INDIA

JAPAN

TAIWAN

INDIA

Non-fungible tokens (NFTs) have attracted a lot of hype globally in the past few years. Their popularity and valuation are growing exponentially in India too, so are the legal challenges associated with them. In this article, the authors throw light on some of these challenges.

Manisha Singh LexOrbis
Manisha Singh
Founder Partner
LexOrbis, New Delhi
Tel: +91 98 1116 1518
Email: manisha@lexorbis.com

Starting with the basics, NFTs are blockchain-based tokens with a unique ID linked to an underlying asset, which cannot be replicated or tampered with. Most of the works that are traded as NFTs are photographs, artworks, video clips and such.

Widespread infringement of the copyright in such works is taking place in the NFT space at two levels – by the NFT creator or seller who indulges in unauthorised minting or publication, and by the buyer who undertakes unauthorised reproduction and distribution of NFTs.

A fair idea of the magnitude of this problem can be gleaned from a statement released earlier this year by the largest NFT marketplace, OpenSea, over pulling back a free listing tool on its platform because “more than 80% of the items created with this tool were plagiarised works, fake collections and spam”.

However, the feature was rolled back because the NFT creators or platform users were not quite happy about this change. Hence, counterfeit NFT collections continue to flood the market.

OUTSIDE EXISTING LAW

Even though this is a new form of infringement, India’s existing copyright law does give enough coverage. Under section 14 of the Indian Copyright Act (1956), the copyright owner of an original work owns a bundle of rights, including the right to make reproductions and adaptations.

The minting or publishing of a copyrighted work through an NFT and making it open to purchase involves making a copy of the work and communicating it to the buyer or potential buyers. Without a licence or authorisation of the copyright owner, this amounts to unauthorised reproduction and distribution, and hence copyright infringement under section 51 of the Copyright Act.

When it comes to infringement by NFT buyers, it wouldn’t be wrong to say that many cases are instances of innocent infringement. People generally work on the understanding that once an NFT is purchased, they own the underlying asset or IP as well, which is not true.

On the purchase of the NFT, the buyer does not automatically acquire the rights in the underlying IP unless the same is assigned by way of a written agreement. When NFT buyers start reproducing the underlying video clip or artwork, make copies and put it to use commercially, they fail to understand they are acquiring only a metadata file that is a signed copy or receipt of the work , not the IP.

COURT RULINGS AWAITED

Simtrat Kaur, LexOrbis
Simtrat Kaur
Associate Partner
LexOrbis in New Delhi
Email: simrat@lexorbis.com

Owing to the peculiar nature of infringements taking place in this area, it is important to see how courts look at the issue and apply existing laws to this new phenomenon.

No NFT-related copyright or trademark infringement issue has yet been decided by courts in India, however cases filed in other jurisdictions can be a good source of guiding vision. The first that comes to mind is the Hermès dispute in the US. Earlier this year, French luxury design house Hermès sued a Los Angeles-based artist, Mason Rothschild, alleging he created NFTs called “metabirkins” very similar to Hermès’ iconic “Birkin” bag. Hermès complained this was the same as counterfeiting in the offline world, and the artist earned thousands of US dollars selling the NFT, just like he would have earned by selling a counterfeit physical bag.

The court’s decision is awaited, and once handed down will likely have major implications on how the world looks at infringement in the metaverse.

There has also been a landmark development in Asia, with a Chinese court for the first time delivering judgment on an NFT-related copyright infringement lawsuit. Shenzhen Qice Diechu Cultural Creativity, the copyright owner of the “fat tiger” illustration series, sued Hangzhou Yuanyuzhou Technology, operators of an NFT digital art trading marketplace called Bigverse, alleging a user on their platform created and sold an NFT of digital work identical to the copyrighted work in question.

The plaintiff alleged the NFT platform was guilty of contributory copyright infringement. The court held in the plaintiff’s favour ordering the platform to render the NFT inaccessible or non-transferrable, as well as pay damages.

In India too, there is a provision of liability for contributory infringement under copyright law. But section 79 of the Information Technology Act (2000) exempts intermediaries from all liability for the acts of users. NFT platforms are also likely to successfully claim the status of intermediary and hence a safe harbour.

In digital NFT marketplaces, traders can buy and sell NFT tokens through the usage of cryptocurrencies. They are, therefore, online platforms that act as conduits between buyers and sellers of NFT assets.

DUE DILIGENCE

But to take protection under section 79, the intermediaries are required to release some due diligence burden. They need to take reasonable care and take prompt action if they gain knowledge that their platform is being exploited to facilitate illicit activity.

If they don’t implement or follow the measures listed under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules (2021), they can become liable for the act of a user as a contributor or facilitator.

E-commerce platforms like Amazon and Flipkart, and entertainment platforms like YouTube, all apply such measures, so should the NFT platforms. Due to their blockchain nature, NFT platforms might face some unique problems. But their core responsibilities and liability in cases of due diligence deficits should be the same.

It is pertinent to note that, unlike an online platform that simply hosts content, NFT platforms offer the technology for creating an NFT and they automatically draft smart contracts for sales. Therefore, their role with respect to the content is not passive. Like e-commerce platforms, it is crucial to hold them liable if they don’t delist infringing collections when aware of them.

Well-established digital platforms have account verification systems and offer some sort of automated system to identify, remove and prevent “copymints” (copying of authentic NFT content). OpenSea, for example, provides such a system. Its website states: “Our new copymint prevention system leverages computer vision tech to scan all NFTs on OpenSea (including new mints). The system then matches these scans against a set of authentic collections, starting with some of the most copyminted collections – we’ll look for flips, rotations and other permutations. We’ll expand this set over the coming months and constantly train our models to improve detection.”

The platform further mentions: “Our user safety team actively monitors the platform and removes fraudulent content as soon as it is discovered or reported by users.”

All NFT platforms should be made to take such measures to stand compliant with the due diligence provisions of Intermediary Rules, or they should be made liable for contributory infringement.

TRADEMARK PROTECTION?

Particularly with respect to trademarks, another question comes to mind on whether registrations in class 9 of the Nice classification should be a prerequisite to protect trademarks in the NFT space.

For instance, if a footwear brand has registration in class 25 for its brand, can it file an infringement suit against an NFT minter who mints images of the same-looking footwear carrying the same brand? If not, does it mean that all businesses or brands are expected to procure registration for their brands in class 9 if they wish to protect their brand in the metaverse?

Assuming they obtain registrations for their brands in class 9, how would they maintain them after five years, if they fail to show actual use of the brands for virtual goods in the metaverse? Ideally, registrations should not be considered compulsory in class 9, and the cross-class relevance factor should come into play here. However, it remains to be seen how courts look at this.

If any copyrighted content is being licensed to a licensee by the copyright owner for any sort of digital usage, it’s important to expressly cover in the contract if such licence includes the right to NFT minting or not, so that the licensees don’t misuse the vague or broad language or clauses of the agreement.

ACCOUNTABILITY IS THE KEY

The above-mentioned examples raise just a handful of current issues or questions, with many new problems likely to emerge as NFTs gain more popularity.

Although making people aware of the acts that amount to infringement may help a great deal, at least to minimise innocent infringements. It seems making the NFT platforms accountable along the lines of other intermediaries like YouTube and Amazon would finally provide for some real solution to NFT counterfeits because tracing individual infringers and going after each of them would be practically impossible for copyright owners.

LexOrbis

LexOrbis
709-710 Tolstoy House
15-17 Tolstoy Road
New Delhi – 110001, India
Tel:+91 11 2371 6565
Email: mail@lexorbis.com

www.lexorbis.com

JAPAN

Japan’s non-fungible tokens (NFTs) market emerged in early 2021 with many companies since entering the business, which continues to grow and expand. With a wealth of internationally competitive IP such as animation, manga and games, NFT-related business in these fields has become very active. In addition, many companies have also started NFT-related businesses in the sports industry.

Masakazu Iwakura, TMI Associates
Masakazu Iwakura
Senior Partner
TMI Associates

On the other hand, some existing laws and regulations have been a hindrance to starting new NFT-related businesses. The authors described the updated status of NFTs under Japanese law in the article titled “A comparison of regulations surrounding NFTs”, published in the September/October 2021 issue of Asia Business Law Journal.

Since then, no new laws or regulations relating to NFTs have been enacted, nor have any guidelines been issued by the Japanese government. But a number of project teams have been set up by parliamentarians and relevant industry associations to examine existing and possible problems with the current laws and regulations, organise legal interpretations and lobby the government on the need to amend the laws.

This article introduces two important legal issues that are real problems for NFT-related business in Japan, providing guidance on how to resolve them, as well as the current state of the debate.

GAMBLING-RELATED OFFENCES

The Japanese Penal Code prohibits any act of gambling (i.e., the contesting of gaining or losing property by winning or losing by chance) that could result in criminal penalties for those who engage (Penal Code, article 185).

The method of selling NFTs at random is one of the related businesses gaining popularity worldwide. For example, when selling digital trading card NFTs, businesses usually create a package and randomly combine multiple NFTs into its package, with contents revealed after purchasing them.

Atsushi Igarashi, TMI Associates
Atsushi Igarashi
Partner
TMI Associates

But there is debate as to whether or not the formation of a secondary distribution market by an operator in the random sale of such NFTs may constitute a prohibited gambling offence.

The reason is that if the NFT purchased as a package on the primary distribution market is traded on the secondary distribution market at a lower price. The purchaser is considered to have obtained the NFT worth less than the price actually paid on the primary distribution market, and the purchaser is perceived to be losing property for the difference. This concern has deterred many businesses from launching random NFT sales with a secondary market.

Regarding this issue, many legal experts strongly suggest that since the price formation carried out by users in the secondary distribution market is based on circumstances separate from the sales price formation carried out by sellers in the primary distribution market, the market price in the secondary distribution market should not be taken into account when calculating the value of NFTs obtained by users in the primary distribution market.

Therefore, the establishment of a secondary distribution market when selling NFTs through a random method should be assessed as not constituting a gambling offence. Given the situation, on 12 October 2022, the Japan Contents Blockchain Initiative, an industry association with a large number of content-related companies as members, jointly with other blockchain-related industry associations, published industry guidelines on the random sale of NFTs.

The guidelines state that as long as the seller does not set the purchase price or other resale price on the secondary distribution market – and does not purchase or resell the NFTs on its own – there should be no problem with the seller operating and managing the secondary distribution market on its own, and it does not constitute a gambling offence.

The guidelines also state that in cases where individual sales are conducted in addition to random sales in the primary distribution market, the selling price of random sales must not exceed the lowest selling price set at the time of individual sales for the NFTs that appear. As the content of these guidelines is only the industry association opinion, careful consideration is required when actually operating such business, and an official opinion on this issue from the regulator is awaited.

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