Legal Cheek’s Will Holmes takes a deep dive into the latest legal developments surrounding NFTs
“This is no mere monkey business” explains Yuga Labs in their complaint filed against Ryder Ripps on 24 June.
The company and its world famous non-fungible token (NFT) collection the Bored Ape Yacht Club (BAYC) are breaking new legal ground with a variety of different challenges stemming from the 10,000 unique Bored Ape NFTs. At its most basic level, an NFT is just metadata (a string of numbers and letters) that links to particular file (normally an image or a song). So, how are Bored Apes and other NFTs changing the law?
Bored Ape No. 2162 has played an important role in ensuring that NFTs are steadily being recognised as property in certain jurisdictions. In that case, the Singapore High Court granted a proprietary injunction over Bored Ape No. 2162, following the defendant’s decision to take possession over an NFT which had been used as collateral in a refinancing agreement prematurely. In doing so, the court had to recognise that NFTs are able of constituting property.
Similarly, the English case of Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc saw Lavinia Osborne, co-CEO of Boss Beauties, successfully obtain an interim injunction to compel the NFT trading platform OpenSea to freeze two of her Boss Beauty NFTs that had been taken from her digital wallet. Again, in order to obtain an injunction, it had to be proved that the assets were property. Using Lord Wilberforce’s definition of property in National Provincial Bank v Ainsworth — that something is definable, identifiable, capable of assumption by a third party and has some degree of permanence — it was proved that these sentimental NFTs (worth only a couple of thousand pounds each) were property and therefore could be subject to an interim injunction. Osbourne has also made clear that NFTs are taxable in England and Wales.
These cases, however, also raise yet more questions. The claimant in the Singapore case is now said to be seeking to regain his BAYC NFT by requesting that the defendant, who is a lender on NFTfi, accept his repayment. This is an example of how NFTs could have the potential to encourage money laundering in the art market with new NFT lending platforms emerging in this area, although there is no suggestion this is what is happening in this case. In 2021, new AML (anti-money laundering) laws expanded the definition of “financial institution” in the Bank Secrecy Act 1970 to include antiquities dealers, whilst the EU’s AML Directive (EU) 2018/843 (known as the Fifth AML Directive) now covers “works of art”. The question in these cases comes down to definitions. What is an antiquity? What is art? As I have suggested before, unless clearly included within the definitions provided by legislative schemes, NFTs are likely to challenge our understanding of art and it will be a point that is fiercely mooted in coming disputes.
Indeed, regulators are looking closely at NFTs to try and distinguish art from securities. This issue is apparent in Jeeun Friel v. Dapper Labs, et al, where Friel is claiming that a NFT collection of NBA Top Shot Moments are in fact unregistered securities, whilst Dapper Labs’ remain steadfast that the NFTs are just “objects of play” that are “not for investment or speculative purposes”. Fractionalised NFTs (where purchasers buy only a part of an NFT), NFTs that offer a right to a revenue stream and NFT presales where the NFT has no current use are all examples, flagged recently by the SEC, of when NFT products are likely to be closer to share certificates than pieces of authentic art. This may affect how these products are regulated and see damages, rather than an injunction, being awarded where appropriate.
A common source of lawsuits, given the fact that NFT collections essentially aim to build the most influential brand names, is trademark infringement and counterfeiting. This has seen the likes of Nike, Hermès and indeed Bored Ape creators Yuga Labs file proceedings to defend their brands from creators of NFT collections that are related to their products. The first of these cases was Hermès International v. Mason Rothschild, where the court found that Rothschild’s MetaBirkins (fluffy renditions of Hermès’s famous Birkin Bags) did not satisfy the Rogers test, which weighs the artistic relevance of a title against the likelihood that the title is explicitly misleading. Then, Nike, Inc. v. Stockx LLC has added a new angle that the courts are yet to decide on.
Rather than purely digital products, StockX, which provides a secondary market for people to buy and sell trainers, launched NFTs which are linked to physical trainers aiming to enable buyers to track the ownership and authenticity of resold physical products. StockX are claiming that Nike suffersfrom “a fundamental misunderstanding of the various functions NFTs can serve”. In this case, StockX argues, the NFTs are not a branded collection of digital sneakers but merely “claim tickets” to access physical shoes placing the products under the first-sale doctrine that limits the rights of IP holders in secondary resale markets.
However, there seems to be less certainty around copyright lawsuits. Yuga Labs’s dispute with Ryder Ripps exemplifies this. Ripps created an NFT collection called RR BAYC with all the same Bored Apes attached in digital files. Interestingly, however, Yuga Labs have focused on trademark infringement rather than copyright, which according to their website they appear to have retained (the company only grant a licence). Why?
Well, Ripps has been clear that in his opinion “you can’t copy an NFT”. But is he right? An interesting dispute on this issue that could go test Ripps’s claims in court in Germany, excellently examined by Professor Andres Guadamuz here, is the August Sander NFT collection created by the German photographer’s grandson Julian in February 2022. An art foundation in Cologne, SK Stiftung Kultur, bought the copyright to August’s existing negatives and originals from August’s son Gerd in 1992. Unsurprisingly, the foundation do not seem best pleased about Julian’s NFT collection which aims to “function as a living and active archive preserved for continued scholarship, appreciation, and windows into the eyes of a man who sought to preserve the truth about the world he knew”.
The question in this dispute will come down to whether this NFT (remember that an NFT is just a link to an image) gives those who click on it access to an unauthorised copy of the work. Guadamuz suggests that the relevant legal arguments in this German case are likely to come down to European case law about when a link can infringe copyright, rather than notions that the NFT itself, construed as a ‘digital canvas’, is a novel form of infringing copyright.
So, in one sense Ripps is correct — you can’t copy an NFT. But what matters in relation to copyright is US copyright law on links. In the US, unlike in Germany, the availability of a fair use defence, something that Ryder is clearly pointing to when he claims RR BAYC is “appropriation art” which “uses satire and appropriation to protest and educate people regarding The Bored Ape Yacht Club”, is also something to which Yuga Labs will likely have to respond.
The Bored Ape creators have already put out a rebuttal for that argument in their lawsuit, pointing out that RR BAYC “claims that minting exact replicas of Yuga Labs’ Bored Ape NFTs and reselling them at a profit is ‘satire’”. Trademark infringement, amongst other claims, are also valid concerns for Yuga Labs – Ripps has been keen to highlight “extensive connections between BAYC and subversive internet nazi troll culture” – in what has become a case centred more around BAYC’s reputation and the rarity of its Apes than the intricacies of NFTs and copyright law. In light of all this, creating, owning and deploying NFTs are certainly no mere monkey business, but a rather brusque welcome to the legal jungle.
Will Holmes is reporter at Legal Cheek and a future trainee solicitor at a magic circle law firm.