NFTs and blockchain-enabled goods are not above the law

The highly publicized case involving Yuga Labs and creators Ryder Ripps and Jeremy Cahen sends an important signal that courts are willing to apply established legal doctrines to the dynamic and still maturing marketplace for blockchain-enabled collectibles.

The decision, which finds that Ripps and Cahen’s controversial NFT project infringed Yuga Labs’ trademarks, builds on the precedent set by the MetaBirkins case: namely, that use of another party’s trademark as part of an NFT is not necessarily protected by the First Amendment .

Despite the court pointing to the availability and degree of copyright protection for algorithmically generated visual assets, the case sends a strong message to creators that unless their NFT project contains significant artistic expression, unauthorized use of third-party intellectual property rights can result in liability.

The Ripps case, along with other recent NFT case law, also provides a stark warning to those looking to take advantage of the Web3 industry’s youth – existing law applies to NFTs just as it does to more traditional assets.

Background

Yuga created arguably the world’s most recognized NFT collection: Bored Ape Yacht Club (BAYC), a series of 10,000 images of monkeys with combinations of attributes of varying degrees of rarity. Yuga claimed ownership of several unregistered trademarks that they claimed to be using in connection with BAYC as of April 2021, including “BORED APE YACHT CLUB.”

In November 2021, Ripps began publicly criticizing Yuga’s use of allegedly racist, neo-Nazi and alt-right imagery and naming conventions in the BAYC NFT project. Around May 2022, the defendant created his own NFT collection, called Ryder Ripps Bored Ape Yacht Club (RR/BAYC) NFTs. Defendants claim that they created the RR/BAYC NFTs for expression purposes, including bringing attention to Yuga’s alleged use of the offending content.

Yuga sued the defendants in the Central District of California, bringing a variety of claims including trademark infringement, false designation of origin, false advertising, unfair competition and cybersquatting. Ripps asserted defenses including First Amendment, nominative trademark “fair use” and unclean hands.

On March 15, 2023, Yuga moved for partial summary judgment with respect to the unfair competition and online squatting claims, as well as several affirmative defenses. The court granted Yuga summary judgment.

The Yuga decision comes on the heels of the MetaBirkins case, in which a jury in the Southern District of New York found that the NFTs representing “MetaBirkins” – stylized digital depictions of handbags created by defendant artist Mason Rothschild, allegedly to criticize the luxury manufacturer’s use of animal materials—was not artistic expression protected under the First Amendment, and instead infringed plaintiff Hermès’ BIRKIN and HERMÈS trademarks and trade mark.

Rejection of First Amendment and Fair Use Trademark Defenses

The Yuga Court broadly rejected the defendant’s First Amendment defense in a strongly worded passage:

[T]The RR/BAYC NFTs do not express an idea or point of view, but instead simply point to the same digital digital images associated with the BAYC collection. In fact, even the defendant’s token tracker uses an exact copy of Yuga’s BAYC Marks without any expressive content. Similarly, the defendant’s NFT marketplace sales and the Ape Market website contain no artistic expression or critical commentary. … These are all commercial activities designed to sell infringing products, not expressive artistic speech protected by the First Amendment. … Defendant’s sale of RR/BAYC NFTs is no more artistic than the sale of a counterfeit handbag.

By establishing that Rogers v. Grimaldi test did not apply to the RR/BAYC NFT project, the court explained that while there is a “low bar for artistic relevance,” that bar is not “infinitely low,” and it was unclear where the BAYC marks were used as “the middle » in the RR/BAYC project, “unadorned with any artistic contribution from” the defendants as junior users.

The court also found that a disclaimer used to identify Ripps as the creator and describe the RR/BAYC NFTs as satire worked against the defendants—showing that the defendants were aware that their “use of the BAYC marks was misleading.”

This result was somewhat harsher than in the MetaBirkins case, where the Southern District of New York held that Rogers v. Grimaldi test did apply to the NFT-related works of art in question, but the jury ultimately found that the weight did not tip in favor of artistic expressions.

The court also rejected the affirmative defense of nominative “fair use,” because the defendants used BAYC’s marks to “prominently and boldly” market and sell their own NFTs by exploiting consumer confusion or appropriating the cachet of Yuga’s product rather than simply using a BAYC brand. as the only language available to describe the alternative offer. Moreover, Defendants used the BAYC Marks without modification, thereby implying that Yuga sponsored or endorsed the RR/BAYC NFTs.

Implications for the future

Trademark law and blockchain-enabled goods: The Yuga decision confirms that NFTs are “goods” under the Lanham Act, and therefore principles of trademark infringement apply to them in the same way as to other types of goods. This holding can be extended to other uses of blockchain technology, such as crypto and metaverse products (including leather and other wearables), where protected trademarks may be infringed.

Moreover, the Yuga decision provides further guidance regarding the blurred line between infringement under the Lanham Act and the freedom to protect artistic expression with respect to blockchain-enabled goods. That said, the decision does not establish a “bright line” test for NFTs or other digital goods, and the use of Rogers v. Grimaldi test in the digital goods context will continue to answer the specific facts of the alleged infringement.

It remains to be seen whether a court would reach the same conclusion as in the Yuga case if an allegedly infringing NFT reflected a greater degree of artistic expression than was evident in the RR/BAYC NFTs and the MetaBirkins NFTs.

What is clear, however, is that using someone else’s trademark as part of an NFT project can create liability implications if the artistically expressive elements of the project are considered outweighed by consumer confusion.

The Yuga decision represents a further post-MetaBirkins warning to artists that the amount and nature of artistic expression necessary to tip Rogers v. Grimaldi extent in their favor is not definitely known.

Traditional legal principles apply to NFTs: The decisions in Yuga and MetaBirkins parallel holding a new decision in a seminal NFT dispute, Free Holdings Inc. v. McCoy et al. In that case, renowned artist Kevin McCoy defended claims made in relation to the sale of his Quantum NFT through Sotheby’s for $1.47 million.

In its decision, the Southern District of New York held that traditional legal principles regarding property ownership apply to NFTs, rejecting the plaintiff’s “attempt to exploit open questions of ownership in the still-evolving NFT field to claim the merits of a legitimate artist and creates.”

Taken in combination with Yuga court’s conclusion that trademark law applies in full effect to NFTs and the MetaBirkins court’s finding of infringement, this small but growing body of precedent underscores that NFTs are subject to the legal rights and protections attached to other assets.

The Quantum, Yugaand MetaBirkins decisions provide timely and stark warnings to those seeking to take advantage of perceived gaps between technology and the law, indicating that violations of third-party intellectual property and other legal rights will not be tolerated.

The copyright elephant in the room: An interesting aspect of Yuga the issue is the copyright problem that was not addressed. With its counterclaim for a declaratory judgment of no copyright in the BAYC images, the defendants raised a unique legal question about the copyrightability of algorithmically generated images.

On March 17, 2023, the court dismissed this counterclaim, finding simply that because Yuga did not have registered any copyrights in these images, there was “no issue or controversy regarding the issue of copyright infringement between Yuga and counterclaim”, since Yuga could not assert such a claim in relation to unregistered works.

After this order, Ripps’ related “knowing misrepresentation of infringing activity” remained active. In the March 21 decision, the court addressed Ripps’ corresponding claim that the DMCA takedown notices sent by Yuga were inappropriate and sent in bad faith based on alleged trademark breach, but not copyright infringement.

After finding that only four of Yuga’s takedown notices were at issue (as only those notices resulted in the actual removal of any of the defendant’s content), the court found that only one of these notes were actually posed as one DMCA takedown notice, and that it concerned the Ape Skull logo, which itself may be the subject of both copyright and trademark protection; Therefore, Yuga had not engaged in misrepresentation by filing a DMCA takedown notice regarding defendant’s use of that logo.

The Ripps decision does not explicitly address copyright issues related to the BAYC images, nor did the Southern District of New York address the copyright in the digital images related to MetaBirkin’s NFTs at issue in that case.

There remains a lacuna of definitive precedent regarding the application of copyright law to NFTs and the visual assets with which they are often associated, including the copyright of generative and/or algorithmically generated images, as well as images created using artificial intelligence tools , and the United States Supreme Court’s decision in Warhol Foundation v. Goldsmith raises further questions about the application of the “fair use” doctrine in the context of a mixed artistic and commercial use, for example an NFT project.

This makes it extremely important for creators to exercise vigilance when creating blockchain-enabled goods that may implicate the intellectual property rights of others, and to obtain appropriate licenses when necessary.

What’s next for NFTs and the law

Recent cases indicate that courts are likely to continue to apply traditional legal principles in the NFT space, giving creators little leniency where they conclude that minimal artistic expression is evident in a contested NFT project or other blockchain-enabled goods.

These cases provide some comfort to owners of intellectual property rights, such as brands, that their rights are likely to be enforceable in the Web3 space.

They also provide timely reminders to those looking to take advantage of the newness of the Web3 space that blockchain-enabled goods are not above the law, and for creators to be especially careful in the creative process.

Dyan Finguerra-DuCharme is a partner at Pryor Cashman and co-chair of the firm’s trademark practice and fashion group. Megan Noahh is also a partner at the firm and co-chair of its art law group and non-fungible tokens (NFT) practice. Nicholas Saady is a solicitor in the firm.