NFTs And Intellectual Property

Non-Fungible Tokens (NFTs) have been around since 2014, but in 2021 they gained new hype owing to very high-profile technological stories covered in the media. Quentin Tarantino, a renowned Hollywood filmmaker, was sued by Miramax LLC, a production company, to block an auction of NFTs related to the screenplay of the movie ‘Pulp Fiction’. Twitter’s former CEO, Jack Dorsey, sold an NFT of his first tweet for approximately USD 2.5 million. A digital artist, known by the handle Beplee, sold NFT of digital collages for approximately USD 69 million. The NFT industry was valued at USD 11.3 billion in 2021, and the sector is projected to grow at a compound annual rate of 33.7% over the next eight years. With the explosive growth of NFT, it’s only a matter of time before courts get an influx of IP lawsuits.

It is imperative that we familiarise ourselves with the NFT and analyse some foreign cases to recognize underlying IP issues that have surfaced in some other countries.

What Is NFT

NFT is a unique cryptographic token, which holds information about the digitised work recorded in the blockchain. It’s a record stored on a digital ledger certifying digital assets as unique and providing a certificate of ownership.

Creating a new NFT is called minting; it entails the creation of code on a blockchain network with a unique token id to identify the digital asset, the wallet address of the creator, a link to the original digital content, and corresponding ownership details. Transaction history starting from minting to the latest ownership of NFT can be traced; and this information is technically public. Non-fungible tokens do not generally carry digitised work in themselves due to large size of the underlying work; instead, they mostly have links to original work (photos, videos, audio, etc.). An NFT can be created for any work that can be digitized. They are listed and traded on NFT platform and are governed by “smart contracts”

Non-fungible tokens are unique, indivisible, and cannot be exchanged or replaced with another token, such as a unique custom-made design or unique painting, whereas fungible assets are interchangeable, uniform, and divisible because each unit is identical in value, such as a cryptocurrency or fiat currency.

Let’s consider some cases and legal issues being brought up for litigation in other countries, offering a glimpse of legal disputes to come:

Shenzhen Qice Diechu Cultural Creativity Co., Ltd. v Hangzhou Yuanyuzhou Technology Co., Ltd

In China, a lawsuit was filed by Shenzhen Qice Diechu Cultural Creativity Co., Ltd. against Hangzhou Yuanyuzhou Technology Co., Ltd., which runs an NFT marketplace called Bigverse.

Shenzhen Qice Diechu is the owner of the copyright of the cartoon series “Fat Tiger” created by Chinese artist Ma Qianli on Weibo. An NFT user on Bigverse had minted an NFT of one of Qianli’s works, “Fat Tiger Vaccination” (a cartoon of a fat tiger receiving vaccine), whose copyright subsists with Shenzhen Qice, and sold it for RMB 899 on Bigverse. The NFT uses the same name and image as the original work. The original author was not notified of the same. The plaintiff hence sued the defendant for contributory infringement.

The court held that the defendant had committed a contributory infringement of the rights by facilitating the dissemination of the impugned work. The defendant was directed by the court to destroy the digital work by sending it to an inaccessible address to disconnect it from the blockchain and was also ordered to compensate.

The court confirmed the liability of NFT platforms and underlined that the marketplaces should conduct a preliminary ownership check of digital work during the minting of NFT and should not wait for a notice from the copyright owner. Some kind of IP review mechanism should be in place for this purpose.

The platform directly benefited from the NFT digital work by charging transaction fees and commission, and also possessed significant control over digital work. The platform should be aware that ownership of the copyright of digital work should be ascertained not to infringe rights.

This case concerns intermediary liability and the obligation of a platform. The marketplaces will be held liable for the content uploaded and will have a stricter duty of care than other online marketplaces. This also serves as a warning to the NFT marketplace and owners of brands and copyrights to safeguard IP rights.

Nike v StockX

In another important case, which might end up dictating IP laws, Nike sued the online retail platform StockX for infringing on its trademark by minting NFTs of Nike shoes and selling those NFTs capitalising on Nike’s goodwill in the Vault NFT collection launched by StockX. Nike also claimed that these NFTs might cause confusion considering the acquisition by Nike of RTFKT, a digital art and collective creative studio. Later, Nike amended the complaint to add two more claims of counterfeiting and advertising.

StockX is an online resale retailer. It connects buyers and sellers and has an authentication process that guarantees authentic products are only resold, and this feature sets it apart. It uses multiple-step authentication and ensures products traded are not counterfeit. It launched the Vault NFT collection, where it minted NFT for the products and linked the token to physical items that it provided to buyers. The purchasers could trade the NFT for a physical item (shoes) in StockX’s possession. Nike has accused StockX of misusing its trademark to promote its Vault NFT.

StockX has invoked a nominative fair use defence as it argues that its Vault NFT does not infringe any IP rights because it uses NFTs to identify products, which is akin to digital receipts. It’s no different from e-commerce retailers who use images and descriptions of products to sell physical goods that consumers view before buying them, and no ambiguity is created about the source and content of the work.

This case raises new questions about fair use and whether NFT in the resale market will mean trademark violations. This might threaten the legitimate use of a manufacturer’s trademark and test the relationship between retailers and manufacturers. This case will have far-reaching implications for whether NFT in resale is an infringement of trademarks.

Hermes International v. Mason Rothschild

Another significant case in the US, is the Hermes International case. Hermes International filed a complaint digital artist Mason Rothschild in federal court in the Southern District of New York for minting NFTs called MetaBirkins. MetaBirkins are collection of digital images of Hermes’ Birkin handbags, each image depicts a faux-fur-covered Birkin handbag.

Hermes avers infringement of trademark, dilution of goodwill and reputation, and false depiction of bags as if they were Hermes authorised digital products, which were likely to cause confusion in the minds of the public about the source of the work. Rothschild also derived economic benefits from Hermes’ trademark through the sale and resale of NFTs.

Rothschild argued a fair use defence under the first amendment and that the use of a trademark is not actionable because MetaBirkins are only an artistic representation and commentary on animal cruelty in Hermes’ manufacturing process of the handbags. The defendant has also asserted that there might be some general confusion but no explicit misleading.

The court has held that MetaBirkins are adequately and explicitly misleading. The Court has denied the motion to dismiss Hermes’ case. Hermes has proved sufficient actual confusion and misleading the public. The decision is largely influenced by the commercial nature of Rothschild’s activities. Also, the court notes that such NFTs will not qualify as artwork if they are attached to virtually wearable products and will categorise them as non-speech commercial products.

This case gives the first available insights into how courts will consider trademark cases regarding NFT for images and virtual products. A balance needs to be created between originality in creating digital assets and the right to artistic expression as more NFTs will be launched in the future—some by big brands themselves and some by others using trademarks of luxury brands.

Miramax LLC v Tarantino

Micramax LLC, a production company, filed a suit against Hollywood filmmaker Quentin Tarantino when he announced the sale of NFTs based on his original handwritten script, with personalised commentary, for the movie Pulp Fiction. The sale of NFTs was supposed to take place on one of the largest NFT platforms, OpenSea. Micramax filed a suit claiming breach of contract, and copyright and trademark infringement. Asserting claims of copyright infringement, Micramax contended that the NFTs were unauthorised derivative works of Pulp Fiction and the use of the trademark was likely to deceive people about the source of the work and indicate that Micramax authorised the sale of NFTs.

Quentin Tarantino had retained a few rights, which included the right to screenplay publication, allowing him to make books, comic books, and novels in audio and electronic format. The defendants argued it was a fair use exception and NFT fell under the reserved rights to publish the Pulp Fiction screenplay.

NFTs were absent in terms of the contract because they weren’t known at the time the contract was signed. In this case, the core issue is whether the screenplay rights cover NFTs. For the trademark claims, Micramax will need to establish the confusion the NFTs will bring about regarding the source of NFTs.

This case will be more of a contractual dispute, but a greater problem will emanate in cases where an unauthorised user mints an NFT connected to the work of another musician or filmmaker without consent.

Some important points to be noted about NFTs are:

• The sale of NFT does not imply the sale of rights related to a digital asset. The sale of NFT might signify only ownership of NFT and nothing more. For example, the sale of NFT of Jack Dorsey’s tweet can be seen as an autographed certificate of the tweet, which does not include any other rights unless there is a contract to the contrary. The buyers need to be observant of what exactly they are purchasing; otherwise innocent and gullible customers might be easily defrauded.
• Under Section 14 of the Copyright Act, 1957, only an owner has the right to reproduce and distribute the artwork. These rights are not assigned automatically; they can be transferred by the owner of the copyright with express written terms in the contract.
• A written contract with explicit terms is needed for the assignment of copyrights under Section 19 of the Copyright Act.
• NFT purchasers must be cautious about who owns the underlying asset. An unauthorised person may attempt to mint NFT without the owner’s permission and sell it on the NFT platform.

Caveat emptor cannot be stressed more in NFT transactions because of the unavailability of any legal framework. The users need to be aware of the underlying risk. The foreign cases give the first set of indications of the kinds of issues that can be raised and how they will be evaluated by the courts. Rules related to responsibility and liability of NFT platforms, rights and liabilities of creators and holders of NFT, applicability with other laws, and rights of copyright holder after first sale and resale needs to be laid down to avert litigation and unwarranted expense to people.

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