Welcome to our monthly NFT litigation roundup.

As the rise of Non-Fungible Tokens (NFTs) continues to soar, so too do the questions, legal issues and disputes around them.

When faced with such a high growth phenomenon, the law can take time to catch up. Boodle Hatfield is closely monitoring the developments and each month will bring you a roundup of the key NFT disputes to be aware of.

United Kingdom 

HMRC seize NFTs for the first time 

HMRC has seized crypto assets and three NFTs as part of an investigation into a suspected £1.4m VAT fraud.  

Nick Sharp, Deputy Director of Economic Crime at HMRC has said: "Our first seizure of a Non-Fungible Token serves as a warning to anyone who thinks they can use cryptoassets to hide money from HMRC…We constantly adapt to new technology to ensure we keep pace with how criminals and evaders look to conceal their assets."

The investigation is ongoing.

Art Wars

London-based artist and curator Ben Moore launched Art Wars at the Saatchi Gallery in 2013, with life sized Stormtrooper helmets custom painted by artists. Moore has now moved to selling NFTs of the helmets, allegedly without the permission of the artists.

After receiving a copyright infringement notice, OpenSea has taken down the Art Wars NFT page.

DACs has told Artnet News that "As the art market evolves with new and emerging technology such as NFTs, we must ensure that we protect both the creative, intellectual, and moral rights of artists. The minting of NFTs without artists’ permission has the potential to destroy how we as a society value creativity and within this, guarantee that artists are protected through existing intellectual property laws and mechanisms such as the Artist’s Resale Right.”

Owners of the Art Wars NFTs are looking for clarification on the next steps, and the project has been moved to an alternative platform, Looksrare.

Overseas

Sothebys and Kevin McCoy sued over the $1.47m sale of "first ever" NFT

Canadian-based company, Free Holdings, is claiming rights to Kevin McCoy's Quantum (2014), which is regarded by some as the first NFT.

In June 2021 Quantum was sold by Sotheby's for almost $1.5 million. A dispute over ownership rights soon followed. Quantum was originally 'minted' (i.e. turned into a digital asset to make it purchasable) on blockchain software called 'NameCoin'. NameCoins are required to be reclaimed by their owners every 250 days. After creating his NFT in 2014, McCoy did not renew Quantum, supposedly leaving it free to be claimed by others. In April 2021, Free Holdings' claim that their owner registered themselves as the owner of Quantum.

Nameless (the corporation who run NameCoin) is also named as a defendant. They had provided Sotheby's with a condition report on the NFT prior to the auction which states "this specific Namecoin entry was removed from the system after not being renewed and was effectively burned from the chain" (in other words, its ownership could not be re-registered). Colin Woodward, general counsel for Nameless states "while we cannot further comment on ongoing litigation, the brilliance of NFTs is that the blockchain records historical provenance so ownership can easily be proven."

A Sotheby’s spokesperson has said, “the allegations in this suit are baseless, and Sotheby’s is prepared to vigorously defend itself.”

The case will provide insight on how the Courts will view ownership in the realm of blockchain.

Nike sue StockX for selling NFTs based on Nike shoes

Nike have filed a claim against StockX, an online trainer reseller, for trademark infringement.

In January StockX launched "Vault NFTs". These Vault NFTs can be traded digitally or redeemed for the corresponding physical trainer. However, the NFT can sell for more than the physical trainers. The NFTs include the name and image of Nike trainers, and Nike claims that this is trademark infringement (among other things).

The question is whether the NFTs are a product in their own right, or if they are simply an extension of the normal sale process (like a digital receipt would be). Jeff Trexler of the Fashion Law Institute comments "this isn’t just a reseller using the brand’s mark for used goods. Nike is saying that this is unauthorised use of a trademark to sell something else…This is a key issue for the future of the NFT market in fashion.”

Nike alleges this is impacting its reputation and legitimacy and has requested the court to bar StockX from continuing to sell NFTs featuring Nike's marks.

Hermès sues the creator of NFTs resembling the Birkin handbag

Mason Rothschild has designed 100 NFTs resembling the iconic Hermès Birkin handbag. Rothschild started selling NFTs of the MetaBirkins in December last year, and the first sold for $42,000. Later that month the 100 MetaBirkin NFTs had an accumulated value of nearly $450,000.

Hermès has filed a 47-page complaint with the New York's Southern District Court, stating that Rothschild “rips off Hermès’ famous Birkin trademark by adding the generic prefix ‘meta’ " and saying "There can be no doubt that this success arises from his confusing and dilutive use of Hermès’ famous trademarks.” Hermès is seeking injunctive relief, asking that the Court require Rothschild to cease his activity, and pay his profits over as damages. They also want him to surrender the MetaBirkins.com domain name.

Rothschild claims his activities are protected by the First Amendment (guaranteeing freedom of speech), with the MetaBirkins being simply a “playful abstraction of an existing fashion-culture landmark.”

This case throws important issues into the spotlight such as how trademarks of real-life items will be enforced in the digital world, and the implications for the owners of MetaBirkin NFTs if Hermès is successful in its case against Rothschild.

Cryptopunks - V1 v V2 

Cryptopunks is an NFT collection of characters on the Ethereum blockchain that began as an experiment in 2017, with Larva Labs creating a software program to generate thousands of different 'Cryptopunk' characters.

When Larva Labs distributed the original (V1) Cryptopunks in 2017, there was a mistake in the smart contract which allowed the buyer, rather than the seller, to withdraw the money after a transaction - meaning the buyer could purchase a Cryptopunk, get the NFT, and take its money back.

Larva Labs scrapped the V1 contracts and launched an updated version, V2, in quick succession. The V2 NFTs eventually became world famous.

However, V1 Cryptopunks still existed on the blockchain. Originally they had no marketplace to trade on because Open Sea banned them, but a new platform arrived and allowed them to reappear, each with a different coloured background to the V2 Cyrptopunks. This means that there are now two sets of Crytopunks, V1 and V2.

The situation so far:

Larva Labs argues that it maintains a license for the V1 tokens and no longer wants them to be traded, as they undermine the value of the current V2.

Holders of cryptopunks V1 have filed a counter-DMCA notice to overturn a request by Larva Labs to delist the collection from OpenSea

The V1 community is arguing that as close to $50 million has been spent on the V1s, the community holds at least some ownership over the assets

If the V1s are considered legitimate, that would double the supply of Cryptopunks and potentially deflate their value.

Boodle Hatfield has a specialist art law team offering expert know-how and pragmatic legal advice. Responding to the boom of NFTs and cryptocurrencies, we have created a digital assets group, pooling our expertise to ensure we can navigate the legal issues that arise with such assets for our clients. The group brings together specialists from around the firm, who can advise on everything from corporate structuring and intellectual property through to tax, financial claims in divorce and estate planning.

Click here to read more of our expert insights.