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Image: NFTCN

A copyright case over allegedly infringing non-fungible tokens (“NFTs”) listed on an online marketplace in China has resulted in what is being characterized as a “first-of-its-kind judgment.” Filing suit against Bigverse, plaintiff Shenzhen QiCeDieChu Culture Creativity Co Ltd. (“QiCeDieChu”) asserts that it is the copyright holder of a series of illustrated works by Chinese artist Ma Qianli, including one of a cartoon tiger receiving a vaccine, which was tied to an NFT and offered up on Bigverse’s NFTCNplatform without its authorization. As the operator of the marketplace site, Bigverse is contributorily liable for failing to adequately police the platform for infringements, QiCeDieChu argued.

Specifically, QiCeDieChu argued in its complaint that Hangzho-headquartered Bigverse has an obligation to review the NFTs that are minted and then offered up on its NFTCN platform – in connection with which it collects a portion of the sale – to ensure that the digital tokens are not tied to works that infringe the rights of others. Unsurprisingly, Bigverse argued in response to QiCeDieChu’s suit that it should be shielded from infringement liability, as it is merely a middleman and not the creator or the seller of the NFTs on its platform, which are created – and uploaded – by users.  

Following a hearing in April, the Hangzhou Internet Court sided with QiCeDieChu, holding that Bigverse does, in fact, have a duty to detect and prevent infringement before NFTs are actually listed on its platform, in addition to having an obligation to respond to infringement notices about infringing NFTs after the fact. By failing to fulfill that duty, which is critical when it comes to NFTs because of the generally irreversible nature of the transactions and the ability of “flaws in the copyright ownership of the underlying work of an NFT” to impact the “entire NFT transaction chain,” Bigverse infringed QiCeDieChu’s “right to disseminate works through information networks.”

As such, the court ordered that one-year-old Bigverse – which raised RMB 10 million ($1.6 million) in a Series A round in March – remove the infringing NFTs and pay RMB 4,000 ($589) in damages to QiCeDieChu. Additionally, the court also states that Bigverse should maintain a vetting system to verify that NFTs that users are looking to list on the NFTCN platform do not infringe the rights of others, as well as a takedown system to address infringing NFTs that have been listed.

The court noted that while NFTs cannot be destroyed, they can be sent to an “eater address” (or burn address) and thus, removed from circulation, which it asserted is a sufficient way to deal with infringing NFTs.  

Reflecting on the “landmark” case, DLA Piper’s Horace Lam states that it is the first time that a Chinese court has specifically spoken to the legal nature of NFTs and the obligations of an NFT platform. Specifically, Lam notes that the court characterized NFTs as “digital commodities,” and emphasized that the sale of an NFT does not equate to a transfer or license of the intellectual property of the underlying artwork, unless the terms of the sale provide otherwise. (The court also noted a party that mints an NFT should have rights in the underlying artwork, as distinct from merely having a copy of the underlying work.)

A key takeaway, according to Lam, is the court’s determination that the sale of an NFT that makes unauthorized use of another’s copyright-protected work “does not infringe upon the copyright owner’s ‘right of distribution’ in the underlying work, which is limited by the first-sale doctrine. Instead, it infringes the copyright holder’s “right of communication by information networks,” which he says is “a highly controversial issue in relation to copyright infringement of an NFT.” 

Given that the Hangzhou Internet Court is only a district-level court, Lam asserts that it is “unclear whether its ruling will be widely followed or is likely to be challenged in subsequent cases by other courts in China,” but says that the outcome is “meaningful,” nonetheless, in the light of the fact that formal NFT laws or regulations have not been enacted in China (yet). As such, he encourages players in the NFT space in China to “carefully consider the implications of the ruling.” 

In much the same way as NFTs have boomed in popularity in other countries across the globe, there has been significant interest in – and demand – for NFTs in China. The potential drawback, however, comes in the form of an inability to resell such digital tokens amid an enduring crackdown on cryptocurrency trading and mining by the Chinese government. 

MIT Technology Review reported last month that three national financial industry associations in China released a joint statement centering on NFTs. The three associations, “which collectively cover almost all Chinese banks, brokerages, and fintech companies,” according to MIT Tech Review’s Zeyi Yang, asserted that to “prevent financial risks,” they are asking their members “not to offer centralized trading platforms for NFTs, to refrain from investing directly or indirectly in NFTs, and to forbid using cryptocurrencies like Bitcoin or Ethereum in buying or selling them, among other measures.” 

“The initiative is designed to make it harder to trade NFTs and impossible to speculate in them,” Yang states. “Ultimately, the shifting political atmosphere around NFTs may help test whether they hold any intrinsic value.”