Chinese court rules in NFT’s first copyright infringement case

NFT (non-fungible token) is probably the most popular digital asset to emerge in the last 2 years. It has attracted a large number of artists, musicians, collectors and investors, with NFT sales resulting in a billion dollar market; Yet, laws and regulations pertaining to this specific asset class are failing to keep up with the rapid pace of development and failing to address many key legal issues and controversies surrounding NFTs in traditional legal areas including human rights law. ‘author.

In China, like markets elsewhere, the NFT market is booming and has huge potential for growth. However, apart from regulations and restrictions from a financial perspective, so far neither Chinese authorities nor Chinese courts have ever formally answered other key legal questions relating to NFTs, in particular in matters of copyright.

Significant new case

This has changed with the Hangzhou Internet Court’s recent decision on an NFT copyright infringement case, 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. Here are some key takeaways from the case:

  1. An NFT is a digital commodity. The sale of an NFT does not imply a transfer or license of the intellectual property of the underlying work (unless the sales contract provides otherwise).
  2. The sale of an unauthorized NFT does not infringe the copyright owner’s “distribution right” in the underlying work, which is limited by the first-sale doctrine, but rather infringes the ” right of communication by information networks” (which is a very controversial issue concerning copyright infringement of an NFT).
  3. The legitimate creator of an NFT should not be the person who simply owns a copy of the underlying work, but the person who owns the copyright or obtains an appropriate license for the underlying work.
  4. Unlike a regular e-commerce platform where the “safe harbor rule” applies, an NFT platform’s verification requirements should be relatively higher, because:
  • NFT activity, by nature, requires more “trusts”. The reason being that the “blockchain”, the underlying technology of NFTs was designed to create a reliable ecosystem for all parties to a transaction, so it is extremely important for an NFT platform to ensure that it there are no obvious defects in the copyright ownership of the underlying. work of an NFT (which is the very basis and beginning of all subsequent transactions of the NFT); otherwise, the whole NFT transaction chain would become very unstable and the interests of all related parties would be threatened.
  • The NFT platform receives commissions (profits) directly from the sales of NFT on its platform, so it should have a higher level of “duty of care”.
  • The court further suggests that an NFT platform should establish a verification mechanism and make reasonable efforts to verify the copyright ownership of each underlying work, i.e. it should require its users to submit at least prima facie evidence (such as manuscripts, original works, public publications, copyright registration certificate, certificate issued by certification agency, etc.) to prove the copyright ownership and provide warranties where necessary, before a User can create an NFT based on the Work through the Platform. The court finds that the verification mechanism is technically possible and would not cause excessive burden for NFT platform operators.
  • The court also mentions that an NFT platform should have an effective takedown mechanism to stop the spread of counterfeit NFTs. In this regard, the court accepts that NFTs cannot be removed due to their special technical characteristics, but states that platforms can send infringing NFTs to an “eater address” (where the NFT is “ burnt” and removed from circulation), which would be considered an effective removal of 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 answered some key legal issues in the field of business law. author regarding NFTs. The judgment undoubtedly has an important reference value and provides useful guidance to the operations of NFT platforms in China. However, as the tribunal is only a district court, it is unclear whether its ruling will be widely followed or likely to be challenged in subsequent cases by other courts in China. In any case, as authorities have yet to enact formal NFT laws or regulations, the court’s findings in the judgment are significant, and China’s NFT players should no doubt carefully consider the implications of decision.

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