A recent Chinese court’s ruling on copyright infringement of NFTs could define how tokens and other digital assets are viewed by regulators in the United States and around the world. The court found that an NFT platform is liable for contributory copyright infringement with respect to a digital artwork it hosted. In addition, the ruling touched upon other related issues such as intermediary liability and the applicability of safe harbor provisions to NFT platforms. Here, we will examine the decision, review how US courts have ruled in similar cases, and analyze how the Chinese decision may influence future cases in the US.
Hangzhou Internet Court decided that NFT hosting and commercial platforms are responsible for the digital works traded there. The plaintiff, Shenzhen Qice Diechu Cultural Creativity Co., alleged that Hangzhou Yuanyuzhou Technology Co., Ltd. infringed upon its copyright to a series of “Fat Tiger” illustrations. The defendant operates an NFT marketplace and digital art trading platform called Bigverse. The plaintiff initiated the lawsuit after finding that a third party had created a digital illustration identical to its copyrighted work (down to the artist’s Weibo watermark) and sold an NFT that uses the image on Bigverse.
The plaintiff claimed that, as a specialized NFT marketplace, Bigverse assumes a heightened obligation to monitor artwork hosted on its platform. According to the plaintiff, Bigverse must protect copyright holders’ intellectual property by conducting preliminary reviews to determine whether users who create and market NFTs on the site actually hold the copyrights to the underlying artworks. Failure to do so, the plaintiff argued, constitutes contributory infringement.
The defendant sought refuge in the safe harbor rule, which intends to shield ISPs that provide passive distribution and facilitation services for copyrighted works. Bigverse argued that, as an intermediary, it should not be liable for damages incurred as a result of the sale of counterfeit artwork and that its obligation only extends as far as taking down works upon receiving a notice of infringement from a copyright holder.
The Hangzhou Internet Court ruled in favor of the plaintiff, effectively narrowing the interpretation of safe harbor. The court held that Bigverse was liable for copyright infringement as a transaction involving an NFT digital work is subject to the copyright holder’s right of information network dissemination under the People’s Republic of China’s copyright law. The court decided the nature of the plaintiff’s business in actively promoting not only the distribution but also the creation of copyrighted works carries an additional burden of care in deterring intellectual property infringement. It should have taken the proactive step to prevent the NFT from being uploaded rather than reactively taking it down when its authenticity came into question.
In ruling for the plaintive, the court ordered compensatory damages of $600 to cover the economic loss and reasonable legal expenses incurred.
Applicability to the US
The fundamental question arising from this case is whether the US courts will agree with the Chinese decision that the intermediary liability exception contained within safe harbor standards does not apply to NFT platforms. Our view is that domestic judges would reaffirm safe harbor for these platforms and not hold them contributorily liable in the event of copyright infringement. This is due to the policy and legal considerations explained below:
US Policy: Chinese Judicial Trends
There has been a strong recent trend among Chinese courts to strip e-commerce platforms of their liability protections. Responding to strong government criticisms and retaliatory actions against e-commerce companies in China, courts have taken an activist stance, not just regarding copyright but also other issues such as real-name authentication and data protection. There is no policy reason for an open society and free-enterprise system such as exists in the US to over-regulate these sites or hold them responsible for the third-party content they host.
US Jurisprudence: Safe Harbor Precedent
Internet providers, social media sites, and other online communications networks have enjoyed the safe harbor provisions outlined in the Digital Millennium Copyright Act (DMCA) for nearly 25 years. US courts likely would not exclude NFT platforms from this precedent. In fact, some NFT marketplaces claim safe harbor protections within their terms of service. There are certain situations, however, in which the courts may consider that a platform’s participation in NFT creation and sales nullifies safe harbor. For instance, an NFT marketplace may lose protection if it receives any financial benefit directly attributable to the infringing activity, takes any action in selecting the content it hosts or modifies the content after it is uploaded and before it is transmitted to the audience. As such, the system of receiving fees for sales, either from the buyers or the sellers, could cost the platforms their ability to rely on the DMCA safe harbors. This also suggests that the American courts may hold differently if a similar case comes before it.
US Legislation: The Future of NFTs
In recent times, Congress has shown some willingness to address the shortcomings of the existing DMCA procedures. In 2020, Senator Thom Tillis released a discussion draft of his Digital Copyright Act, which is likely to significantly reform the DMCA. It is expected that in 2022 Congress may return to the question of updating the DMCA takedown regime. Consequently, it is likely that any decision on the liability of NFT platforms by US courts would be codified in future iterations.
The Chinese court ruling established a landmark regarding the rights and liabilities of NFT platforms. Only time will tell how the courts in the US will rule when a similar case comes before them. Given the weight of authorities and current precedents in the US, it seems that NFT e-commerce sites may find recourse in the safe harbor rule and avoid liability for contributing to copyright infringement simply by hosting dubious art or digital works, provided they do not profit directly from their sale. Nonetheless, due to impending changes to the DMCA take-down provisions and the complexity of the issues involved, it is recommended that NFT platforms and related parties should seek up-to-date advice from an attorney or a law firm specializing in NFTs if any potential risk is identified. In particular, having well-drafted legal documents, especially with regard to DMCA take-downs, is extremely important for mitigating legal liability under the DMCA.
Gamma Law is a San Francisco-based firm supporting select clients in cutting-edge business sectors. We provide our clients with the support required to succeed in complex and dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.