FinTech

The liability regime of an NFT marketplace for infringing contents

An NFT marketplace risks facing a liability regime similar to Internet Service Providers and should be ready to deal with it.

It is now clear that the actual value of NFTs and unique avatars like the CryptoPunks collection is that they are status symbols, ensuring their owners’ recognizability and membership of an exclusive community, precisely like it happens with luxury and fashion.

Those who regularly follow us know that we have already been dealing with the main legal implications of NFTs and the first cases related to them in the fashion industry, so we will now take a step further and try to figure out the remedies available for rights holders and the regime of liability applicable to an NFT marketplace for infringing contents.  If you are approaching this market either as a seller or a buyer, you probably happened to question how platforms like OpenSea, Rarible, etc., guarantee that the NFTs on sale do not infringe the third’s intellectual property rights of third parties?  What can a brand do to remove the infringing contents from the platforms, and which obligations do the platforms have in this respect?  And what if, meanwhile, the NFT has already been sold?

Given the incredible amount of money involved, especially when successful brands or collections are at stake, we are assisting to the proliferation of fake NFTs tied to others’ artworks and trademarks without the right owner’s authorization as well as of fake accounts selling them, resulting in allegations of trademark and/or copyright infringement.

Since marketplaces do not provide a system to authenticate their users and verify that they have secured the proper rights before minting and/or selling the digital asset, NFTs can guarantee ownership but not authenticity because if the information entered initially is false or in error from the start; the NFTs will confirm and perpetuate that falsehood in all its future sales.  To give you the idea of the phenomenon, OpenSea recently reported that it has experienced an “exponential” increase in “misuse” of its free minting tool and that “more than 80 per cent of the items created with this tool were plagiarized works, fake collections, and spam“.

However, it is impossible to identify the seller who listed the NFT on the platform in most cases.  Especially when there are many fakes, the right holders take action directly against the platforms.  In particular, like social media platforms and an e-commerce marketplace, an NFT and crypto art platform might be qualified as hosting providers.  They might be subject to the liability regime that applies to Internet Service Providers.

Under Italian law, according to article 17 of Legislative Decree no. 70 of April 9th 2003, which implemented the E-commerce Directive 2000/31/EC, as hosting providers, a marketplace like OpenSea, Rarible, etc. does not have a general obligation to monitor the lawfulness of the content published by users on their platform.  However, upon notification by the rights holder, they have the responsibility to remove unlawful content when its infringing nature is evident.

Moreover, in its decision of October 3rd, 2019, in case C-18/18, the European Court of Justice held that an Internet Service Provider might also be required to remove contents equivalent to the content deemed unlawful.  Therefore, the platforms can be requested to remove any other NFT with the same characteristics (i.e. including the same infringing content) as the contested NFTs.

To this end, the leading marketplaces have adopted a notice and take-down system not so different from eBay or YouTube, enabling rights holders to ask for the removal of the infringing content directly through the platform by including the relevant URLs.  In most cases, the platforms seem to be collaborative, but the timing might be delayed, and such procedure does not allow the complainant to know if the NFT has already been sold, to whom and at what price.

Therefore, rights holders might also consider sending a cease and the desist letter to the platform to ask it not only to remove the infringing contents and accounts but also to disclose the information mentioned above about sales.

Should the provider not comply with such requests, under Italian law interim proceedings can be started to request a so-called “dynamic injunction“, i.e. an injunction extended not only to the NFTs available on the platform at the time when the lawsuit is filed but – upon indication of the right holder – also to the following NFTs offered for sale that presents an objective and subjective continuity with those subject to the initial injunction.

These are some steps that – based on the existing laws – rights holders might take to enforce their intellectual property rights in the metaverse.  However, some lawsuits have already been brought (mainly in the US).  The main platforms are considering additional tools and measures to police the market, so more metaverse-related remedies will probably be adopted.

On a similar topic, you may find interesting the article “Intellectual property rights in the metaverse – NFT and fashion“.

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Valentina Mazza

I am a lawyer in the Intellectual Property & Technology department of DLA Piper specializing in IP issues relating to the fashion and retail sector.

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