NFTs: Key Legal Developments & Litigation Scorecard (11/7/22)
Major NFT Developments, Where Key NFT Litigation Stands, and Why You Should Care (Including Detailed Analysis of the Current State of Play)
Welcome to this election week edition of my weekly NFT newsletter. This is where you can follow the most critical developments in the legal world of Web3 and NFTs. Why should you care? Because today’s NFT legal developments and litigation will have outsized effects on establishing relevant “rules of the game.” If you like this newsletter, please share it.
I. ONGOING POTENTIALLY TRANSFORMATIONAL NFT DEVELOPMENTS TO TRACK
These are 3 key U.S. governmental actions/developments with far-reaching implications for the entire NFT ecosystem - all critical to track. I’ll do it for you.
(1) The U.S. Supreme recently heard oral arguments in Andy Warhol Foundation v. Goldsmith - a case that addresses the scope of the Copyright Act’s “fair use” exemption in the context of art. My bet is that the Court 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 copyrighted works (and then claim fair use). But the inherent subjective nature of fair use only guarantees more litigation.
(2) The U.S. Justice Department recently filed a report to President Biden recommending to amend the Bank Secrecy Act to include NFTs to deter money laundering.
(3) The SEC is investigating Yuga Labs, creators of Bored Apes and CryptoPunks, to determine whether certain Yuga NFTs are akin to stocks that should be subject to SEC disclosure rules.
II. NFT “QUICK HITS” (KEY NEW DEVELOPMENTS)
Welcome to this week’s “Quick Hits” of recent major Web3 and NFT news.
(1) Where Elon goes, crypto and NFTs are sure to follow. He will seek to justify his $44 billion price tag with crypto and NFTs. Just last week, Twitter announced “NFT Tweet Tiles” - a new feature that will enable users to buy and sell NFTs via tweets.
(2) Not to be overshadowed, non-innovator Mark Zuckerberg will follow suit. Instagram just announced that it will soon enable select Creators to make and sell NFTs directly in its app. After all, Zuck must do something to resurrect his company that is now down about 75% from its market highs.
(3) China’s Web3 landscape is confounding, yet NFTs are alive. Yes, crypto is banned. But NFTs are permitted if they: (i) use registered Chinese NFT platforms; (ii) do not encourage or permit any trading or speculation (or imply that NFTs may rise in value); and (iii) describe NFTs as “digital collectibles” rather than “tokens” or “currency.”
On that note, the term “NFT” now has a negative connotation in many minds during this crypto winter (despite the undeniable power of what NFTs represent).
III. LITIGATION SCORECARD: KEY ONGOING/ACTIVE LITIGATION
Here’s the latest on the key NFT cases to track (as of today, November 7th, 2022) (NOTE: reach out to me at firstname.lastname@example.org with any tips, special insights or recommendations for additional key NFT cases to add to this scorecard).
A. KEY NFT LITIGATION IN THE U.S.
The cases below are arranged from top to bottom in terms of which ones had the most significant updates in the past week. So let’s do this!
(1) United States v. Chastain
Here’s a significant new case added to my weekly update (a criminal one at that!).
In May, 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.
On October 21st, the U.S. District Court judge (from the Southern District of New York) completely rejected Chastain’s various defenses in his Motion to Dismiss, ruling that they were both “premature” and “without merit.”
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.
(2) Yuga Labs v. Ryder Ripp
Creators of Bored Apes (Yuga Labs) sued a self-proclaimed “satirist” who created and sold digital replicas of the same Bored Apes (but added a stylized disclaimer that purportedly made it clear to buyers that his were not the real deal). Yuga Labs argues that Ripp has made millions stealing its IP and trading off its Bored Apes brand. Ripp’s defense to infringement is “fair use” (satire and protest). He also counter-sued, claiming that Yuga Labs 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.”
Interestingly, despite the fact that the court recently referred the case to private mediation that must take place prior to January 23rd, 2023, it is still considering Ripp’s recent Motion to Dismiss (and separate Anti-SLAPP motion). It had scheduled a hearing for today, November 7th. But instead, the court will decide Ripp’s Motion without oral arguments. Separately, the court recently set a pre-trial conference for June 9th, 2023 and jury trial date for June 27th, 2023.
Separately, as noted previously, in a massive development to watch in the Web3/NFT world, the Securities and Exchange Commission is now investigating Yuga Labs to examine whether certain Yuga Labs NFTs are akin to stocks and should be subjec to SEC disclosure rules.
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 copyright). No matter how the U.S. Supreme Court decides the Andy Warhol “Price” fair use case (that I discussed at length two weeks ago), it’s likely that it too would find no fair use here. But now that the trial court has ordered mediation, we may not get to that point. Hey Ripp, settle this thing.
(3) 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, pursuant to which courts are required to balance the “public interest in avoiding consumer confusion” against the “public interest in free expression.”
The court set the final pre-trial conference for November 18th. Previously, both sides recently filed pending Motions for Summary Judgment to essentially “win” pre-trial (and continued to file opposition and reply briefs last week). But trial courts typically do not like to end litigation via summary judgment based on just the pleadings and documentary evidence (i.e., before an actual trial). Courts prefer for cases to go to trial and hope that the parties settle pre-trial.
Applying the U.S. Supreme Court’s analysis in its recent Google v. Oracle fair use case in the software context - in which the Court specifically referred to Warhol’s Campbell’s soup cans as being an example of non-infringing fair use - Rothschild may have a credible defense (and the recent oral arguments at the Supreme Court in the Andy Warhol fair use case may bolster his defense, as I discussed two weeks ago in detail). In fact, the trial court in this Hermes case did dismiss some of Hermes’ copyright infringement claims. But even when dismissing those claims, the court indicated that its decision might have been different if Rothschild’s MetaBirkens had some kind of utilitarian value.
Importantly, the court 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 to some meaningful degree.
(4) Friel v. Dapper Labs
Buyers of NBA Top Shot “Moments” sued the NFT maker Dapper Labs for allegedly 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” (i.e., there was no “reasonable” expectation of profit). The case’s core securities issue could impact a broad swath of NFTs.
Last week plaintiffs filed their opposition briefs to Dapper’s Motion to Dismiss the case that it had filed August 31st, 2022.
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.” At the same time, the SEC’s new investigation of Yuga Labs - discussed above - is relevant here too and will potentially lay out some more clarity about requisite disclosures in general.
(5) 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 will hear oral arguments on November 10th (remotely via Microsoft Teams) on anonymous defendants’ “Motion to Quash” subpoenas to show up at trial. 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 with all the relevant court papers (that would qualify for accepting service of process).
This case 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 have showed up to defend the lawsuit.
(6) Nike v. StockX
This cases pits trademark claims of likelihood of confusion against the so-called “first sale doctrine.” 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.” Instead, it uses Nike’s trademarks only for descriptive purposes (i.e., fair use).
Nothing new to report this week - no status changes. Most recently, the magistrate ordered the parties to schedule a second settlement conference and extended the deadline for completion of all discovery until January 20th, 2023. It also scheduled the next pretrial conference for February 3rd, 2023.
Why should StockX settle pre-trial? Well, 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. And, as mentioned above, Nike plays hard and “just does it” in the NFT world (and is the most successful fashion brand playing in that world by a long-shot). Nike also has solid arguments that StockX intentionally misled its customers into believing that Nike was somehow involved.
B. KEY NFT LITIGATION OUTSIDE THE U.S.
(1) 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.
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.
This case is important because it places legal obligations and liability on the NFT marketplace itself for the “bad acts” of its users (in the unique NFT legal landscape in China as noted above).
(2) 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.
Most recently, the High Court of Singapore held that the Bored Ape NFT can be considered “property” that is subject to an injunction. The judge pointed to the “growing judicial support for ‘deploying property concepts to protect digital assets.’” The judge further noted that while “cars, books, wine and luxury watches … are a few examples of highly sought-after items for collectors, [f]or digital nomads, especially those steeped in the world of blockchain and cryptocurrencies, NFTs have emerged as a highly sought-after collectors’ item.” As a result, 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 court case above - i.e., solving the issue of service of process (legal papers) on Web3 persons unknown - as well as for its conclusion that laws related to “property” can apply to digital assets. Critically, the court’s conclusion that NFTs are property - which makes sense - also means that it’s at least questionable whether industry terms of service (TOS) that give platforms the ability to bar users for violations of those TOS are legally permissible. It’s at least arguable that such actions instead could be considered to be illegal confiscations of property.
(3) ENGLAND: Osbourne v. Persons Unknown
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.
Similar to the Singapore court in the case above, the court here 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 (much like the China case above) it places legal obligations and potential liability on the NFT marketplaces/exchanges themselves for the “bad acts” of users (as well as to reveal private information about its users).
IV. CLOSING THOUGHTS
(1) NFTs (THE “REAL” ONES) ARE ALIVE AND WELL
Let’s be clear. Despite today’s “crypto winter,” NFTs with continuing and lasting utility, value, experiences and real community are here to stay - and I remain bullish. For all you doubters out there, here are two data points that matter:
(1) According to Crunchbase, the overall Web3 market (including crypto and blockchain investments) has received $89 billion in total funding into 16,315 companies. Over $16 billion of that sum was invested this year (as of September 1st). That’s money dedicated to fueling a long-term massive NFT market.
(2) “Over half” of active Internet users between the ages 25-44 in the U.S. and other key digital asset market territories have already used NFTs, according to this recent report by McKinsey based on a survey of 35,000 users. So, yes, consumers care about NFTs and are hungry for more.
And check out my recent article in TheWrap - “NFTs Aren’t Dead - The Right Ones Will Transform Entertainment.” You can find it here. You can also watch my recent NFT webinar - I discuss the key business issues, risks, specific sectors of opportunity, and even more of the context that ties it all together.
(2) NFT SMART CONTRACTS ARE STILL TOO DUMB
They typically come with terms of service and copyright licensing terms that vary significantly across different platforms. This lack of standardization means risk in a fast-evolving NFT world. Yet one more critical reason to closely follow and use “best practices” (and the cases/content featured in this newsletter).
(3) IF YOU LIKE THIS NEWSLETTER, SHARE IT! (AND REACH OUT TO ME AND MY FIRM, CREATIVE MEDIA, TO DISCUSS YOUR OWN LEGAL & BUSINESS ISSUES)
I am gratified that industry expert Jim Louderback calls this newsletter “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 email@example.com to discuss your own Web3 and NFT legal and business issues (as well as media, entertainment, business and tech issues in general) - 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 solutions - and to give you the Web3/NFT experience and innovation you need.]
(4) ADDITIONAL RESOURCES ABOUT NFTS (WHAT THEY ARE, WHAT THEY DO)
To learn more about NFTs, I added a new section of resources to the NFT Legal Update website (which you can access here).
(5) RECENTLY SETTLED/RESOLVED KEY LITIGATION
Yes, these cases have been settled out of court. But their lessons learned should be top of mind.
(A) Miramax v. Tarantino
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., that 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, and the court formally dismissed the case on October 2nd.
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 NFT cases. So this case gives no formal guidance. But it does underscore 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 as a result).
(B) Halston Thayer v. Matt Furie (& Others)
Halston Thayer, an NFT buyer, filed a lawsuit against crypto-artist Matt Furie, asserting 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). But after he paid, Furie allegedly released 46 additional identical NFTs.
The court dismissed the case in August 2022 after the parties settled.
Did Furie misrepresent what he was selling? And did he fraudulently induce Thayer to buy based on those misrepresentations? We’ll never know, because the parties settled. But the obvious lesson 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.
Please send me your feedback - and key NFT legal and litigation updates of your own to firstname.lastname@example.org and check out my legal services and business advisory firm Creative Media.
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