares rocket 120% at the news that it plans to use AI to scale its content (in a bellwether of more things to come in terms of threats to human jobs). Read about it here.
(7) And the man behind the curtain speaks! Here is Forbes’ new interview with OpenAI’s founder and CEO Sam Altman (who rarely gives interviews). Read it here.
(8) Creatives - head spinning yet? Then read this thought piece titled “How Generative AI is going to disrupt every aspect of the creation process.”
(9) Humans everywhere - head spinning yet? A new startup teaches AI to read our emotions. Yup, our human reactions. Read about it here.
IV. THE BI-MONTHLY NFT CASE TRACKER & STATUS REPORT
Here are the headline updates since the last newsletter two weeks ago in the most important cases we are tracking. You can dig in much more deeply into the background of each case in Section V. below - and read Peter’s analysis of each one (including predictions of how some of them are likely to end).
Infringement Cases
Hermes v. Mason Rothschild. High end fashion brand sued artist Rothschild for infringement for creating digital versions of its famed Birken bags. Well ladies and gentlemen, start your engines. Trial has begun on this closely-watched case (as of January 30th). After a flurry of pre-trial activity, the parties failed to settle - and the court re-affirmed its denial of each party’s cross motions for summary judgment in order to send it to trial. In the words of the judge, “a genuine factual dispute [exists] as to whether Rothschild’s decision to center his work around the Birkin bag stemmed from genuine artistic expression or, rather, from an unlawful intent to cash in on a highly exclusive and uniquely valuable brand name.” The court also denied defendant’s ability to call an Andy Warhol expert. The U.S. Supreme Court earlier this year heard oral arguments about whether a certain work based on a Warhol artwork crossed the line into infringement.
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.” Discovery continues, as the court moved February 3rd’s discovery conference to March 3rd.
Yuga Labs v. Ryder Ripp. Yuga is creator of Bored Apes and CryptoPunks. Yet another “infringement meets fair use” case. On January 24th, the parties filed their joint report results of their settlement conference. Obviously, the cased didn’t settle, because the case moves onward. The court will hear oral arguments on pending motions to strike certain claims on February 13th.
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. On January 27th, defendant 3LAU filed his answer to plaintiff’s amended complaint.
Securities Cases
Friel v. Dapper Labs. Buyers of NBA Top Shots sued Dapper for allegedly selling unregistered securities. Once again, no major updates since November 30th, 2022 when Dapper filed its reply to defendant’s opposition brief in connection with Dapper’s motion to dismiss which remains in the hands of the court.
Theft of Property Cases
LCX AG v. John Does Nos. 1-25. A European cryptocurrency exchange sued unknown hackers for theft of $8 million in NFT assets. Yet again, it appears that there have been no major updates for the past several weeks. Defendants’ motion to dismiss is pending. The last activity was a couple months ago.
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 weeks. The court most recently rejected Chastain’s motion to dismiss in October.
Key NFT Cases Outside the U.S.
Keep reading in Section IV. below for key NFT cases to track from the U.K., Singapore and China.
V. THE FULL NFT LITIGATION BRIEFING, ANALYSIS & SCORECARD
Here’s Peter’s full briefing and analysis for the major NFT cases tracked above. To get the status of each case, refer to Section IV. above. (Reach out at peter@creativemedia.biz with tips or recommendations for more key NFT cases to track.)
(1) 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 IV. above.
Peter’s Thoughts.
Why should StockX settle pre-trial? First, they’re up against Nike and its blank litigation checkbook. Nike won’t let go, because it has no control over StockX’s use of its trademarks in the context of NFTs. Let’s face it. Nike plays hard and “just does it” in the NFT world (the most successful fashion brand playing in that world). Nike also has solid arguments that StockX intentionally misled its customers into believing that Nike was somehow involved.
(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 claims fair use (satire and protest). He also counter-sued, claiming that Yuga is trying to shut down his free speech in “an attempt to silence an artist who used his craft to call out a multi-billion dollar company built on racist and neo-Nazi dog whistles.” Ripp also seeks to dismiss Yuga’s copyright infringement claims based on the argument that the U.S. Copyright office does not grant copyright protection to AI-only generative art.
Current Status. See Section IV. above.
Peter’s Thoughts.
Ripp’s Bored Apes are essentially exact replicas. Given this reality, and even with Ripp’s disclaimer, it’s likely that the jury would find infringement (and not allow a satire defense swallow up the entire doctrine of trademark). However, Ripp may win on his motion to dismiss Yuga’s copyright claims.
(iii) Hermes v. Mason Rothschild
Fashion brand Hermes sued artist Mason Rothschild for infringement based on the artist’s creation of “MetaBirkins” - i.e., digital versions of its famed Birkin handbags for the metaverse. Rothschild asserts a First Amendment “artistic relevance” fair use defense - a doctrine that requires courts to balance the “public interest in avoiding consumer confusion” against the “public interest in free expression.”
Current Status. See Section IV. above.
Peter’s Thoughts.
The U.S. Supreme Court recently heard oral arguments in Andy Warhol Foundation v. Goldsmith, a case that addresses the scope of fair use in the context of art. Based on the Court’s own precedent in Google v. Oracle, my bet is that it will broaden the scope of fair use, which will most certainly impact the world of NFTs by giving Web3 players more leeway to create NFTs based on existing works (and then claim fair use). That could be a positive development for Rothschild’s fair use defense. But the trial court here previously denied Rothschild’s motions to dismiss and continues 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 to some meaningful degree.
(2) BREACH OF CONTRACT CASES
Luna Aura LLC v. 3LAU Entertainment
Plaintiff, whose real name is Angela Anne Flores, sued DJ and producer 3LAU (whose real name is Justin Blau) in connection with the song “Walk Away” that she co-wrote and on which she also performed. 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 IV. above.
Peter’s Thoughts.
This case should be closely tracked, because the NFT market opportunity in the world of music (and entertainment in general) is great. So are the complexities, however, given all of the fractionalized and complex intellectual property and music licensing issues involved.
(3) 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 IV. above.
Peter’s 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.”
(ii) Other Key Securities Developments
The SEC also continues to investigate Yuga Labs to determine whether certain Yuga NFTs are akin to stocks that should be subject to SEC disclosure rules. We’ll continue to track this critical development which may impact a broad swath of NFTs.
(4) THEFT OF PROPERTY CASES
LCX AG v. John Does Nos. 1-25
European cryptocurrency exchange LCX sued unknown hackers in the New York State courts for theft of assets worth $8 million held in digital wallets on Ethereum.
Current Status. See Section IV. above.
Peter’s Thoughts.
The most fascinating aspect of this case is that 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). Here, the court permitted the plaintiff to serve legal documents on the anonymous defendants by airdropping them via “a special-purpose Ethereum-based token” (what it called a “Service Token”). Interestingly, the airdropped service of papers on the unknown defendants in this case worked. Their attorneys have showed up to defend the lawsuit.
(5) CRIMINAL INSIDER TRADING CASES
U.S. v. Chastain
In May 2022, the Department of Justice indicted former OpenSea employee Nathanial Chastain, charging 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 IV. above.
Peter’s 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.
(6) KEY NFT CASES OUTSIDE THE U.S.
(i) ENGLAND: Osbourne v. Persons Unknown
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. This one is an important case to follow, particularly because (much like the China case below) it places legal obligations and potential liability on the NFT marketplaces/exchanges themselves for the “bad acts” of users (and to reveal private information about users).
(ii) SINGAPORE: Bored Ape Yacht Club NFT #2162
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. This one is fascinating for similar reasons to the LCX AG case above - i.e., solving the issue of service of legal papers on Web3 persons unknown - as well as for its conclusion that laws related to “property” can apply to digital assets.
(iii) CHINA : The BigVerse Litigation
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. This case is important because it places legal obligations and liability on the NFT marketplace itself for the “bad acts” of its users.
VI. CHECK OUT THE NEW “AI CREATIVE FORUM” THINK TANK (& SIGN UP TO LEARN MORE)
2022’s biggest media-tech story was the arrival of Chat GPT and its “AHA moment” of shock and awe about AI’s new mainstream ease and sophistication. And 2023’s biggest media-tech story will be the same - AI - only accelerated. Daunting. Sobering. Perhaps even a bit frightening. But reality, all the same. We must face it head on.
Welcome to the AI Creative Forum - Our Mission:
Creative Media just founded the AI Creative Forum to address these issues and to fill a void specifically for Creatives (and the ecosystem that that supports and celebrates them). Our Mission is to bring together leading innovative artists, creators, technologists, industry professionals, educators, philosophers, and humanists to collaborate, communicate and explore how AI is impacting the creative process in media, music, entertainment and all of the Arts. The Forum will strive to understand the potential of AI to enhance and augment human creativity, while also preserving and celebrating individuality and humanity as being at the center of artistic and creative expression.
The AI Creative Forum Think Tank:
The AI Creative Forum “think tank” will work with partners like AI LA to organize highly curated content, events and experiences that celebrate the past, present and future of media, music, entertainment and the Arts. It is envisioned to foster creativity, humanity and real community - and to fearlessly embrace the change and transformation ahead, much of which is empowered by technology that is increasingly AI. We will gather. We will discuss. We will learn. We will understand the realities and risks. We will understand the opportunities. And we will be empowered to be proactive and act!
And watch this great video (via this link) that highlights how Hollywood has portrayed AI over the years - and why AI will never match human creativity (which is something I believe).
VII. CLOSING THOUGHTS
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