New model, new rules – no "Safe Harbour" in China for NFT platforms?

In this blog we look at a very recent court decision in the first NFT infringement case in China, which is likely to have implications for Chinese and foreign businesses looking to safeguard their rights in the emerging NFT space in China.

On 20 April 2022, the Hangzhou Internet Court held an online public hearing in the dispute between Shenzhen Qicediechu Culture and Creative Co., Ltd. ("the Plaintiff") and Hangzhou Yuanzhou Technology Co., Ltd, an NFT ("Non Fungible Token") platform trading as "Bigverse" at www.nftcn.com.cn ("the NFT platform"), over the right to disseminate information over a network regarding a comic work called "Fat Tiger Vaccination".
 
The court delivered its judgment on the same day, finding the NFT platform liable for its failure to fulfil its duty of care to verify the copyright owner of the work when approving the NFT. It ordered the NFT platform to immediately delete the NFT work and compensate the Plaintiff for losses.
 
Background
 
The Plaintiff is the exclusive copyright owner of the cartoon series "I am not a fat tiger" ("Fat Tiger") created by the cartoonist Ma Qianli.  Ma Qianli posted the work "Fat Tiger Vaccination" on its Weibo account named "Uncle Bu Er Ma" in December 2021. When it was published on weibo.com, Weibo's watermark was automatically applied to the image.
 
In March 2022, the Plaintiff found that on the NFT platform "Bigverse" (www.nftcn.com.cn) , an NFT work called "Fat Tiger Vaccination" was available for sale at the price of RMB 899. This NFT work was exactly the same as the one posted by Ma Qianli on weibo.com, even including Weibo's watermark and listing Uncle Bu Er Ma as the creator of the NFT work.
 
The Plaintiff sued the NFT platform for infringing its right to disseminate information over a network in relation to the cartoon work.
 
The NFT platform’s arguments
 
The NFT platform argued that it was a third-party platform; the NFT minter had uploaded the work involved. The NFT platform had already put the work involved in the address “black hole” (functionally equivalent to deletion); therefore, the NFT platform had fulfilled its obligation of notification-deletion and should not be liable for the infringement.
 
Court’s decision
 
The court did no’ agree with the NFT platform’s arguments. They considered several factors and held that the NFT platform should take a high duty of care in such cases. These factors were that:  

• The NFT was not only a digital product but also a copyright work. Therefore, the minter should not only be the owner of the digital file, but should also have permission to mint the work from the copyright owner. The NFT platform knew and should have known that it must take necessary steps to avoid copyright infringement.
• Scarcity and transferability are a NFT’s greatest attractions. Once it is approved to be available on the blockchain, the transaction could be made directly through a smart contract between the users without any security concerns. If the NFT work is involved in an infringement issue, it may damage many users’ interests and also damage the trust in the NFT business model.
• The NFT platform has the capacity to review whether the minter has the requisite permission before approval, and such a review will not increase its burden.
• Finally, the NFT platform will directly benefit from each minting NFT and its transactions.

Based on the above, the court ruled that the NFT platform should have noted that the minter and author were not the same entity, but it did not request any explanation or proof. The NFT platform had failed to exercise its duty of care properly and consequently should be liable for the infringement.  
 
Comments
 
The court has given a detailed analysis of the feature and characteristics of an NFT and its transactions, from which it took an innovative approach to conclude that the NFT platform should have undertaken a higher duty of care in granting the NFT minting. The question is to what extent the NFT platform should exercise its duty of care.
 
The court set out the methods that the NFT platform may take to verify the ownership of the copyright, i.e., scripts, original works, certificates of registration, legal publications, or certificates issued by certification organisations, etc. However, the court also commented in the reasoning part of its judgment that the NFT platform only searched with the National Work Information Registration and Publicity System, without conducting any other online or offline searches; such a method is obviously limited according to the court. Based on this comment, the court appears to consider that an NFT platform should request proof from the minter and also conduct its own searches to verify the ownership of the NFT work. If searching with the National Work Information Registration and Publicity System is not enough, what else would be deemed sufficient to undertake its duty of care?
 
Looking at other network platforms that directly benefit financially from online transactions, such as Taobao.com: for individual sellers, they charge 0.6% of the transaction fee if the payment was made through its affiliated payment system (majority mothed). Taobao does not request their user to provide legal documents regarding trade mark ownership before selling such goods online unless they are to open a flagship shop. If the trade mark owner files a complaint about counterfeits, Taobao may even request prima facie evidence proving the infringement, before taking down the link of the infringing goods. Even if there is an infringement, normally, the court will not hold the platform liable for the infringement unless the platform was at fault. This approach is derived from the "Safe Harbour" rule and has become more platform-friendly in IP enforcement actions. Will the same IP review and resolution scheme suit the NFT business?
 
The NFT platform, in this case, is currently charging 10% of the transaction fee as its administration fee for the first purchase and 5% for each additional purchase. In addition to that, the NFT platform will also charge a fixed "gas" fee (minting fee) when the NFT is encoded in a blockchain. Will the significant increase in the administration fee change the platform's position in the IP infringement cases? We assume the answer is in the affirmative, but we are yet to know the clear border.