AI & NFTs: Key Legal Developments & Litigation Scorecard (3/6/23)
AI & NFTs: Key Legal Developments & Litigation Scorecard (3/6/23)
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 newly named and expanded “AI & NFT Legal Update” newsletter. My newsletter 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 by clicking on the graphic below or 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.
I. THE HEADLINE AI & NFT STORIES
(1) DAPPER LABS “TOP SHOTS” FACE POTENTIAL DESIGNATION AS BEING “SECURITIES”
MASSIVE ruling (and that’s not hyperbole) in the closely watched NBA Top Shots NFT case - a ruling 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. Well, the court shot Dapper down - with extreme candor and prejudice. Read a great full analysis here - because, yes, it’s that critical and may directly impact your NFT strategy, marketing and execution.
(2) COPYRIGHT OFFICE JOINS THE US PATENT OFFICE & REJECTS PROTECTION FOR PURELY AI-GENERATED WORKS
This just happened, and you should know about it (read about it here). Now both the U.S. patent and copyright offices reject protection for AI-only generated works - which begs the question, don’t humans have a role in generative creative works simply by having developed the AI (and prompting AI generation via their textual instructions)? My bet is that these policies may change over time - and I’m making no judgment whether that is a good or bad thing for human creators and creativity.
(3) HERMES WINS METABIRKINS NFT TRADEMARK CASE
YES, I PREDICTED IT! As reported in my last newsletter (and worth repeating here due to the case’s importance as a cautionary tale), a jury recently found Metabirkens creator Mason Rothschild liable for trademark infringement for essentially copying (and selling without license) Hermes famed luxury Birkin bags for the metaverse. The jury rightfully didn’t buy Rothschild’s First Amendment “fair use” argument of social commentary. The First Amendment can’t be reflexively used to block outright theft. So beware NFT opportunists. Study this case carefully - and take some deep breaths before you are “inspired” to copy and sell the works of others under the guise of “free speech.” Here’s a great analysis of the verdict and what it means from The Fashion Law. And here’s a blow-by-blow timeline of the case.
II. AI & WEB3/NFT “QUICK HITS” (KEY DEVELOPMENTS)
Here are some of the key AI, Web3, NFT-related news hits of the past two weeks.
AI Quick Hits
(1) Oh Elon, he can’t help himself! Of course, the once-revered-by-all Tony Stark of our time (and now culture “warrior”?) jumps into the AI game and continues to troll all of us. His latest, um, “endeavor?” Musk tweeted out a meme showing a dog named “Based AI” that was attacking monsters named “Woke AI” and “Closed AI.” “Based” apparently is internet slang for wokeness. Oh how the mighty have fallen ….
(2) It’s Baaaaaack! As expected OpenAI just launched an API for ChatGPT so that developers can integrate its artificial “brain” into myriad applications. Expect the unexpected - because developers most certainly will create the unexpected (and it is happening in an unregulated world). Exhibit A is (7) below - Bing’s Roose love affair.
(3) Musicans, yes you are understandably worried! Popular TikTok-focused music AI app BandLab’s AI-enabled 60 million registered “creators” now churn out over 17 million “new” songs each month.
(4) No surprise then that the entire music industry reels from the AI threat. Check out this article from Synchtank that gives perspectives of both artists and music execs.
(5) Check out this past Friday’s The New York Times article titled, “As A.I. Booms, Lawmakers Struggle to Understand the Technology.” Here’s the thing. If we find it challenging to keep up - and all of you reading this are savvy and tech-forward - then how can we expect government officials to keep up? The real answer is “they can’t.”
(6) Check out these 10 evolving AI compliance considerations for employers. And thanks to Mike Kasdan of Wiggin and Dana for bringing them to my attention!
(7) What’s an Artist and Creator to do as AI “creative works” flood the marketplace? Read my recent piece in TheWrap that lays out why AI art can never match human creative endeavors (and why must never lose sight of our humanity … and I am no anti-tech alarmist!).
(8) Want to track generative AI investment and M&A activity? Now you can! Check this out.
(9) ICYMI - Aren’t we all still reeling from Bing’s dark, obsessive and extremely creepy love affair with The New York Times reporter Kevin Roose? Will Micrsoft/Bing’s President Brad Smith listen to his own advice? Just a few weeks ago he called for governments and other “stakeholders” to have a greater dialogue about the risks and impacts of AI. And that was BEFORE Bing expressed its undying love for Roose.
WEB3/NFT Quick Hits
(1) Outer Edge LA (formerly NFT LA) - the largest Web3 gathering on the West Coast - is now just 2 weeks away! Lock in March 20-23, 2023 in your books (and register here).
(2) Worth Repeating: Huge news on the NFT front, as leading marketplace OpenSea drops “off chain” enforcement of ongoing resale royalties for Creators. This development has major implications - and you will find my latest article in TheWrap later this week (which includes interviews with top OpenSea executives). You’ll find my article via this link not later than March 8th (it’s one of my deepest dives, and urge you to read it). Bottom line: OpenSea, rocked by waves of competitive pressures (mostly 0% fee marketplace Blur) essentially abandoned Creator ships, just when they needed it most.
(3) As Adele would sing, rumor has it that the biggest video game of all time, Grand Theft Auto 6, may integrate blockchain tech to enable players to collect, trade and sell in-game NFTs.
(4) Speaking of Adele and music, Spotify is testing playlists that can be unlocked by NFTs. Exclusive and early access to playlists - and content in general - represent a massive opportunity for musicians, artists and creators in general.
(5) Another example of the power and promise of NFT-unlocked exclusive content access is the new Nouns TV show. Get your exclusive digital ticket here for $5.
(6) Many of the world’s biggest brands continue to embrace NFTs and challenge the conventional wisdom that NFT promise has faded. This time its Walmart, General Motors and Lacoste, all of which filed Web3 trademarks in February.
(7) Want to track Web3 and NFT investment and M&A activity? Now you can do that too! Check this out.
(8) Always wondered what the difference is between NFTs and crypto? Well, wonder no more! Check out this primer.
III. CLIENT SPOTLIGHT: OP3N WORLD (& ITS UPCOMING MARCH 15TH EXCLUSIVE SIMON FULLER FILM LAUNCH)
Check out spotlight client, OP3N World (op3n.world) - a Web3/NFT platform that enables Creators to easily develop, distribute and monetize their creative works. On March 15th, OP3N open’s its doors to exclusive digital tickets to a major Simon Fuller produced film starring global supergroup Now United (Fuller is the legendary producer of “American Idol” and is a leading figure in the world of entertainment). The film will then be exclusively available to digital ticket holders on March 22nd, together with exclusive early exclusive access to the film’s soundtrack - and other tiers of benefits. It’s a major new Web3-enabled development and innovation for both Creators and their audiences, and Creative Media is proud to serve as OP3N’s external General Counsel and business development arm.
IV. 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 V. 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. You can read all about it, together with a great analysis, in this blog post by colleague Michael Kasdan. So far, formal responses to the plaintiffs’ complaint are still being filed, and 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. So far, lawyers for all sides are still being locked in, and the court on February 24th agreed to extend the time for Stability AI to answer Getty’s complaint to April 18th.
OpenAI Looks to Dismiss DMCA Lawsuit Over its AI Tool Copilot. I will begin to track this one closely. But 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. See Headline Story #1 above.
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.” On March 2nd, the court rescheduled the March 17th case status conference for April 7th.
Yuga Labs v. Ryder Ripp. Yuga is creator of Bored Apes and CryptoPunks. Yet another “infringement meets fair use” case. On February 22nd, the court took plaintiff Yuga Labs’ motion to dismiss counterclaims under advisement without oral argument and will issue a ruling in the days ahead. And on March 21st, 2023, it will consider Yuga Labs’ motion for sanctions against defendant for spoliation of evidence. Not good for defendant. Hey Ryder, pull the Ripp-cord and settle this case!
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 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.
V. 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 IV. 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 IV. 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 IV. 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 IV. 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 IV. 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.
VI. IMPORTANT RESOLVED CASES & WHAT THEY REPRESENT
(1) LCX AG v. John Does Nos. 1-25: Who to Sue in Cases Where it is Impossible to Identify the “Bad Guys” in a Blockchain-based Web3 Ecosystem of Unidentifiable Users
In this case in the New York courts, a European cryptocurrency exchange sued unknown hackers for theft of $8 million in NFT assets. Interestingly, and without explanation, the the case was “disposed” on November 30th, 2022.
The critical development here was that the court permitted the plaintiff to serve 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, so that when the unknown person associated with that address clicked the link, it would take them to a website with all the relevant court papers (which would qualify for accepting service of process). Interestingly, the airdropped service of papers on the unknown defendants in this case worked. Their attorneys have showed up to defend the lawsuit. But we still don’t know why the case was ultimately simply “disposed.”
(2) Miramax v. Tarantino: Draft The Grant of Rights in Your Entertainment Contracts Carefully
The studio sued auteur Quentin Tarantino for selling NFTs based on his actual script pages for the film Pulp Fiction, asserting that Tarantino had granted it all NFT rights. Tarantino had granted most rights to the studio, but expressly reserved the right of “screenplay publication.” Miramax sued for copyright and trademark infringement – i.e., Tarantino’s NFTs did not fall within his “narrowly-drafted” reserved rights and that it, instead, had acquired all NFT rights via its contract’s “broad, catch-all rights” that included “all rights now or hereafter known in all media now or hereafter known.” The parties settled in September 2022.
The critical “take away” from this case is that it underscores the need for both sides of any IP deal to contemplate NFTs and all other future tech-transformed possibilities, and draft their contracts as broadly as possible to maximize their IP rights.
(3) Halston Thayer v. Matt Furie: Buyer Beware!
NFT buyer Halston Thayer sued crypto-artist Matt Furie, claiming that Furie engaged in a “scheme to artificially inflate the value” of his FEELSGOODMAN Rare Pepe Card NFT. Furie is alleged to have misrepresented the number of NFTs he would sell and essentially duped Thayer into “grossly overbidding” for his NFT. Thayer claims he was led to believe that Furie would sell only 1 NFT, rather than 46 identical others - and that’s why he paid $507,084 for it. The case settled late last year.
The obvious lesson here is “buyer beware” in this nascent world of NFTs. Lots of explicit misrepresentation, but also lots of intentional confusion and inducement. Very few, if any, standards now exist regarding required disclosures. But they are coming.
VI. CLOSING THOUGHTS
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