The First NFT Legal Case in China

As of 2017, the mining, minting and trading of Bitcoin and cryptocurrencies is banned in China. In contrast, NFTs are heating up in China under the name of “digital collectibles” despite growing restrictions and a tough regulatory environment banning users from selling their digital assets for cash. Now, for the first time, a Chinese court has considered a case involving NFTs, with implications for copyright and platform liabilities.

Case Summary

An NFT (or “digital collectible”) platform called Qice had acquired a worldwide exclusive copyright license for the popular “Fat Tiger” series of digital images. Qice then discovered that one or more NFTs based on the “Fat Tiger” series were available on another NFT platform, Bigverse. Bigverse enables the minting of NFTs by users, and the NFTs at issue here was created and posted by a Bigverse user, not Bigverse itself. Qice sued Bigverse (not the user) for infringing its licensed right of dissemination via the internet.

(The subject NFT digital work in this case)

The court held that Bigverse had failed to fulfill its duty of care and to take necessary measures to prevent infringement when it knew or should have known that its user had infringed another party’s rights. It ordered Bigverse to cease the infringement and pay statutory compensation of RMB 4,000 (around USD 615) to Qice.

Analysis

The responsibility of an NFT creator : to obtain permission from the copyright owner of the underlying work. 

As reiterated in the judgement, the creation and issuance of NFTs involves the copying, sale and transmission via the internet of digital works, for which there are two major rights involved: copyright in the underlying artwork and property rights in the resulting NFT. Hence, for the creation of the NFT, the creator must either already have or acquire copyright in the underlying artwork. Although purchasers will acquire property rights in the NFT, the copyrights will remain with the original copyright owner unless otherwise agreed. In this case, Qice, as the authorized copyright holder in the “Fat Tiger” series, was entitled to the protection of its economic interests therein, including as related to the creation and issuance of NFT digital works, such as the right of copying and the right of dissemination through the internet.

The responsibility of the NFT platform operator: to fulfill the duty of care and prevent infringement. 

As noted, Qice did not sue the NFT creator – it sued the NFT platform. Hence, the judgement is focused on the obligations of the platform (and platforms in general). Note: Qice did request as part of its petition for Bigverse to disclose the NFT creator’s name, the specific block chain position, and the content of applicable smart contract, so a future case against the user for infringement and illegal profit is possible. In China, content platform operators are liable for certain copyright and other intellectual property right violations that occur on their platforms. In the Bigverse judgement, the court emphasized the message that platform operators must fulfill their duty of care and take necessary measures to prevent infringements, including in respect of NFTs. For this specific case, the court noted that:

• all NFT digital work transaction data is recorded by the platform, so the platform is able to control the transaction process;
• there is clear watermark of the original artwork author’s Weibo (Chinese “Twitter”) nickname on the works uploaded by the Bigverse user, which were reviewed and approved by the platform before publication on the platform, so the court holds that Bigverse should have known that such work was directly copied from the author’s posts on Weibo but still failed to stop the upload. According to the Civil Code, an internet service provider who knows or should have known that its user has infringed the civil rights and interests of other persons through the internet services it provides but fails to take necessary measures, shall take joint and several liability with such internet user.
• the platform not only charges services fees for the creation of the NFT digital works but also commissions on any successful transactions. According to the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law to Trial of Civil Dispute Cases of Infringement of Rights of Transmission through Internet, where the internet service provider obtains economic interest directly from the works, performance, sound or visual recordings provided by its users, the court shall recognize that such provider shall pay relatively high attention to its users’ infringement of the right of transmission through the internet.

Therefore, although Bigverse’s user agreement contained warranties and undertakings from users on copyright infringement, including the clear phrase “Please do not upload works that may involves infringement”, the court held that this cannot eliminate the platform’s liability for serious infringements occurring on the platform, as the platform has a significant duty of care, which extends to actually preventing infringements. Hence, the court determined that Bigverse was at fault for facilitating the infringement of Qice’s right of transmission through the internet of the subject work.

In this respect, it’s worth noting that in many well-known NFT intellectual property lawsuits so far, such as Nike vs. StockX (which made Nike sneaker NFTs) and Hermes vs. Mason Rothschild (who made Hermes Birkin bag-inspired NFTs called “MetaBirkins”), the defendants are the NFT creators rather than the platforms. In the Bigverse case, the platform is the target. This aligns with a statement from Jeff Gluck, CEO of CXIP Labs — an NFT minting platform —that “There are dozens of artists making ready lawsuits in opposition to OpenSea for promoting infringing NFTs.” (‘Wave of litigation’ to hit NFT space as copyright issues abound (cointelegraph.com). Thus the Bigverse case should serve as an alert for NFT platform operators in China that the courts take their IP supervisions obligations seriously. The damages in this case may be very low, but repeated infringements would likely invite more serious penalties, with potential escalation to administrative enforcements.

Conclusion

Given this case, several points should be noted for those who intend to initiate NFT business in China:

1. Data and online virtual assets, including NFTs, are clearly protected under the Civil Code of the PRC, as a type of private civil asset; and other rights in NFT works, such as copyright, are also protected under the specific relevant laws and regulations, such as the Copyright Law of the PRC;
2. Like other platforms, NFT platforms are expected to take effective measures to fulfill the duty of care and prevent intellectual property infringements. This means effective review of content before posting, and rapid removal after posting if any infringements are discovered. Moreover, as this case demonstrates, expectations may be even higher for NFT platforms, given the traceability of NFTs and their character as an object that is intended to be sold and not just an ephemeral piece of online content;
3. Although there are currently no laws or regulations that specifically or explicitly address NFTs, PRC authorities are paying attention to this industry, given its association with cryptocurrency, which is now banned in China, and the government’s many attempts to regulate and limit similar digital property, e.g. in-game items and loot in the gaming industry. In line with this focus, on April 13, 2022, the National Internet Finance Association of China, the China Banking Association, and the China Securities Regulatory Commission jointly published a proposal for preventing NFT-related financial risks, which stated, among others, that members of above associations, mostly financial institutions, should not engage in the following:

• issuing financial products in disguised form by including financial products into NFT products;
• conducting initial coin issuances in disguised form by weakening the non-fungible features of NFTs;
• providing trade venues that offer trade services for NFTs;
• using virtual currencies such as Bitcoin and Ether as pricing and settlement tools for NFT issuance;
• failing to conduct real-name verification on persons who issue, sell, or purchase NFTs; and
• directly or indirectly investing in NFTs or providing any financing support to NFTs.