08 July 2022
For the owners of brands and copyrights, the metaverse, which has suddenly become hot in the past two years, shows a new and untapped huge market. In particular, the emergence of NFTs – non-fungible tokens – has really opened the imagination space for digital assets and have built a new and unique way of carrying value.
From the perspective of economics, only a transaction can make the final allocation of resources to users who can maximize their value. In China, NFTs are called “digital collections” rather than “tokens” because the Chinese government is very firmly opposed to cryptocurrency. Therefore, an NFT is not a banknote with the same value, nor is it an equivalent of mutual replacement, but a unique product. More specifically, it is a unique digital commodity stored on the blockchain which can be bought and sold online.
In China, Article 127 of the Civil Code stipulates that “where the law has provisions on the protection of data and network virtual property, its provisions shall prevail.” But so far, there are no specific legal provisions on how to deal with virtual property, and it is becoming more and more urgent to formulate legal rules, and even judicial rules, of virtual property.
On April 20, 2022, China’s Hangzhou Internet Court handed down a first-of-its-kind judgment in a dispute over the alleged infringement of a non-fungible token published on a trading platform.
The court ordered the defendant to immediately delete the infringing NFT works published on its platform and to compensate the plaintiff for economic losses and reasonable expenses totaling Rmb4,000 (US$600). The case is the first NFT infringement case in China and has important significance for future IP compliance and protection in the NFT space.
The plaintiff in this case, Shenzhen QiCeDieChu Culture Creativity Co., found that an internet user had released a picture work as an NFT entitled Fat tiger is vaccinating on the defendant’s NFT platform, Bigverse. The NFT image was consistent with illustrated works released by a Chinese artist on his microblog and even had the author’s microblog watermark in the lower right-hand corner. However, QiCeDieChu was authorized by the author to enjoy exclusive copyright in the series of works worldwide. Therefore, it argued that use of the artwork as an NFT infringed its exclusive rights.
QiCeDieChu believed that the defendant, as the operator of a professional NFT platform, should fulfill a higher obligation of IP protection and should conduct a preliminary review on the ownership of NFT digital works published on its platform. However, the defendant had failed to fulfill the audit obligation and had charged transaction fees, which constituted infringement of the right of information network communication. Therefore, QiCeDieChu sued the defendant and asked the court to stop the infringement and compensate the loss of Rmb100,000 (US$14,900).
The defendant argued the following in response:
Bigverse was a third-party platform and the works involved were uploaded by the platform users themselves. Therefore, Bigverse should bear no responsibility.
The platform has only the obligation of post review and had already put the disputed works into an address ‘black hole’ and fulfilled the obligation of notification and deletion. Therefore, it was not necessary to ask it to stop the infringement.
The defendant did not disclose the specific blockchain and node location of the NFT corresponding to the work involved, nor the obligations of the smart contract content applicable to the NFT of the work involved, as this is not expressly stipulated by the law.
The Hangzhou Internet Court held that the responsibility of a network platform providing NFT digital works trading services (such as the platform involved in this case) should be evaluated with the particularities of the NFT digital works in mind – including the trading mode, technical characteristics, platform controls, profit-making mode, and other aspects of the NFT digital works.
As it was a trading service for NFT works, the Bigverse platform was found to have failed to fulfill its duty of examination and attention, and the defendant had subjective fault – its behavior constituting the aiding of infringement. The Hangzhou Internet Court therefore ordered the defendant to delete the infringing NFT works and compensate QiCeDieChu Rmb4,000.
From a legal practice perspective, the following three aspects of the case deserve special attention:
The Hangzhou Internet Court held that, from the aspects of transaction mode, technical characteristics, platform control ability and profit mode, NFT trading platform is a new type of network service provider. NFT trading platform can obtain direct economic benefits from the gas fee and transaction fee of NFT digital works, and the platform shall have the control ability to review and remove NFT digital works. Therefore, the digital collection trading platform should not only bear the obligation of ‘notice deletion’ after the effect but should also bear a higher duty of care in advance.
The court held that the dissemination of works through an information network is part of ‘information flow’, which does not constitute a direct dissemination of the work and lead to the transfer of ownership or possession of the works. Thus, it is not controlled by the ‘distribution right’, and there is no premise or basis for the application of rights exhaustion. Therefore, the court confirmed that the principle of ‘exhaustion of rights’ is not applicable to the transaction of NFT digital works.
The court made clear the innovative approach required for the cessation of infringement of NFT digital works. Considering that the trading of NFTs combines the technical characteristics of blockchain and smart contracts, once the transaction transfer is completed, the NFT cannot be deleted on all blockchains. Therefore, it is necessary to disconnect the infringing NFT digital works on the blockchain and for the infringing works to enter an address ‘black hole’ to stop the infringement. This measure also has a certain significance for the protection of rights in the NFT space.
Strictly speaking, judicial precedent is not the source of law in China. However, the courts’ approach to new types of cases, such as the one before the Hangzhou Internet Court, will still become an important reference for future judicial practice. The recent decision also has significance for Chinese and foreign companies looking to actively safeguard their rights in NFT space in China.
Moreover, it should also be noted that cases like the above-mentioned infringement of unauthorized NFT works are just the tip of the iceberg surrounding a series of problems of NFT piracy. Taking copyright protection as an example, whether the same work can be uploaded to several blockchains and protected or constrained by multiple different NFTs without exclusive rights, and whether the author’s own rights should be restricted or constrained to a certain extent even if there is no risk of exhaustion of rights after selling NFTs, these are all issues that need to be further considered and finally answered in the application of Chinese current laws.
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