Introduction

On 20 April 2022, the Hangzhou Internet Court (the “Court”) heard a case on NFT copyright infringement and laid down its first judgment that an NFT platform is deemed to be responsible for the digital works traded on its platform, whereby the NFT platform is accountable for allowing users to create NFTs from artwork that infringes the intellectual property rights of others.

Background

The lawsuit was filed against Hangzhou Yuanyuzhou Technology Co., Ltd. (the “Defendant”), the operator of an NFT market named Bigverse (“Bigverse”), by Shenzhen Qice Diechu Cultural Creativity Co., Ltd. (the “Plaintiff”), who is the owner of the copyright of a comic series named “Fat Tiger”. The Plaintiff discovered that one of the users on Bigverse had created and sold an NFT that was identical to one of the comic images as illustrated in “Fat Tiger” at a price of RMB899. The Plaintiff therefore alleged that Bigverse, as a specialised NFT market that enables thousands of users trading NFTs, should provide a better protection on the intellectual property rights of the artworks in trade. The Plaintiff further alleged that the Defendant not only failed to conduct a preliminary review on the artworks to be traded on Bigverse, but also charged a transaction fee.

The Defendant argued that it is contained in Bigverse’s user agreement that users should not upload digital works that involved property rights infringement and therefore Bigverse as a third party intermediary should not be held liable. The only obligation that Bigverse has is to take down the NFTs after it has been notified that such NFTs have breached the intellectual property rights of others.

The Court’s decision

The Court held that the Defendant was at fault of assisting the infringement of the intellectual property rights as it failed to assess and identify any red flag issue in the transaction in question. Although the clause in Bigverse’s user agreement has limited user’s right to upload digital works, the Court is of the view that the Defendant’s liability cannot be eliminated. Furthermore, the Court reiterated that the Defendant, as an operator of an NFT trading platform, shall have a higher threshold in operating an NFT trading platform than ordinary online service providers based on the following reasons:

1.       taking into account the special features of an NFT (i.e. involving blockchain and smart contract technologies), it is almost impossible to delete the NFTs that infringe the intellectual property rights of others;

 

2.       the transaction data of all NFT digital work is recorded by the NFT trading platform and thus the NFT trading platform is able to control the whole transaction process;

 

3.       the “safe harbor rule” which indicates that if the notice-and-takedown procedure is properly followed, the liability of the ordinary online service provider shall be eliminated. However, the Court held that as an NFT trading platform profits from providing a virtual medium for its users to enter into transactions directly and such platform would automatically draft smart contracts for each transaction, a stricter duty of care must be imposed in terms of assessing the likelihood that an NFT infringes copyright; and

 

4.       NFT transactions involve replication and dissemination of NFT digital works and the operator of an NFT trading platform should be more sensitive that other than owning the digital works, the owner of the NFT should also be the owner of the copyright in the digital works.

 

As such, the Court ordered the Defendant to destroy the infringing NFT digital work by sending it to an inaccessible address which can stop the NFT from being circulated and pay damages to the Plaintiff of RMB4,000 for economic loss and reasonable expenses.

Takeaway

This case serves as an important reminder to both NFT creators and operators of NFT trading platforms. As stated in the judgment, it is important for the NFT creator to possess or obtain the copyright in the underlying artwork before putting the NFT up to the market for sale. Even though purchasers will acquire property rights in the NFT, the copyright will remain with the original copyright owner unless otherwise agreed. 

As for the operators of NFT trading platforms, they are expected to impose effective measures in preventing intellectual property infringements, including but not limited to an effective review mechanism for the digital works before allowing users to upload and to remove any infringed digital works in a timely manner if any infringements are discovered.

Pursuant to section 101 of the Copyright Ordinance (Cap 528 of the Laws of Hong Kong), an exclusive licence for a licensee to exercise a copyright must be in writing and signed by the copyright owner. An NFT is merely a blockchain technology tool that can be responsibly adopted and implemented to fulfill its ultimate objective of providing legally binding rights, licenses and ownership with respect to intellectual property. To do this, we cannot rely on smart contracts, which are computer codes only intended to facilitate settlement and not to confer any legal rights or obligations. Instead, it is absolutely necessary to embed legally binding documentation into the metadata of an NFT, especially whether the owner of an NFT has acquired a licence to the intellectual property it proposes to represent.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022