Clearing the way by Chinese courts? – Comments on the first NFT copyright infringement decision made by the Hangzhou Internet Court in April 2022

In April 2022 the Hangzhou Internet Court issued a decision involving joint and several liability of an NFT trading platform for copyright infringement committed through the sale of an NFT by an unauthorized user on said platform.  

This decision shows an increasing “readiness” of Chinese courts to tackle difficult new issues even in an area as contentious and not yet legally fully explored as NFTs. The decision – if not appealed and reversed – may to some extent guide and influence the future development of the Chinese market in this field, as China strongly pushes the use of the Internet and digitalization, building a new ecosystem of “NFT markets”  despite many obstacles such as restrictions on the use of cryptocurrency (for some general introduction to the booming NFT market in China see for example here.  

Internet courts in China

The decision was handed down by one of the “Internet Courts”, another “legal” innovation recently introduced by Chinese authorities. Already on 9 September 2018, well before the pandemic struck, the Supreme People’s Court (“SPC”) had issued the Provisions of the SPC on Several Issues Concerning the Hearing of Cases by Internet Courts (“Provisions”). Since then, so-called Internet courts have been established in Beijing, Guangzhou and Hangzhou, which collectively heard 66,148 cases in 2021 (an increase over 2020 of 6.64%), the majority of which are copyright-related disputes. The proceedings and hearings in these courts are largely online, and are expected to remain so, even after the pandemic. It is interesting to note that, while even complicated hearings may move online, filing cases and other procedural acts in practice still often require presence in person or the submission of hardcopies, thus creating an interesting mixed procedure which must be known when planning and conducting litigation in China.

In the present case, the Hangzhou Internet Court (www.netcourt.gov.cn) was competent based on Art. 2(4) of said Provisions, which gives this court competence over  disputes regarding copyright or neighboring right of works first published on the Internet, in addition to Art. 2(5), which covers disputes arising from online infringement of copyright or neighboring rights of works published or distributed online. Appeals against the decision of the Hangzhou Internet Court are heard by the Hangzhou Intermediate People’s Court, Art. 4 Provisions. Art. 22 Provisions stipulates that the court of second instance shall also hear the case online. The rules and practice thus show a much greater readiness to move and conduct entire proceedings online compared to many other jurisdictions, including Germany.

Notable points of the decision 

(please see the full translation of the decision here)

The claims raised 

The claims originally filed by the plaintiff “Qice” tried to obtain the real name of the uploading party and specific blockchain and node location of the relevant NFT, and to take other measures to prevent further dissemination, which was dropped due to the development of the case and actions taken by the defendant “Metaverse” prior to the judgment being issued. 

It would have been of great interest whether indeed Qice could have obtained the information requested, including on the identity of the user and main infringer, had Metaverse continued to object. Data, including the disclosure of personal data, has become a thorny issue since the issuance of the Data Security Law and Personal Information Protection Law, which entered into force in September and November 2021 respectively. In case of disputes involving Chinese cyberspace and related data, Art. 36 Data Security Law may block litigation outside of China in future, if related to internet and data and such data is required. This is due to a new prior approval requirement for Chinese data controllers or data processors to provide any foreign judicial or law enforcement body with any data “stored within the territory of the PRC without the approval of competent authorities of the PRC”.

The question of ownership 

The copyright ownership and original author was not in doubt in this case, and was quickly proven, since the unique watermark of the author Ma Qianli "@不二马大叔" was displayed on the Weibo platform, which had also published the picture “Fat Tiger Vaccination”, and was still present as a unique marker in the file on the blockchain. The defendant still claimed however, that the work was only published to Weibo after having been present on the blockchain. Qice’s right as exclusive licensee to sue was thus undoubtedly confirmed by the court.. 

The technical and legal understanding of “NFT digital work” by the court

The court used quite a brief technical introduction to NFTs as a basis and introduction to its decision. Some explanations were less extensive than Western observers would expect, and probably may be disputed from the technical assumptions presented (such as that the blockchain will record the encrypted wallet address corresponding to the uploader of the work, which actually may or may not be the case depending on the type of blockchain and token used). The court therefore employed a new practice, which may also provide guidance to other courts on how to deal with such cases in future. 

In its description of the process of transaction of sale of NFT digital works the court further explained: “If it is a single work, then there is only one digital work for sale, if it is multiple, then you need to set the specific number of copies you want to sell. These number of copies are all the same digital work, without distinction between originals and copies, and can also be sold as a folder for multiple NFT digital works under the account.” This assumption appears to have guided the court in its understanding that a key point of the judgment, namely the uploading and sale of the NFT, was held to be an infringement of the network transmission right, rather than the right of distribution under the Copyright Law.

Key legal issues according to the decision

The decision on copyright infringement relied on the court’s understanding of the existence of an “NFT digital work” to open the case to the application of copyright law, despite the question if buying an NFT could actually also be qualified as simply buying the metadata associated with the work, not the work itself. While the court pointed out that the “NFT does not store the digital work file, but only records the data characteristics of the digital work file, the NFT does not contain the picture itself and cannot be ‘viewed’, but is only an abstract information record.” It also stated: “Works in the field of literature and art traded through the NFT are called ‘NFT digital work’, providing ‘NFT digital works’ trading platforms are called ‘NFT digital works trading service platform’". The court thus concluded on this basis that the “act of publishing NFT works is equivalent to placing the works on the Internet”.

The court identified the question whether “the ‘Fat Tiger Vaccination’ picture claimed by Qice constitutes a work or art” (which was quickly confirmed) as a key issue, but it somewhat skipped a deeper discussion on what legal nature should be attributed to an NFT itself in relation to Copyright Law. The court stated its understanding of it being a “work and commodity at the same time”, and stated that an NFT transaction is the transfer of ownership of a “digital commodity” protected under the newly enacted Chinese Civil Code, but did not explain what precisely is sold in a “NFT” sale transaction. The Chinese court subsequently held that the entirety of the sale via the platform constituted a sale of an “NFT digital work” and could therefore result in a copyright infringement. 

With reference to Art. 10(6) Copyright Law, the court reasoned that the transfer as part of a sale transaction should require the transfer of ownership of an original or copy of the work “in tangible form”, which the court then rejected to exclude infringement of the right of distribution. Through this approach the Court further rejected the defense of first sale and exhaustion of right raised by the defendant Metaverse. The decision argued that “according to the relevant provisions of the Copyright Law, when the original or copy of the work is transferred as an object, the ownership is transferred, but the copyright of the work is not transferred. Under the NFT trading model, the act of the minter (seller) of NFT digital works copying and uploading the NFT digital works to the platform for trading falls under the control of the reproduction right (sic!) and the information network transmission right in the Copyright Law respectively. Therefore, the minters of NFT digital works (the seller) should not only be the owner of the copy of the work, but also the copyright owner or licensor of the digital work, otherwise it will infringe the copyright of others.”

The judgment finally held that although “there is an act of uploading the work in the process of minting NFT digital works, which makes the digital works stored in the terminal device of the maker be copied to the network server simultaneously, the copying is a step of network transmission, and its purpose is to provide the work to the public by means of the Internet”, and this should be deemed an infringement of the plaintiff’s right of information network transmission.

Platform liability

For the court the posed question was whether the trading platform Metaverse could be held liable as co-infringer, or for contributory infringement, including in regards to the conditions of use in its Platform User Service Agreement which stated, that it would not verify the copyright ownership or authorization. The Hangzhou Internet Court assumed a broader obligation which could not to be abrogated by the general terms and conditions for use of the platform services, citing inter alia the special commission applicable to sales on the platform, which let the platform participate not only in the first, but also subsequent sales of the NFT, changing its role to an active participant in the transactions rather than a “normal” internet service provider. 

According to the judgment, a platform, as a service platform for trading NFT digital works, is or should be aware of potential copyright infringements, and should take reasonable measures to prevent infringements by examining the legality and authenticity of the source of the NFT digital works and confirming that the NFT minter has the appropriate rights or license to engage in this act.

The court then arrived at a joint infringement by referencing the control of the NFT sales platform, the business model of continuous profit taking, and the technical functioning of smart contracts, which in the view of the court would, “if there are defects in the rights of NFT digital works”, not only lead to the destruction of the trust mechanism already established by the transaction subjects and the NFT trading platform, but also seriously damage the certainty of the transaction order as well as the legitimate rights and interests of the transaction counterparties and the copyright owners. At the same time, because the whole transaction is automatically executed by code through smart contract, the number of transactions will not be controlled manually, and the transaction of NFT digital works belongs to the act of information network communication, and the principle of exhaustion of rights does not apply. Therefore, once the NFT digital works constitute infringement, it will often damage the legitimate interests of several or even dozens of counterparties in the transaction.”

In summary, the court focused strongly on the obviousness of abuse of a work not owned by the user uploading the work and minting the related NFT, and assumed a higher duty of care for the platform provider based on its commercial participation in the sale, but also technical execution and – in this case – lack of tangible efforts to clarify copyright ownership of the “Fat Tiger Vaccination” picture, which had carried a clear indication of the actual owner of the related picture, but was not further clarified by the platform. 

Right result, but disputable reasoning?

The judgment raises many difficult legal questions, but did not answer all of them in as much detail as users and rights owners would hope. The technical assumptions and legal reasoning in relation to the existence of a digital work and infringement of copyright certainly may be subject to debate (such as to whether indeed there is no exhaustion of rights, and if so, whether it is sufficient to point out that it would be “unfair” to copyright owners). It is clear however, that platforms which participate in sales will carry a higher burden of proof to verify ownership or authorization, while the court did give some leniency by not demanding full certainty of proof to be provided by the parties. 

The decision follows the trend of Chinese courts to strengthen the liability of E-Commerce platforms in general, which have seen strong criticism and adverse actions by governmental authorities in recent years, also on other issues such as real name authentication and data protection. Given the attitude of this recent court decision, copyright owners may actively consider whether actions in China on alleged copyright infringement for NFT creation or sale can be a preferable choice over other jurisdictions, especially in cases involving commercial business models by the transaction platforms.