NFTs & AI: Key Legal Developments & Litigation Scorecard (1/23/23)
NFTs & AI: Key Legal Developments & Litigation Scorecard (1/23/23)
Major NFT & AI Developments, Where Key NFT & AI Litigation Stands, and Why You Should Care (Including Detailed Analysis of the Current State of Play)
NFTs & AI: Key Legal Developments & Litigation Scorecard (1/23/23)
Welcome to Creative Media’s NFT Legal Update newsletter that focuses on the always-evolving, and frequently perplexing, legal landscape that surrounds Web3 and Web3-powered NFTs (and key litigation that define the “rules of the game”). We track these key developments for you, so that you can better plan and execute your Web3/NFT projects and maximize success by also minimizing business & legal risks. (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. WEB3/NFT SPOTLIGHT CLIENT - OP3N WORLD
Check out spotlight client, OP3N World (op3n.world) - a Web3/NFT platform that enables all Creators to easily develop, distribute and monetize their creative works. The company was founded by highly successful serial entrepreneurs and creative executives who co-founded leading international music and marketing company 88rising and work closely with leading artists, musicians, filmmakers, and fashion brands. Expect big announcements and exciting Web3 projects in the weeks ahead. Creative Media serves as OP3N World’s external GC and business development arm.
II. YOU READERS HAVE SPOKEN AND ALSO WANT UPDATES ON AI LEGAL DEVELOPMENTS
In the last newsletter, we featured a poll asking you whether you would like to see updates on key legal developments and litigation in the world of AI as well. An overwhelming 80% of you said “yes,” so we begin to add some updates in this newsletter. If this continues, we will change the newsletter’s name to encapsulate its new breadth beyond Web3 and NFTs. So we need your help to choose a new name for an expanded newsletter that also covers AI and other transformational tech. Here are some of our ideas - PLEASE VOTE ON THE POLL BELOW! (and feel free to submit your own ideas to peter@creativemedia.biz).
III. SPEAKING OF AI, 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.
As Peter recently wrote in his separate “Fearless Media” newsletter (you can read it here), AI is already transforming the very definition of what it means to be a “Creator.” What it means to “Create.” And what it means to be an original “Created Work” of any kind or form. This is real disruption - with potentially very significant real pain - but also potentially significant new power and opportunity. Which will we choose?
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 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).
IV. NFT “QUICK HITS” (KEY NEW WEB3 DEVELOPMENTS)
Here are some of the key Web3 and NFT-related news hits since the last newsletter two weeks ago. But first, and keeping the AI flow going, we start with two AI legal bombshells that just exploded last week.
(1) Hey AI, real Artists and Creators are watching you! A class action copyright infringement lawsuit was filed on behalf of artists against AI creator platforms Stable Diffusion, Midjourney and DeviantArt. You can read all about it, together with a great analysis, in this blog post by Michael Kasdan.
(2) Getty Images also sees AI as a fundamental threat - and is having none of it! 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) Yes, even more AI news, this time driven by the Feds! Mid last year, the FTC released a report that cautioned against relying upon AI to fight destructive online content. A good analysis can be found here.
(4) Enough AI, now back to NFTs! This headline screams that NFT sales dropped a whopping 83% last year (with a corresponding $2.37 billion drop in revenue). But here’s the thing. Major brands continue to invest massively into Web3 and NFTs. Cases in point: (i) Porsche, which claims that “there is no substitute” for its new NFT collection; and (ii) Mastercard and its new “Artist Accelerator” music program to support emerging artists. And ICYMI, here’s Peter Csathy’s recent article where he lays out why he remains bullish on the “right” kind of NFTs in the world of media and entertainment.
(5) ICYMI, check out Peter Csathy’s 12 predictions for media, entertainment and tech for this new year. Peter rolls out each prediction in the way he expects them to unfold throughout the year. In particular, check out the month of May - his Web3/NFT-related prediction.
(6) NFT LA - the largest Web3 gathering on the West Coast - is now only 2 months away! Lock in March 20-23, 2023 in your books. For a very limited time, you can get “early bird” tickets with a 10% discount. And if you register by tomorrow, Tuesday 1/24, you can get another 10% off by using the promo code CreativeMedia at checkout. Join technology and creative leaders like Erick Calderon of Art Blocks, Yat Siu of Animoca Brands, NBA All-Stars Metta World Peace and Baron Davis to explore how blockchain tech is shaking up the entertainment industry and to get the latest developments in crypto regulation. And reach out to Creative Media Chairman Peter Csathy to schedule a meeting at peter@creativemedia.biz.
V. 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 VI. below - and read Peter’s analysis of each one (including predictions of how some of them are likely to end).
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.” No major substantive updates in the past two weeks. Discovery (and related disputes) continue apace.
Yuga Labs v. Ryder Ripp. Yuga is creator of Bored Apes and CryptoPunks. Yet another “infringement meets fair use” case. In the past two weeks, Yuga Labs filed motions to strike and dismiss defendant Ripp’s counter-claims. The court will hear oral arguments February 13th, 2023. Discovery (and related disputes) also continue apace.
Hermes v. Mason Rothschild. High end fashion brand sued artist Rothschild for infringement for creating digital versions of its famed Birken bags. Most recently, on December 30th, 2022, the court denied each party’s motion for summary judgment. It will render is written opinion by January 24th, 2023, and the jury trial is still set for January 30th. So get ready to rumble!
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. No major substantive updates in the past two weeks. But the case was transferred to a different court. The first pre-trial conference was previously set for January 20th, 2023.
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 the last briefs were filed 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.
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. (& Resolved/Settled Cases That Matter)
Keep reading in Section VI. 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).
VI. 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 V. 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 V. 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 V. 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 V. 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 V. 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 V. 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 V. 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 V. 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.
(7) IMPORTANT SETTLED/RESOLVED LITIGATION
Yes, these cases have settled out of court, but their lessons live on.
(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.” This case 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 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. 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.
VII. CLOSING THOUGHTS
If you like this newsletter, subscribe to it and 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.”