China issues its first court ruling on NFT violations | Dorsey & Whitney LLP
In contrast to the current prohibitive policies on the trading and trading of cryptocurrencies in China, the Chinese government has taken a more pragmatic approach to non-fungible tokens (“NFTs”). It considers NFTs to be digitized works of art/collectibles or “training artistic digital products” rather than digital financial products. This pragmatic approach is an attempt by the Chinese government to adapt to the rising tide of NFT-related developments based on blockchain technology, given the rapidly increasing popularity of NFTs among Chinese traders and collectors, and the fast-growing transaction market for NFTs in China.
In April 2022, China saw its first court ruling on NFT infringement, which was handed down by the Hangzhou Internet Court (“Hangzhou Court”) in the case of Shenzhen Qice Diechu Culture Creation Co., Ltd vs Hangzhou Yuanyuzhou Technology Co., Ltdaka “the chubby tiger has his shot” case. The Hangzhou Court is a district-level court that was formed in 2017 and specializes in Internet-related cases. This post provides a brief introduction about this case and its potential influence on the trading of NFTs by trading platforms in China.
The facts of the case are not complicated. The plaintiff, Shenzhen Qice Diechu, has been granted an exclusive license to use the copyright associated with the artwork “chubby tiger having its shot” by the copyright owner.
(the underlying artwork “chubby tiger having its shot”)
Defendant Hangzhou Yuanyuzhou operates an NFT trading platform. A third party was found to have offered and sold NFT products created and based on the artwork “chubby tiger having its shot” on the defendant’s platform. The plaintiff therefore sued the defendant for copyright infringement. The defendant sought to rely on the Safe Harbor principle in its defense – generally, a network service provider can be protected in a “safe harbor” against any infringement claim regarding third party content posted/offered on the platform if it has exercised a reasonable duty of care and it has followed a procedure for notice and removal. The defendant therefore sought to protect itself by claiming that it was merely a content-hosted NFT trading platform.
The Hangzhou court held that the defendant cannot hide behind the Safe Harbor principle in this case and found the defendant liable for copyright infringement as a trading platform, because the role played by the defendant as a trading platform in the NFT transaction requires it to exercise its duty of care to a higher degree for to ensure that the NFT products traded on its platform do not infringe the intellectual property rights of others.
The Hangzhou court was influenced by evidence that the defendant, although apparently operating only as a trading platform, charged gas fees for minting the digital NFT work, and also charged commissions from the sale of NFT works; therefore, the defendant was a participant in the transaction rather than merely a platform providing its members with an online trading venue. As such, the Hangzhou court held that the defendant must assume a higher level of responsibility and a stricter duty of care in relation to the handling of NFTs on its platform in order for it to seek protection under the Safe Harbor principle.
The defendant in this case poorly exercised its duty of care in monitoring IP infringement, because the infringing NFT work based on “chubby tiger having its shot” clearly bears a watermark with the Internet name of the real copyright owner. This should have immediately raised the alarm for the accused. The Hangzhou court held that the defendant could easily have found the existence of copyright infringement in relation to the NFT work in question by making a simple check on the Internet.
The Hangzhou court discussed what it considered to be an adequate exercise of the duty of care in relation to NFTs. An NFT trading platform must establish an IP review mechanism prior to placement. The platform must also have reasonable measures in place to carry out an ownership check of the NFT works to be placed on its platform and of the underlying artwork by asking the traders/NFT creators to provide documents to prove ownership in or in relation to the underlying copyright, to the extent that a reasonable person would believe that the trader/creator is the owner of the underlying copyright or has otherwise obtained permission to use said copyright.
The Hangzhou court also addressed certain technical issues related to NFTs, for example, regarding the plaintiff’s request to delete the subject infringing NFT digital work from the defendant’s platform, the court ordered the defendant to “disconnect the infringing NFT digital work on the block chain and punch it into the black hole of the address to stop the violation” given that deleting NFTs from the Internet is not possible.
Unlike the other recent high-profile cases involving NFTs in other jurisdictions, for example Nike, Inc. v StockX LLC (involving Nike sneakers NFTs) and Hermès International v. Mason Rothschild (Hermes Birkin bag-inspired NFTs), which is between the owners of IP rights (as the plaintiffs) and the infringing creator of NFTs (as the defendant), this is the first NFT infringement case in China against a trading platform. The reason is that the plaintiff could not establish the true identity of the infringing creator. The plaintiff therefore requested in the court proceedings, among other things, that the defendant state the real identity of the creator so that the plaintiff can also initiate legal action against the creator. This indicates that the plaintiff is considering a new and further legal case against the creator of the infringing NFT work.
The defendant in this case has appealed this judgment from a court of first instance to the Hangzhou Intermediate People’s Court. We will continue to monitor this matter and will report on new developments. We will also keep an eye on any new court decisions involving NFTs in China, especially those from higher level courts.
