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China’s Practice on NFT Digital Artworks in the Context of the Metaverse
The Fat Tiger Case
In April 2022, the Hangzhou Internet Court issued China’s first judgment in a copyright infringement case involving NFTs. The case features NFT digital artwork transaction platforms and the rights that can be asserted.
As a key pillar in the digital economic system, NFTs (Non-Fungible Tokens) and their intellectual property (IP) rights offer an example of how digital economic models can promote the development of cultural and creative industries, while protecting the rights of those who create them.
As the digital ecosystem develops and expands every day, questions abound about how the new digital assets will function, specifically in regard to the rights of NFT digital artwork and the rights upon their creation, sale, and adaptation/use in its digital form.
In April 2022, the Hangzhou Internet Court issued China’s first judgment about these rights in a copyright infringement case involving NFTs, Fat Tiger case (Case No. (2022) Zhe 01 Min Final No. 5272, Fat Tiger case (Case No. (2022) Zhe 01 Min Final No. 5272).
With no previous explicit legal rules for how such rights might be defined and protected, the judgment by the Hangzhou Intermediate Court, which was affirming a judgment previously made by the Hangzhou Internet Court, was notable in many ways.
The judgement actively explores the characteristics of NFTs and NFT digital artworks, each one highlighting the different actions that take place in the course of NFT transactions. The case features NFT digital artwork transaction platforms and the rights that can be asserted, with liability confirmation and manners of infringement cessation, which will prove to be a valuable standard when applied to similar cases.
Below are some points from the judgment that are of particular interest to IP stakeholders.
“With no previous explicit legal rules for how such rights might be defined and protected, the judgment by the Hangzhou Intermediate Court … was notable in many ways.”
- Ason Zhang | Chang Tsi & Partners (China)
Rights Involved and Addressed
First, the judgment confirmed that the trading of an NFT digital work is a transfer of property rights. It also addressed the difficulties presented by the inherently decentralized nature of blockchain technology as it functions within the centralized nature of regulatory frameworks. It defines NFT digital works as special digitalized works using blockchain technology to make a unique label.
The court further 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 the distribution right.
In other words, the transaction process for NFT digital artworks on their platform follows this path: Users (upload) or “cast,” then launch, and finally, sell and transfer. “Casting” involves the act of replication.
The launch of NFT digital artworks involves information network dissemination. Sales and transfers are not related to replication, or information network dissemination, or even publishing.
The judgment thus concludes NFT digital artworks transaction is not bound or regulated by publishing rights under copyright law.
Doctrine of Right Exhaustion is Not Applicable to NFT Digital Artworks Transactions
The reasoning of the court in this regard states that the doctrine of right exhaustion is generally applicable to the situation where the original copy or the permitted replication of the original works are resold, or given out after their first sales, or giving out with the approval of the copyright owner.
In this case, however, the NFT digital artworks are solely cast by Internet users and did not obtain the copyright owners’ prior consent. Thus, this case bears no prerequisite for the application of the exhaustion of distribution rights.
Liability for NFT Digital Artwork Transaction Platforms
The court defined the NFT digital artwork transaction platform, first of all, as an Internet service provider (ISP) because it provides Internet service for Internet users’ casting and transaction of NFT digital artworks.
Thus, the NFT digital artwork transaction platform is not a content service provider, but is, instead a new type of ISP and, when assessing its liability, the court shall consider the following factors:
The NTFs and the nature of the internet service: The transaction begins with the casting of property interests and is conducted with the assignment of such interests. It is related to a work’s replication and information network dissemination.
NFT digital artwork transaction platforms should foresee the possibility of copyright infringement arising thereof, and thus should take necessary measures to curb the same.
Infringement and a new form of ISP: In short, the court believes the operator of the NFT digital artwork transaction platform—different from traditional/general ISPs who provide services of automatic connection, transfer, information storage space, search, linkage, and documents sharing technology—is a new type of ISP.
Based on the nature of the Internet services provided by the NFT digital artwork transaction platform, which controls the function of the platform, it may have possibly caused the resulting infringement.
The profit model of the NFT digital artwork transaction platform should bear more duty of care than the general ISP regarding its users’ infringement of copyright owners’ right of information network dissemination.
The platform should establish an IP review system to ensure the non-infringement of users’ acts.
“The court defined the NFT digital artwork transaction platform, first of all, as an Internet service provider (ISP) because it provides Internet service for Internet users’ casting and transaction of NFT digital artworks.”
- Ron Tsi | Chang Tsi & Partners (China)
Cessation of Infringement
Considering the fact that deletion of pictures and blocking NFT linkages cannot achieve the effect of destruction of casted NFTs on the blockchain, the court demanded the platform take further measures to ensure the cessation of infringement. In other words, disconnecting the accused NFT digital work on the blockchain could stop the infringement, sending it into an IP address black hole, which would cut off all access to it.
This judgment is now final and in effect. Through active exploration of this case, the court forms a judicial standard to guide the dispensation for similar disputes in the field of copyright infringement. It also provides reference value for other IP rights in the context of the metaverse, especially in regard to the trademark rights, and even patent rights, protection in China.
Ason Zhang is Partner at Chang Tsi & Partners. He can be contacted at asonzhang@changtsi.com
Ron Tsi is Attorney at Law at Chang Tsi & Partners. He can be contacted at rontsi@changtsi.com
