NFTs: Key Legal Developments & Litigation Scorecard (1/9/23)

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

Happy New NFT’year! Welcome to a bold new year of Web3-empowered NFTs - and the surrounding, and frequently perplexing, legal landscape that surrounds it (and key litigation that increasingly defines it). That’s what my weekly newsletter is here for - to keep you on top of the ever-evolving major developments that define the rules of the game. So welcome back from CES 2023 - and strap in for another year of profound change - and opportunity. (And check out Creative Media, my media, entertainment & tech law and business advisory firm - think of us as your external General Counsel and Biz Dev team on Web3/NFT and media/tech matters.)

FYI - the next newsletter will be out January 23rd (due to upcoming travels).

I. NFT “QUICK HITS” (KEY NEW WEB3 DEVELOPMENTS)

Here are some of this week’s major Web3 and NFT-related news.

(1) Yes, Google searches for “Web3” and “NFTs” dipped throughout last year (due to the frost of crypto winter), but NFT interest amongst brands remains high (says The Information). Meanwhile, TechCrunch predicts Web3 hype to be “in” for 2023. And hype or not, I believe NFTs will begin to show their early real commercial power and promise in the world of media and entertainment (including gated access to major motion pictures and music). Check out my recent article where I lay it all out.

(2) In a major vote of NFT confidence, Activision Blizzard President & COO Daniel Alegre takes the reins at Web3/NFT pioneer Yuga Labs. Now here comes the tricky part. Yuga Labs finds itself in several legal cross-hairs right now, including in one of the key cases highlighted below.

(3) The music industry continues to be bullish on NFTs. In particular, the opportunity for artists to connect directly with fans is transformational. Read “The Music NFT Community Is The New Fan Club.” Meanwhile, Music Ally gave its own “14 Thoughts About Music, NFTs and Web3 Technologies” as 2022 ended.

(4) But sports platform Fanatics apparently is getting cold feet. Just last week it was reported that it will sell its 60% stake in sports-focused NFT business Candy Digital to crypto merchant bank Galaxy Digital.

(5) The U.S. Patent and Trademark Office’s joint study on NFTs marches on, with public comments due February 3rd. No deadline for the study yet exists, but its conclusions may have significant IRL NFT impacts.

(6) And ICYMI, check out my 12 predictions for media, entertainment and tech for this new year. The format is entirely new this time. I roll each prediction out in the way I expect them to unfold throughout the yeer. Bold? Perhaps. At a minimum, I think you will find them interesting. In particular, check out the merry month of May - which offers my Web3/NFT-related prediction.

(7) NFT LA inches ever closer! Start your new year planning now by locking in March 20-23, 2023 in your books! I plan to be there - physically IRL, not digitally ….

NOTE: If you are interested in AI, and how it will transform the worlds of media and entertainment (and the entire Creative community and ecosystem - including the concept of creativity itself), check out the new AI Creative Forum think tank (and sign up to its mailing list to learn more). The Forum will curate the best minds and organize special workshops and events throughout the year focused on this transformational topic - which is most definitely here and now. Make no mistake. AI is THE big media-tech story of 2023.

II. THE WEEKLY NFT CASE TRACKER & STATUS REPORT

Here are the headline updates as we start this new year. You can dig in much more deeply into the background of each case - and see my analysis of each one (including some predictions of how they will end) - in Section III. below.

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.” The end of December 2022 and beginning of this year have seen a flurry of activity. On December 20th and then again on December 27th, the court granted Nike’s motions to seal certain discovery-related matters. Discovery continues apace into the new year.

Yuga Labs v. Ryder Ripp. Yuga is creator of Bored Apes and CryptoPunks. Yet another “infringement meets fair use” case. Here too the end of December 2022 and beginning of this year have seen a flurry of activity. On December 16th, 2022, the court granted in part, and denied in part, defendants’ anti-SLAPP motion. The court also denied defendants’ motion to dismiss, except with respect to plaintiff’s action for unjust enrichment (which was dismissed). Then, on December 21st, 2022, defendants filed a notice of appeal to the 9th Circuit Court of Appeals regarding its rejected motion to strike. Then, on December 27th, 2022, defendants filed a counterclaim against Yuga Labs. Discovery continues apace into the new year.

Hermes v. Mason Rothschild. High end fashion brand sued artist Rothschild for infringement for creating digital versions of its famed Birken bags. On December 30th, 2022, the court denied each party’s motion for summary judgment and indicated that its opinion on the separate motions will issue by January 20th, 2023. The jury trial is still set for January 30th, 2023. So buckle up!

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. Nothing new to report since each party made their first appearances before the court on December 14th. The first pre-trial conference is set for January 20th, 2023.

Securities Cases

Friel v. Dapper Labs. Buyers of NBA Top Shots sued Dapper for allegedly selling unregistered securities. Surprisingly, still no major updates since November 30th, 2022 when the last briefs were filed in connection with Dapper’s motion to dismiss - which continues to be 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, no major updates for the past several weeks. Defendants’ motion to dismiss is pending.

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. Yet again, 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. (& Resolved/Settled Cases That Matter)

Keep reading in Section III. below for key NFT cases to track from the U.K., Singapore and China - as well as NFT cases that recently settled (but still “matter” and should be considered).

III. THE FULL NFT LITIGATION BRIEFING, ANALYSIS & SCORECARD

Here’s my full briefing and analysis for the major NFT cases tracked above. To get the status of each case, refer to Section II. 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 II. above.

My Thoughts.

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. 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. 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.”

Current Status. See Section II. above.

My 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 copyright). But now that the trial court has ordered mediation, we may not get to that point. Hey Ripp, settle this thing!

(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 II. above.

My Thoughts.

Importantly, 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 (a recent fair use case in the software context), 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 copyrighted works (and then claim fair use). That could be a positive development for Rothschild’s fair use defense in this case. 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) on November 11th 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 II. above.

My Thoughts.

It’s too early to tell, because the case is so fresh. But this one 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 intellectual property and complex music licensing issues involved. That’s part of the realm in which my background is deep. Very.

(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 II. 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.”

(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. I’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 II. above.

My 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 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.

(5) CRIMINAL INSIDER TRADING CASES

U.S. v. Chastain

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.

Current Status. See Section II. 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.

(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.

Current Status.

The court held that “there is at least a realistically arguable case that such tokens are to be treated as property as a matter of English law.” The court also ordered OpenSea to reveal information about the unidentified wallet holders, despite the fact that OpenSea has no physical presence in England.

My Thoughts.

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 (as well as to reveal private information about its 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.

Current Status.

The court held that the Bored Ape NFT can be considered “property” that is subject to an injunction. In that important ruling, 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 enjoined defendant from transferring it. And, much like in the U.S. LCX case above, the court permitted legal documents to be served on the defendant via his social media account and via his NFT itself.

My Thoughts.

This one is fascinating for similar reasons to the LCX AG case - 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 and conditions (T’s & C’s) that give platforms the ability to bar users for violations of those T’s & C’s are legally permissible. It’s at least arguable that such actions could be considered to be illegal confiscations of property.

(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.

Current Status.

Much like in the English Osbourne case above, 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.

My Thoughts.

This case is important because it places legal obligations and liability on the NFT marketplace itself for the “bad acts” of its users.

(7) IMPORTANT SETTLED/RESOLVED LITIGATION

Yes, these cases have settled out of court. But their lessons live on - and should be heeded.

(i) Miramax v. Tarantino (settled and dismissed October 2022)

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.”

My Thoughts.

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).

(ii) Halston Thayer v. Matt Furie (& Others) (settled and dismissed August 2022)

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 tokens.

My Thoughts.

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.

IV. CLOSING THOUGHTS

If you like this newsletter, 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.” And although it is entirely free, please support my work by signing up for a low-cost monthly or annual subscription with added benefits. The newsletter takes a lot of time - researching it, analyzing the cases, and writing it. Help me make it better.

And to learn more about NFTs, check out these resources on the NFT Legal Update website (which you can access here). Reach out to me to me at peter@creativemedia.biz to discuss your own questions or schedule a private consultation - and check out Creative Media, my legal services and business advisory firm. We uniquely offer flat fee legal and business advisory services in addition to hourly billing.