NFTs: Key Legal Developments & Litigation Scorecard (11/21/22)

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 week’s NFT newsletter - where I help you track the most critical business, legal and litigation developments in the world of NFTs. If you like it, please share it. (And check out Creative Media, my media, entertainment & tech legal services and business advisory firm - think of us as your external General Counsel.) (NOTE: there will be no weekly update next Monday due to the Thanksgiving holiday). Now, let’s dig in!

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

Here are this week’s “Quick Hits” of major Web3 and NFT news (because there’s more to web3 than the recent FTX debacle - much more, especially in the world of NFTs).

(1) Oh Elon, is this all just part of some diabolical plan we mere mortals don’t understand? Read my recent article that digs into his mind (I know, a dangerous thing to do), “Can Elon Musk Save Twitter By Turning His Crypto Bros Into Pay Pals?” from my most recent weekly column in TheWrap.

(2) One thing is certain, where NFT opportunities go, litigation is soon to follow. DJ/producer 3LAU faces a new lawsuit from a collaborator Angela Anne Flores over his $11.7 million NFT auction earlier this year. Yes, I will begin to track this one.

(3) NFT litigation isn’t just for Americans, after all. An Italian court recently sided with Turin-based soccer team Juventus in the latest kick in this international NFT shootout. Club trademarks and designs are at play. I’ll track this one too.

(4) Nike is on an NFT roll, so why stop now? Leading NFT fashionista Nike announced the launch of its new Web3 platform .Swoosh. $200 million in NFT sales to date are just the beginning!

II. THE WEEKLY NFT CASE TRACKER

Here are the immediate updates from the week before. Then you can dig in much deeper below in Section III.

Infringement Cases

Nike v. StockX. Yes, more Nike news! Nike is the most successful apparel/fashion brand in the NFT world as mentioned above. Here, trademark likelihood of confusion butts up against “fair use.” The parties filed a joint statement/update to the court about discovery.

Yuga Labs v. Ryder Ripp. Yuga is creator of Bored Apes and CryptoPunks. This is another “infringement meets fair use” case. No major updates last week. The court still has Ripp’s motion to dismiss under consideration.

Hermes v. Mason Rothschild. High end fashion brand sued an artist for infringement for creating digital versions of its famed Birken bags. No major updates last week. The final pre-trial conference was scheduled for last Friday, November 18th.

Securities Cases

Friel v. Dapper Labs. Buyers of NBA Top Shots sued Dapper for allegedly selling unregistered securities. No major updates last week. Dapper’s motion to dismiss is pending.

Theft of Property

LCX AG v. John Does Nos. 1-25. A European cryptocurrency exchange sued unknown hackers for theft of $8 million in NFT assets. Awaiting updates regarding anonymous defendants’ motion to quash subpoenas to show up at trial.

Criminal Insider Trading

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 last week. The court most recently rejected Chastain’s motion to dismiss.

Key NFT Cases Outside the U.S. (& Resolved/Settled Cases That Matter)

Keep reading 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). As noted above, Italy will soon join the International briefing pitch below.

III. THE FULL NFT LITIGATION BRIEFING, ANALYSIS & SCORECARD

Here’s my full briefing and analysis for the major NFT cases tracked above. (Reach out to me at peter@creativemedia.biz with any tips, insights or recommendations for additional 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.

The parties filed a joint statement with the court last week, giving an update on discovery. Previously, the magistrate ordered the parties to schedule a second settlement conference and extended the deadline for completion of all discovery until January 20th, 2023 - and scheduled the next pretrial conference for February 3rd, 2023.

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. 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.

(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 has 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.

No major updates last week. The court is still considering Ripp’s recent motion to dismiss (and separate anti-SLAPP motion), which it took under submission and without oral argument. Earlier, the court referred the case to private mediation to take place not later than January 23rd, 2023, scheduled a pre-trial conference for June 9th, 2023, and set the jury trial for June 27th, 2023.

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.

No major updates last week, other than the final pre-trial conference was scheduled for last Friday, November 18th. Previously, both sides recently filed pending motions for summary judgment to “win” pre-trial. But trial courts typically do not like to end litigation pre-trial via summary judgment based on just the pleadings and documentary evidence. Courts prefer for cases to go to trial and hope that the parties settle pre-trial.

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. Nonetheless, 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) SECURITIES CASES

(i) 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.” In other words, there was no reasonable expectation of profit. The core securities issues here could impact a broad swath of NFTs.

Current Status.

No major updates last week. Most recently, plaintiffs filed their opposition briefs to Dapper’s Motion to Dismiss, which is pending.

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.” At the same time, the SEC’s new investigation of Yuga Labs (discussed immediately below) is relevant here too and will potentially lay out some more clarity about requisite disclosures in general.

(ii) Other Key Securities Developments

The SEC continues to investigateYuga Labs (mentioned above) to determine whether certain Yuga NFTs are akin to stocks that should be subject to SEC disclosure rules.

(3) 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.

The court heard was scheduled to have further oral arguments - remotely via Microsoft Teams - on anonymous defendants’ motion to quash subpoenas to show up at trial (and am awaiting updates on those hearings). 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, 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 (that would qualify for accepting service of process).

My Thoughts.

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.

(4) CRIMINAL INSIDER TRADING

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.

In October the U.S. District Court judge (from the Southern District of New York) rejected Chastain’s various defenses in his motion to dismiss, ruling that they were both “premature” and “without merit.”

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.

(5) 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 most recently granted Osbourne’s 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.

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.

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 enjoined chefpierre from transferring it. Much like in the LCX case above, the court permitted relevant legal documents to be served on chefpierre via his social media account and his Etherium platform-based NFT itself.

My Thoughts.

This one is fascinating for similar reasons to the LCX AG 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 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.

(6) RECENTLY SETTLED/RESOLVED KEY LITIGATION

Yes, these cases have settled out of court. But their lessons should be top of mind.

(i) 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., 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.”

Settlement Date.

The parties settled in September and the court formally dismissed the case in October.

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)

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.

Current Status.

The court dismissed the case in August after the parties settled.

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

Let’s be clear. Despite today’s “crypto winter” (more like a blizzard), NFTs with continuing and lasting utility, 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) The overall Web3 market (including crypto and blockchain investments) has received $89 billion in total funding into 16,315 companies (according to CrunchBase). 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.

(3) Check out my recent article in TheWrap - “NFTs Aren’t Dead - The Right Ones Will Transform Entertainment.” 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.

And 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.” 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.

[And check out my media-tech focused legal services and business advisory firm Creative Media. Reach out to me at peter@creativemedia.biz 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. In addition to hourly billing, we uniquely offer flat fee legal services 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.]

V. ADDITIONAL RESOURCES (NFTS: WHAT THEY ARE, WHY THEY MATTER)

To learn more about NFTs, check out these resources on the NFT Legal Update website (which you can access here). And reach out to me to me at peter@creativemedia.biz to discuss your own questions - and check out Creative Media, my legal services and business advisory firm.

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