IP Protection of NFTs: A Comparative Look at the US and China
The author would like to thank John Hodges and Elisa Li for their contributions to this post.
The emergence of blockchain-supported Non-Fungible Tokens (NFTs) has captured the interest of the entertainment and business worlds in the past couple of years. Large digital transactions like that of Beeple NFT that sold for $69 million and the ever-mounting numbers of more or less successful NFT cooperations like that between Tiffany and CryptoPunks or millions-heavy NBA Top Shot NFT have made the headlines. NFTs are also playing a key role in a generation’s development, with GenZ’ers dreaming of quick money through buy-and-sell of NFTs on crypto platforms.
NFTs are both a new creative form of intellectual and artistic expression and a lucrative business opportunity. Through the secure blockchain technology, NFTs allow the creation and sale of exclusive and limited content in the form of collectible digital assets that can be transported on multiple media such as images, videos, or music. In turn, this attracts interest from businesses ranging from fashion and sports brands, sport teams, designers, game developers, and other content owners.
Securing the right IP protection for an NFT will be key to its successful commercialization and exploitation by the creator and its owner. The exclusivity of exploitation is key to the success of a limited-edition collectible. The challenge becomes even bigger if NFTs are to be commercialized, exploited, and protected in different jurisdictions and at the same time — particularly when those markets include China, where protection for a foreign NFT creator or exploiter may face unique challenges.
In this blog post we examine how copyright is leveraged to protect NFTs, both in the US and China, with a comparative approach that elucidates both the challenges and potential solutions.
IP Rights and NFTs
What is the intellectual property right that most suits NFTs? Given that NFTs are the result of digital work that is transported in images, videos, photography and other forms of digital media, copyright seems to be the closest IP right to protect both the source code of the digital work, as well as its derivative works. Is this the same in the US and China? Can other IP rights like trademarks play a role in protecting NFTs? If yes, under what circumstances?
The United States
Applicable IP Rights
Copyrights in the US are protected under the U.S. Copyright Act. The purpose of copyrights is to protect creative works, including writings, from infringement. The Copyright Act today includes an “ever expanding understanding of the word ‘writings.’” It covers architectural design, software, graphic arts, motions pictures, sound recordings, and more, and it is adaptive to new technological advances that would likely apply to NFTs. Section 102 of the Copyright Act specifically details that there is copyright protection for “original works of authorship” that are fixed to a “tangible medium of expression from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine.” Due to the encompassing nature of the Copyright Act, a way in which NFT owners can protect their property is likely through copyrights.
For NFTs that have to do with an indicator of a company’s trademark, the Lanham Act may provide protection to an NFT as well. The Lanham Act in a broad sense protects words, phrases, logos, symbols, shapes, sounds, colors, and more. Use in commerce and distinctiveness are two basic requirements to obtain trademark protection. As companies are utilizing NFTs for their businesses, trademark protection may be an additional mechanism for protecting NFTs. As NFTs per se are currently unregulated by statutes in the US, common law protection through trademarks may become all the more important.
The Specific Chinese Name for NFTs
Protection of NFTs seems more problematic in China. It starts with the Chinese translation of Non-Fungible Tokens. The literal Chinese translation of NFT should be 非同质化代币 (Fei Tong Zhi Hua Dai Bi), an expression that contains the word token. Given that the Chinese government prohibits the transaction of virtual currencies, the Chinese market and users had to change this translation to avoid referring to crypto currencies as that could make NFTs illegal. To avoid this risk, the Chinese market has created a different Chinese name for NFTs: Digital Collection (数字藏品, hereafter also referred as “DC”).
Compared to NFTs as defined in the US, the DC in China: 1) are under strict market supervision that caps their valuation and pricing by avoiding social media hyping of the same; and 2) can only be purchased with Chinese currency, the Ren Min Bi (RMB) in the traditional or digital form.
Therefore, DCs cannot be freely transacted in the Chinese market.
Applicable IP rights
Article 3 of the China Copyright Law defines copyrightable works as intellectual creations with originality in the realm of literature, art or science that can be represented in a certain form (the “tangibility” requirement in the US) and expands its scope by including other intellectual creations that meet the characteristics of works. NFTs/DC are indeed intellectual creations that can be represented in a certain form and therefore can be copyrightable in China as long as they possess originality and fit one of the listed categories of works. As it may be inferred from the Chinese name “Digital Collection” (数字藏品, the “DC”), most NFTs in China assume the form of works of art, photographic works, etc.
It has been debated whether NFTs/DC could be protected in China by design patents. The current tendency is that of denying protection to designs of non-physical products, like metaverses. However, given the recent developments in favor of extending design patent protection to metaverses in other Asian countries including Singapore, Japan, and South Korea, Chinese right holders have started filing design patents to protect digital creations which may include NFTS and metaverses. For more details on the topic of design and the metaverse in China see our previous blog post.
In addition, if there is some distinctive device or wordings in the NFT indicative of its source, then an additional layer of protection could be added by filing for trademark protection.
Ownership and Enforcement
Even if copyright is accepted in both the US and China as the most suitable IP for NFTs protection, challenges remain. Copyright statutes and case law were not ready for the digital revolution and the very concept of copyright needs to be newly molded and adapted to the peculiar nature of NFTs. Ownership and scope of protection against infringers are among the key challenges to copyright protection of NFTs.
The United States
NFT owners in the US are in a somewhat ambiguous situation when it comes to protecting their NFTs. In the US, there is currently little regulation regarding NFTs. This is due to both a lack of statutes, as well as few common law cases regarding NFTs. The lack of regulation regarding NFTs has pushed NFT owners to protect their property largely through copyrights.
Two ideas of ownership have emerged under copyrights. The first view is that the artist that created the original digital work should be considered the owner of the copyright. The other opinion maintains that the copyright is only established once the NFT is minted. The first view is more closely aligned with traditional copyright law, and the court is likely to view that standard as applicable to NFTs and copyright law. If the other opinion becomes the standard, whoever mints the artwork first will be the copyright owner and the artist could be at risk of losing their artwork in NFT form.
There are two cases that could help NFT owners better understand how to protect their property under copyrights. Both of these cases originate out of California’s Central District court. The two cases could also help provide some clarity around NFT regulation.
A major pending case is Tarantino v. Miramax. In this case, film director Quentin Tarantino attempted to use scenes of his film Pulp Fiction to create NFTs. In response, the production company Miramax sued Tarantino for copyright and trademark infringement. The way in which this still-pending case is decided may have lasting effects on how NFTs are protected in the US. In particular, this case will determine whether the distribution and sale of NFTs violate copyright rules for derivative works, which must have the original copyright owner’s permission or else they constitute infringement. If the original artist or graphic designer of the NFT holds the copyright; one who mints the NFT does not hold the copyright automatically and would have to get it from the original copyright owner.
An additional case that could create guidance for copyright protections regarding NFTs is B.I.G. LLC v. Yes Snowboards. Case law still does not clearly place NFTs under the protection of copyrights. Yet Snowboards tends to suggest that copyrights may in fact protect NFTs. The court reasoned here that “an NFT is a ‘digital representation’ of the underlying asset, i.e., the photographs at issue. Thus for purposes of the Preliminary Injunction Motion in this case, it is assumed that the NFTs fall within the subject matter of the Copyright Act, which permits copyright holders ‘to reproduce the copyright work’ and to ‘prepare derivative works.’” This case at a minimum provides persuasive authority that copyrights protect NFTs.
Trademark Ownership and Infringement
Hermès International v. Rothschild is a case that is critical in providing precedent for understanding trademark protection’s relationship with NFTs. Hermès International and Hermès of Paris sued the artist Mason Rothschild in the southern district court of New York “for trademark infringement and dilution, misappropriation of its BIRKIN trademark, cybersquatting, false designation of origin and description, and injury to business reputation.” Hermès’ argument is that Rothschild’s use of “MetaBirkin” is causing confusion among customers, as it would make people mistakenly believe that Hermès is associated with the “MetaBirkin” NFTs. Rothschild says that a disclaimer saying it is not affiliated with Hermès ensures no confusion for consumers. The judge in this case found that the alleged infringer’s use of the trademark was misleading. This case helps establish that trademarks can be enforced against NFTs and that indirectly, an NFT owner can receive protection for NFTs through trademarks.
An additional case out of the southern district court of New York could create federal precedent for trademarks protecting NFTs is Nike Inc. v. StockX LLC. Nike claimed that StockX was using its platform to sell knockoff shoes of Nike and selling them on their platform. Nike also claimed that StockX was selling NFTs of Nike, which Nike claims would cause confusion as Nike has also sold NFTs depicting their products. The way in which this pending case is decided could further solidify that trademarks are capable of protecting NFTs.
Companies have begun to use NFTs for their business purposes. Tiffany is the largest company so far to explore the possibilities that NFTs poses. Tiffany created 250 NFTs and put them on the market. They sold out within roughly 20 minutes. The profit from this was over $12.5 million. What was sold are “NFTiffs,” which are digital passes that NFT holders can redeem for digital artwork based on CryptoPunks. Upon receiving the digital art, the owner of the NFT also receives a luxury pendant of the same design which is made of gold and precious stones.
Businesses like Tiffany therefore have much at stake when it comes to understanding how they can leverage copyrights in the Metaverse.
Legislation and Policies
In China, NFTs fall into the scope of online virtual assets. Currently there are no specific laws or regulations related to the protection of online virtual assets. However, recent statutory provisions and judicial opinions of the Supreme People’s Court have acknowledged the existence of ownership rights over virtual assets. Section 2 of the “Opinions of the Supreme People’s Court and the National Development and Reform Commission on Providing Judicial Services and Guarantees for Accelerating the Improvement in the Socialist Market Economic System in the New Era” (最高人民法院、国家发展和改革委员会关于为新时代加快完善社会主义市场经济体制提供司法服务和保障的意见), issued on July 20, 2020, recognizes and demands protection of new rights and interests such as digital currency, as well as online virtual property and data.
Legal practitioners and Chinese judges advocate that virtual property should be protected by reference to the rules on property rights, and the current rules of property law can apply to data. Therefore, it is also accepted that ownership of NFTs/DCs as intellectual work is regulated by the China Copyright Law and its Implementing Regulations.
Back in 2008, the Shenzhen Market Supervision Administration (MSA) set up a digital works recordation center, the so-called “Shenzhen Digital Works Recordation Center” (深圳数字作品备案中心). This center was created to provide recordation services for copyrighted works that could be turned into the digital formats (very far sighted!). In August 2022, the first two metaverse works of art and the first two NFTs were recorded:
4 recorded metaverse related works
2 recorded NFT related works
These developments seem to point to the fact that: a) NFT’s, although restricted in their commercialization, are an emerging trend in China; b) statutory regulations can be expected soon to codify the latest trends; and c) NFT/DC ownership is regulated under the provisions of the Civil Code and the Copyright Law of the People’s Republic of China.
Under the China Copyright Law, the creator/author of the relevant works is the owner of the related copyright, unless otherwise agreed by the involved parties. In the case of a digital work created in the course of employment and as part of the employee’s job’s duties, the copyright will be owned by the employer by operation of law.
However, many NFTs/DCs are derived from physical works such as photographic works, works of art, etc. Unlike the situation in the US, there seems to be no weight given in China to the minting process as a possible generator of ownership. The Chinese practice seems to stick with the traditional principles of copyright ownership: the owner of the original physical works should still be the owner of the derived NFTs/DCs unless otherwise agreed by the involved parties.
In China, the transaction of the NFTs/DCs would not normally include the transfer of the related copyright. The buyer should therefore check with the seller (usually the NFT platform) to check his/her rights, and especially the copyright ownership or license rights. If no copyright ownership or license is obtained, the buyer should use the purchased NFT/DC only for private consumption in order to avoid bearing potential copyright infringement liabilities.
The following are the acts of infringement recognized in China under its Copyright Law:
Mining is “reproduction” under the China Copyright Law
Article 10.1 of the China Copyright Law defines “reproduction” as making one or more copies of a work by printing, photocopying, rubbing, sound or visual recording, recopying or digitalization thereof, or by any other means. Therefore, mining NFTs from a prior work should constitute “reproduction” under the China Copyright Law. The NFT miner should thus bear liability for mining the already copyrighted works without authorization of its original owner.
Chaining constitutes “Information Network Transmission”
The display of the NFTs/DCs on the NFT trading platform for selling purposes (chaining) is considered by the law to be an act of “Information Network Transmission.” The entity or person chaining the NFT (which could be the miner) should thus bear liability for violation of the original copyrighted work, unless consent of the copyright holder has been obtained.
The first judicial NFT decision in China and the liability of the NFT platform
The first NFT copyright infringement lawsuit in China in 2022 [深圳奇策迭出文化创意有限公司诉某科技公司侵害作品信息网络传播权纠纷一案 (Zhe 0192 Min Chu No. 1008] was filed by Shenzhen Qice Diechu Cultural & Creative Co. Ltd. (hereafter referred to as Qice) against an NFT platform instead of the miner (probably because the miner’s identity was not accessible). In the judgment, the Hangzhou Internet court determined that the NFT platform is fully and vicariously liable. An NFT works with a selling price of 899RMB used the original animation IP without authorization, and the trading platform was awarded a compensation of 4000 RMB (NFT作品擅用动漫IP原图标价899元，交易平台被判赔4000元，NFTCN主体与原告存在侵权纠). Interestingly, the court did not find liability of the platform based on the Copyright Law (that would have applied to the miner), but instead resorted to the general principle of negligent tort. The NFT platform had the ability to confirm that the NFT contained work from an author whose name was indicated by a watermark in the microblog account and in the description of the original picture. The NFT platform failed to verify whether the miner was the copyright owner of the accused infringing NFT digital works or check the relation between the foresaid registered owner and the original author.
Picture of the infringing NFT digital works “Fat Tiger Vaccinated” (胖虎打疫苗)
The NFT platform was ordered by the court to disconnect the block chain of the infringing NFT digital works and put it in the address black hole to achieve the legal effect of stopping infringement (an injunction), and to pay damages of 4,000RMB (US$548). The selling price of the infringing NFT digital works was only 899RMB and there had only been one transaction at the time the lawsuit was filed.
In conclusion, even if the Copyright Law of China seems the closest legal base to obtain protection for NFTs, the only relevant judicial decision so far has instead found the NFT platform liable on the tort principles of the civil code and has not even considered the liability of the miner in this case. Also, damages were rather symbolic and would surely not justify the cost to file a lawsuit —at least not one that omits the miner and the one chaining the infringing NFT (which could be the same entity/person as the miner).
More case law will be necessary to determine to what extent the copyright law will be used to protect NFTs in China.
As increasingly relevant blockchain-supported technology, NFTs reside in a wild unregulated legal environment. Owners of NFTs are therefore trying to protect their NFTs through copyrights both in the US and China. Case law regarding the registration of NTFs under copyrights is only beginning to take place in the United States.
In China the case law and the legal literature have no doubt about the rights of ownership of the original copyright holders against the miners and sellers of NFTs, but the apportionment of liabilities among miners, sellers and platforms are still very uncertain. To this, we need to add that, in China, NFTs have not experienced and probably will not experience the same hype as in the US, relegating them to a secondary form of market.
All considered, we can expect NFTs and the related legal issues to take center stage in the US, while they seem to be less relevant in the peculiar crypto-averse Chinese market. However, protecting NFTs in China will be very important in order to obtain effective punishment of and deterrence against the infringers.