Chinese Court Rules in First NFT Copyright Infringement Case

NFT (non-fungible token) is probably the most popular digital asset to have emerged in the past 2 years. It has attracted a large number of artists, musicians, collectors and investors, with the sales of NFTs resulting in a billion-dollar sized market; yet the laws and regulations around this specific asset class are failing to keep up with the fast pace of development and fall short in addressing many key legal issues and controversies surrounding NFTs in traditional legal areas, notably in copyright law.

In China, similar to markets elsewhere, the NFT market is booming and hash huge growth potential. However, aside from the regulations and restrictions from a financial perspective, until now, neither the Chinese authorities nor the Chinese courts had ever formally responded to any other key legal issues pertaining to NFTs, especially in relation to copyright.

New landmark case

This has changed with the recent ruling from the Hangzhou Internet Court on a copyright infringement case relating to an NFT, which is the first case involving an NFT in China. In the judgment, the court shared its views on several copyright issues in relation to NFTs, as well as the obligations of NFT platforms. Below are some key takeaways from the case:

An NFT is a digital commodity. The sale of an NFT does not mean a transfer or license of the intellectual property of the underlying artwork (unless the sales agreement provides otherwise).

The sale of an unauthorized NFT does not infringe upon the copyright owner’s "right of distribution" in the underlying work which is limited by the first-sale doctrine, but instead, infringes upon the "right of communication by information networks" (which is a highly controversial issue in relation to copyright infringement of an NFT).

The legitimate creator of an NFT should not be the person who simply possesses a copy of the underlying work, but the person who owns the copyright in, or obtains a due license for, the underlying work.

Unlike an ordinary e-commerce platform where "safe harbor rule" applies, the vetting obligations of an NFT platform should be relatively higher, because:

The NFT business, by nature requires more "trusts". The reason being that "blockchain", the underlying technology of NFTs was built to create a trustworthy ecosystem for all parties to a transaction, hence it is critically important for an NFT platform to ensure there are no obvious flaws in the copyright ownership of the underlying work of an NFT (which is the very basis and start of all subsequent transactions of the NFT); otherwise, the entire NFT transaction chain would become very unstable and all related parties’ interests would be endangered.

The NFT platform receives commissions (profits) directly from sales of NFTs on its platform, thus should have a higher-level "duty of care".

The court further suggests that an NFT platform should establish a vetting mechanism and use reasonable efforts to verify the copyright ownership of each underlying work, i.e. they should ask their users to submit at least prima facie evidence (such as manuscripts, original work, public publications, copyright registration certificate, certificate issued by certification agency, etc.) to prove copyright ownership, and to provide guarantees if necessary, before a user can mint an NFT based on the work through the platform. The court believes that the vetting mechanism is technically possible and would not cause excessive burden on NFT platform operators.

The court also mentions that an NFT platform should have an effective take-down mechanism to stop the dissemination of infringing NFTs. In this regard, the court accepts the fact that NFTs cannot be deleted due to their special technical features, but stipulates that platforms can send infringing NFTs to an "eater address" (where the NFT is "burned" and removed from circulation), which would be deemed an effective deletion of the NFTs.

Our comments

This is the first NFT case in China where the court has clarified the legal nature of an NFT, as well as the obligations of an NFT platform, and also responded to some key copyright legal issues in respect to NFTs. The ruling is without doubt of important referential value and provides a useful guidance to the operations of NFT platforms in China. However, as the court is only a district-level court, it remains unclear as to whether its ruling will be widely followed or is likely to be challenged in subsequent cases by other courts in China. In any case, as the authorities have not yet enacted any formal NFT laws or regulations, the court’s insights in the judgment are meaningful, and NFT players in China should without doubt carefully consider the implications of the ruling.