[The Viewpoint] New Age Litigation in the NFT Regime

As litigation rises with regards to the hottest new entrant in the art world - Non-Fungible Tokens (“NFTs”), the judiciary in the developed jurisdictions, is faced with a plethora of emerging disputes and having to address novel issues around thought-provoking aspects and dealing with the various challenges pertaining to the interpretation of laws, albeit somewhat archaic, when applied to this novel and evolving concept.

Considering the pace of innovation, many interested stakeholders including lawyers are looking at new age methods to cope with this all embracing next-gen technological advancement. In this article, we seek to showcase and reflect upon some ongoing litigation pertaining to NFTs that are asking critical legal questions such as the intrinsic value, nature, interest and ownership of NFTs and their impact on the rights of existing owners of intellectual property.

Roc-A-Fella Records Inc V. Damon Dash: In June 2021, we witnessed one of the first legal actions involving the copyright of NFTs, when Damon Dash (“Damon”), who co-owns Roc-A-Fella Records, was sued by Roc-A-Fella Records. The lis began pursuant to the allegation that Damon proposed to mint Jay Z’s debut album- Reasonable Doubt, as an NFT, and auction it on SuperFarm - an Ethereum blockchain and Roc-A-Fella Records filed a suit before a Federal District Court in New York City inter-alia seeking injunctive and declaratory reliefs.

Even though the matter was eventually settled, the Court, upon deliberation of the various contentions including that of breach of fiduciary duty, conversion, unjust enrichment that was levelled by Roc-A-Fella and Dash’s plea that he merely attempted to sell his ownership interest in Roc-A-Fella Records, without any attempts to sell the copyright or other intellectual property of Reasonable Doubt, ruled in favor of Roc-A-Fella Records and issued a temporary restraining order barring Damon from altering, selling or otherwise disposing of any copyright or other interest in the album, including auction of an NFT reflecting such interest. It also held that doing so would be in breach of his fiduciary duty, as a co-owner. As per the settlement, Roc-A-Fella Records owns all rights to the album and even though Dash retains the right to sell his share in the label Roc-A-Fella Records, he has no right to sell the album, whether as an NFT or any other token.

Friel V. Dapper Labs: When Jeeun Friel filed a class action lawsuit against Dapper Labs, in the Supreme Court of the state of New York, alleging that the Defendants violated the Securities Act, 1933 (“Securities Act”), by actively promoting, offering and selling NFTs called Top Shot Moments, a critical legal issue surfaced - Are NFT collectables securities?

The NFTs which are the subject matter of the suit included video clips of special moments that happened during NBA games that were tokenized and sold as NFTs. The plaintiffs relied on SEC v W.J. Howey Co., which lays down the elements to determine what constitutes an investment contract under the Securities Act. Currently, the case is being subjected to the Howey test which considers whether there is

(i) investment of money,

(ii) in a common enterprise,

(iii) with the expectation of profits derived solely from the efforts of others. 

A verdict against Dapper Lab would potentially mean that entities promoting, offering and selling NFTs will be required to go through the registration process or verify that the purchasers of the NFTs are accredited investors. 

Miramax LLP V. Tarantino: Another prominent dispute over ownership and trademark infringement pertaining to NFTs emerged when Quentin Tarantino (“Quentin”) announced auctioning off some uncut scenes from the movie Pulp Fiction, in December 2021. This was met with backlash and Miramax LLC, who asserted that it had acquired all rights (including trademark and copyrights) in the movie Pulp Fiction in 1993 and sued Quentin and Visona Romantica Inc., inter alia, contending trademark and copyright infringement, breach of contract and seeking an injunction to restrain them from selling Pulp Fiction NFTs.

The defendants, not only denied all the allegations but claimed that Quentin’s right to develop, market, launch and sell the NFT collection is stemming from his right to “Reserved Rights” pertaining to screenplay publication and novelization (in audio and electronic form), which have been clearly granted to him under the agreements and were never assigned to Miramax. It is further contended by Quentin that the film is a derivative work based on the screenplay and not vice versa and NFTs fall under the fair use exception to the Copyright Act, 1976. The matter is currently pending in the Central District of California and a trial is set to commence in January 2023.

Hermes International, et al. v. Mason Rothschild: A slew of motions were witnessed, when in January 2022, Hermes sued Mason Rothschild (“Mason”), a digital artist, who proposed to sell a collection of NFTs called “MetaBirkins”, for trademark infringement of the iconic Hermes Birkin bags, inter-alia contending that it hampered its reputation, in a scheme to get rich quick.

Mason, relying on Roger v. Grimaldi, filed a motion to dismiss, on the ground of the First Amendment, arguing that the digital images of the Birkin bags, tied to the NFT are “art”, pursuant to which Hermes filed an amended complaint, alleging that Mason had prominently used and displayed the Birkin bags and Hermes trademarks, all over social media and its website, emphasizing that the mark is entitled to protection. This was countered by Mason, who filed a new motion to dismiss and Hermes filed an opposition.

Even though the Court acknowledged the applicability of the Rogers test, at least in part, to the use of “MetaBirkins”, it denied the motion to dismiss, concluding that the even if “MetaBirkins”, satisfied the artistic relevance prong, the amended plaint included sufficient allegations of explicit misleading. As the litigation continues, Hermes has had “MetaBirkins” removed from the NFT exchange OpenSea and it would be interesting to see how the Courts will proceed in dealing with the extent to which creative liberties will apply while balancing the First Amendment rights and safeguarding intellectual property.

Nike V. StockX: Being referred to as “Sneaker Wars”, this ongoing legal battle commenced in February 2021, when Nike initiated action against StockX, for launching its Vault NFT collection, inter alia alleging trademark infringement and thereby capitalizing off Nike’s goodwill and misleading customers. StockX has rebutted all contentions, claiming that its Vault NFT collection, which showcases various sneakers doesn’t hold any other intrinsic value and merely grants its owner a key to access the physical sneaker that StockX resells on its platform. It has further asserted that the use of Nike marks is proper under the first sale doctrine, being no different from an online retailer using images and descriptions of products to sell on its website.  

In response, Nike has amended its original complaint and added counterfeiting and false advertisement claims as well, contending that it had purchased counterfeit sneakers being sold as original Nike sneakers, from the StockX portal. This ongoing case tests the relationship between a brand and its retailer/ reseller and how fair use defense will be interpreted in such dealings.

Keeping up with technology: In a first-time occurrence, a US based Law Firm Holland & Knight served a defendant a pre-trial temporary injunction as an NFT, acting in a legal case involving the crypto exchange LCX, which had suffered a hacking attack in January 2022, wiping close to USD 8m worth of crypto. The NFT subpoena was created and airdropped to the defendant by the law firm as a service token or service NFT.

The outcomes of these early cases and the stand of the judiciary will have ripple effects that will extend far and beyond. Not only will they serve as judicial precedents in future litigation, across jurisdictions, enabling courts in interpreting and addressing these novel issues, but also pave the way for future lawyers, by enabling them in better understanding and handling these new age legal nuances.

Apart from the above, these judicial precedents would potentially lay the foundation for new gen technology law, by steering law-making authorities, across jurisdictions, towards acknowledging the need for reforming existing laws, so as to ensure that the legal framework is adept in dealing with these novel technological age issues. 

Niharika Nagrath is a Partner and Laksh Kundlas is an Associate Partner at SPN Legal.