CHINA: First NFT Infringement Case Could Have Trademark Parallel

On April 22, 2022, the Hangzhou Internet Court issued China’s first judgment in a copyright infringement case involving non-fungible tokens (NFTs) (No. (2022) Zhe 0192 MinChu 1008 Hao). The judgment is groundbreaking because it discusses a broad range of issues in relation to NFTs, such as how NFTs work and the obligations of NFT platforms.

The defendant, Hangzhou Yuantuzhou Technology Company, runs an NFT platform on which a user minted and published a work of art without the authorization of the copyright owner. The plaintiff in this case, Shenzhen Qice Diechu Cultural Creation Co., Ltd. (Qice), filed a civil action for copyright infringement against the defendant at the Hangzhou Internet Court. The court held that the defendant failed to fulfill its obligation as an Internet service provider and was therefore contributarily liable for copyright infringement. The court ordered the defendant to stop the infringement and pay Qice approximately US $600 in compensation.

The judgment discusses several issues as follows:

1. Rights Involved

The court confirmed in its decision that the trading of an NFT digital work is a transfer of property rights in the NFT digital work and not a transfer or license of intellectual property (IP) rights in the underlying artwork, unless the user agreement provides otherwise.

2. Copyright Infringed

The court held that the unauthorized sale of NFT digital works infringed the copyright owner’s right to information network dissemination, but not the reproduction right or distribution right.

3. Exhaustion of Distribution Rights

The court held that the doctrine of exhaustion of distribution rights (i.e., the first sale doctrine) does not apply to the trading of NFT digital works.

4. Duty of Care

The court held that NFT platforms have a higher duty of care and suggested that NFT platforms should establish an IP rights review mechanism and take reasonable efforts to verify the copyright ownership of each underlying artwork.

5. Stopping Infringement

Although NFT digital works are generally immutable, the court ruled that disconnecting the accused NFT digital work on the blockchain could stop the infringement, sending it into an IP address black hole, so that nobody could gain access to it.

Implications

 Although this case involves copyright infringement, Chinese courts are likely to adopt a similar approach where trademark infringement is involved in the sale of NFT digital works. For example, NFT platforms are likely to be held contributorily liable for trademark infringement if they fail to examine the relevant trademark registration certificates or trademark license agreements before publishing NFT digital works.

Although every effort has been made to verify the accuracy of this article, readers are urged to check independently on matters of specific concern or interest. Law & Practice updates are published without comment from INTA except where it has taken an official position.

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