Welcome to our NFT litigation roundup.
Non-Fungible Tokens (NFTs) are the topic of much debate and interest and the questions, legal issues and disputes around them continue to soar.
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.
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Yuga Labs v Ryder Ripps et al
The background details of this case are covered by our June roundup and can be found here.
- As described in our June roundup, The Bored Ape ("BAYC") creators (Yuga Labs) are suing the artist Ryder Ripps, who has been minting "replica" Bored Ape NFTs "as a protest against and parody of Bored Ape Yacht Club". Ripps is said to have made more than $5m from the project, and Yuga allege he has de-valued the BAYC brand.
- Ripps is being sued for false advertising, cybersquatting, trademark infringement and unfair competition, among other claims.
Motion to strike out / dismiss Yuga Labs' claim
- In August, Ryder Ripps filed a motion to strike out Yuga Labs' claim, or in the alternative, a motion to dismiss it. In the motion, Ripps' legal team stated that Yuga Labs are trying to "bully" Ripps into silence and that there is no risk of customer confusion (which is key to a trademark claim) between the NFTs as Ripps "repeatedly used disclaimers" to distinguish the two NFT projects.
- Yuga Labs has filed an opposition to Ripps' motion to dismiss. They argue that Ripps is misleading consumers into believing that his NFTs are genuine BAYC NFTs; that he is free-riding on and illegally profiting off the fame and reputation of BAYC; that he is devaluing the brand value of BAYC; and that he is wrongly using several of their trademarks to promote and sell his own NFTs.
- Yuga Labs argue that if Ripps' motion is not denied, it would "'turn trademark law on its head' and allow anyone to rebut trademark infringement claims with the flimsy and false claim that the infringement is 'art'".
- In their arguments, Yuga Labs' legal team pointed to the Hermès v Rothschild case, where the Court denied the defendant's motion to dismiss the claim - "after a thorough […] analysis, the Court determined that even though the defendant altered the name of the mark (from Birkins to Metabirkins) and the appearance of the NFT images was different from the real bags, Hermès alleged sufficient facts of explicit misleadingness to survive a motion to dismiss". Ripps' NFTs are unaltered from Yuga Labs' NFTs, so the Court's view will be interesting here.
- The Court is still considering Ripps' Motion to Dismiss, but in the meantime has referred the case to mediation and that must take place before 23 January 2023, with a trial date set for the end of June 2023.
Separately, the Securities and Exchange Commission is investigating Yuga Labs' NFTs and the manner in which they are marketed. The SEC has made it clear that NFTs are not exempt from securities laws and that the manner in which they are offered can make them securities which would mean they should be subject to the same disclosure rules. The SEC has not yet publicly filed any charges against Yuga Labs.
Jeeun Friel v Dapper Labs
- In 2019, Dapper Labs (a blockchain company) developed a blockchain called "Flow" and partnered with the National Basketball Association to launch an NFT collection of "NBA Top Show Moments" on the Flow blockchain.
- Buyers of the NFTs have issued a claim against Dapper Labs, alleging that the NFTs were actually unregistered securities. They claimed that the NFTs were "investment contracts" under the US Supreme Court's "Howey Test" which determines whether a transaction qualifies as an investment contract or security and therefore must comply with the relevant securities requirements.
- The claim alleges that the NFTs operate like stocks, bonds, mutual funds and other financial instruments and entail an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts".
- Friel (who seeks to represent all those who purchased or acquired the NFTs) states that the NFT purchasers / investors are denied protections required by the Securities Act. For example, Friel alleges that purchasers should receive relevant risk analysis and disclosure materials, and that they might not appreciate they “do not acquire any intellectual property rights or rights to the underlying NBA highlights.”
Motion to dismiss
- Dapper Labs filed a motion to dismiss the claim on 31 August 2022, arguing that the NFTs are not securities but "objects of play and not for investment or speculative purposes", i.e. that there is no "reasonable" expectation of profit.
- Friel filed an opposition to Dapper Labs' motion to dismiss in early November. This is pending with the Court.
United States v Chastain
- In May, the Department of Justice indicted former OpenSea employee Nathanial Chastain with wire fraud and money laundering allegations. It was alleged that he had engaged in insider trading and had secretly bought NFTs he had chosen for OpenSea's homepage, and sold the tokens at a profit once they had been featured.
- As a product manager for OpenSea, it was claimed he had "exploited his advanced knowledge of what NFTs would be featured […] for his own personal financial gain".
- His legal team filed a motion to dismiss which was rejected by the US District Court on 21 October, ruling that his defences were "premature" and "without merit".
Hermès v Mason Rothschild
- Both sides have now filed their motions for summary judgment (i.e. an early decision on the claim, without it progressing to trial) and their opposition briefs to each other's motions.
- The Court has listed the final pre-trial conference for 18 November 2022.
LCX AG v John Does Nos 1-25
- LCX is a crypto exchange which was hacked in January this year. It suffered a loss of around $8m.
- In June, the Supreme Court of the State of New York granted a temporary restraining order. The Court allowed LCX’s lawyers to serve the order, upon the person or persons controlling the Ethereum wallet address (where a significant amount of the funds were identified) via “airdropping” an NFT into that wallet address.
- The Court heard arguments on 10 November 2022 by anonymous defendants to quash the need to show up at trial.
Angela Anne Flores v 3LAU
- 3LAU is a DJ and producer who held an NFT auction in early 2021. The auction was linked to his album 'Ultraviolet'.
- Luna Aura (real name Angela Anne Flores) co-wrote one of the tracks on the album, called 'Walk Away'. Under the agreement in place, 3LAU agreed to give Flores a writer and featured artist credit, 50% of the net royalties payable to 3LAU, and a pro-rated share of any income received in relation to reproductions of the song.
- The NFT auction in 2021 offered products and benefits related to 'Ultraviolet'. Some were specifically linked to 'Walk Away', but Flores claims that her permission was not sought in advance of this. The auction generated more than $11m.
- Flores has issued a claim stating that she has a stake in the song copyright, and is due an artist royalty under the agreement. She is seeking damages and royalties. While 3LAU did offer Flores a one off payment ($25k) as compensation for the auction, she did not believe that was an appropriate price given the $11m generated.
- The case will bring to a head interesting questions where the artist selling music NFTs does not own 100% of the rights in the underlying song.
England & Wales
Amir Soleymani v Nifty Gateway LLC
The background details of this case are covered by our April roundup and can be found here.
- As described in our April roundup, in May and June 2021 Soleymani was involved in an auction for an NFT associated with the artist known as "Beeple". Soleymani submitted one of the winning bids for the NFT, with his bid of $650,000 ranking third highest.
- According to the terms of sale, Soleymani and the other 98 top bidders were expected to accept second edition (and lower value) NFTs. This meant Soleymani would receive NFT edition number 3 for $650,000. He refused to pay, arguing that his bids were made "with the intention of acquiring the original artwork offered for sale in the Abundance Auction and not the third or any other edition thereof". Nifty Gateway subsequently froze Soleymani's account and blocked access to his assets (which included over 100 NFTs).
- Nifty Gateway commenced arbitration proceedings in New York seeking payment of the $650,000 bid from Mr Soleymani. This was done pursuant to the arbitration and governing law clauses in Nifty Gateway's standard terms and conditions.
- Mr Soleymani filed a counterclaim in New York and issued a separate claim in London, seeking a declaration that the arbitration and governing law clauses in the terms and conditions were unfair, contrary to English consumer rights protections, and so not binding on Mr Soleymani, Mr Soleymani also claimed that any contract arising from the bid was void under the Gambling Act 2005.
- Nifty Gateway contested the English Court's jurisdiction and sought a stay of proceedings.
The High Court decision
- The High Court of England & Wales accepted jurisdiction to hear the non-arbitration aspects of the claim (being the governing law clause and the Gambling Act claim). The High Court did not, however, accept jurisdiction to hear a challenge on the arbitration agreement. This was due to an issue which arose from the interaction between arbitration and consumer rights in EU rules and how those apply following Brexit. The Court ordered a stay of proceedings in favour of the New York arbitration, so that issues around the enforceability and validity of the arbitration agreement could be left to the New York arbitrator.
Permission to appeal
- Lord Justice Birss commented that "the case Mr Soleymani is seeking to make has implications for consumers in general in this jurisdiction and it is important that they are considered and ruled upon in public in a court". It is therefore clear that the consumer context of the dispute was an important factor. It is worth noting that the UK Competition and Markets Authority intervened, urging the court to reach the conclusion they did. This was due to their concerns about the judgment having the effect of undermining consumer rights
- Lord Justice Birss further held that " in a case like this one, provided it is properly arguable that there is a consumer contract with a close connection with the UK and a consumer seeking to rely on their rights under domestic law, then in my judgment the vindication of those consumer's rights in that context is best decided by a domestic court. That applies directly to the submission under s9(4) that the arbitration agreement is null and void (etc.) because it is unfair under domestic law. That is because the domestic court is better placed to undertake the fairness assessment under domestic law than a foreign arbitrator would be applying that law."
- The New York arbitration is continuing in parallel with these English proceedings. We therefore may end up with conflicting decisions on the validity of the arbitration agreement.
Juventus F.C v Blockeras s.r.l
- Juventus F.C. issued a claim against Blockeras (a fantasy football game platform) earlier this year. Juventus claimed trademark infringement, due to Blockeras offering NFTs linked to trading cards featuring Christian Bobo Vieri (a former Juventus player).
- Blockeras had entered into an agreement with Vieri in relation to the cards, but did not receive permission from Juventus.
- The Rome Court of First Instance ordered an injunction, preventing Blockeras from offering any NFTs which included Juventus' trademarks. These include the design of Juventus' shirt, and the words Juventus and Juve.
Janesh S/O Rajkumar v Unknown Person ("Chefpierre")
The background details of this case are covered in our May roundup and can be found here.
- As described in our earlier roundup, in May the Singapore High Court issued an injunction to prevent the sale and transfer of an NFT.
- The judgment of Judge Lee Seiu Kin J has now been issued. Key takeaways are as follows:
- The Judge discussed the difficulties surrounding whether the Court had jurisdiction to hear the application given that the domicile, residence and current location of the defendant was unknown. The Judge commented, "While the decentralised nature of blockchains may pose difficulties when it comes to establishing jurisdiction, to my mind, there had to be a court which had the jurisdiction to hear the dispute". The primary factor he considered in establishing Singapore as the correct Court was the fact that the claimant was located in Singapore and carried on his business there.
- The Court had to consider whether it had jurisdiction against an unknown defendant. Interpreting the Singaporean Rules of Court 2021, the Judge concluded that requiring strict compliance with the formalities, i.e. the claimant being required to name the defendant, may restrict access to justice. It was decided that the description of the defendant must be sufficiently certain as to identify those who are included in the description and those who are not. The Judge said that the case has demonstrated that it is "perfectly possible to have concluded a contract with someone else online, where both parties have concealed their true identities using pseudonyms".
- The Court allowed for substituted service outside of the jurisdiction via the defendant's twitter, discord account and messaging function within the cryptocurrency wallet address. This again required a broad interpretation of the current rules as the Court held that the list of permitted substituted service provisions was "not a closed list". The Court therefore allowed the claimant to serve the papers and orders made on the defendant via substituted service outside of the jurisdiction.
NFTs as property
- The injunction also established that NFTs may be recognised as property. The Judge found that where NFTs are concerned, it may not be entirely appropriate to categorise them as mere information or code on the blockchain. The Court applied the criteria of National Provincial Bank Ltd v Ainsworth and the definition of property, and deemed NFTs to be (i) definable; (ii) identifiable by third parties; (iii) capable in their assumption by third parties; and (iv) possess some degree of permanence or stability.
- Singapore's judgment is similar to those we have seen in England and Wales and underlines the growing trend towards protecting owners of crypto assets.
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