9 January 2023
January 2023/1 – 1 of 4 Insights
Yuga Labs Inc. once again makes headlines with a new legal dispute. The developer of the popular Bored Ape Yacht Club (BAYC) non-fungible token (NFT) collection is facing a class action lawsuit in California, because it allegedly used several celebrities to promote its NFTs in a misleading way.
If you are new to this space, you may enjoy reading our related article on Yuga Labs’ lawsuit against Ryder Ripps here.
The story of the popular BAYC apes began in April 2021, when Yuga Labs launched BAYC as its flagship NFT collection on Twitter with the first roadmap. Shortly thereafter, the NFTs were offered online for $200, which was very cheap compared to the extraordinary prices (up to $2,85 million) charged later, and sold out quickly until May 2021.
In October 2021, a Hollywood talent agent became manager of BAYC. At the same time, Yuga Labs started a cooperation with a new payment service for NFTs and cryptocurrency to ease transactions regarding the purchase of NFTs. Many of the manager’s clients, who were celebrities like actors and musicians, became early investors of this payment service. Meanwhile, more and more of them also became owners of Yuga Labs’ NFTs in connection with using this payment service, so that they obtained access to an individual BAYC ape created by artificial intelligence (AI). To show people around the world that they were part of BAYC and now have their own individual BAYC ape, such celebrities started posting content related thereto within social media. One of them even made a music video that seemed to contain an illustration of the purchase of the NFT. Others were talking about the BAYC apes in TV shows or used their individual BAYC ape as a profile picture on music streaming platforms. As a result, BAYC seemed to be a very exclusive club with a unique value, which made the NFTs really attractive for other “normal” investors.
The main complaint of the claim filed at the Central District Court of California on 08 December 2022 is misleading respectively surreptitious advertising. In this context, the plaintiffs argue that the apes as digital collectibles were misleadingly promoted by using celebrities to bait investors. The payment service was somewhat used as a front operation to provide celebrities with payments or other forms of consideration for their promotion without disclosing this aspect to investors. In particular, there were several cases where such celebrities received their NFTs from the payment service for free or received payments in cryptocurrency. For this reason, the plaintiffs conclude that the promotion was unlawful, because the nature, source and amount of any consideration received by the celebrities, directly or indirectly, was not disclosed.
In addition, the plaintiffs argue that Yuga Labs created the impression of an exclusive club, consisting of famous people like musicians, actors, athletes and reality stars etc., to increase the interest and value of its NFTs. This created a large bubble that normal people desired to be part of and therefor paid considerable money to join.
So far, Yuga Labs has only reacted to the allegations with a short statement basically expressing that the lawsuit was deemed opportunistic and parasitic. The company would strongly believe that the lawsuit is without merit and that it would look forward to proving as much.
In Germany, essentially comparable lawsuits regarding influencer marketing mainly initiated by consumer protection watchdogs have taken place over the last years. The initial factor was a shift in the advertising industry, in which there is a clear trend away from classic mass advertising in newspapers, radio and TV towards influencer marketing that is much more target group oriented. The advantage of influencer marketing is basically that companies are able to select their desired target groups more precisely. In this context, companies engage people with a large reach to specific target groups in social media to promote the respective company’s products and brands. Often the impression of non-commercial posts was created in order to benefit from the influencers’ authenticity and their standing as experts or role models within their community. The legal framework of influencer marketing was one of Germany’s hot and omnipresent topics in recent years, which led to boundless deviating case law and created a considerable degree of legal uncertainty. In particular, this concerned the question whether and how posts by influencers in social media require to be marked as advertising to make their commercial character (where applicable) clearly recognizable to their audience.
Even though some areas remain unresolved to date, differences in opinion came to end to a substantial extent after the German Federal Court of Justice (BGH) issued three principle judgments in September 2021 and the German legislator introduced a law amendment of the German Unfair Competition Act (UWG) addressing issues in conjunction with influencer marketing, which came into force in May 2022. One of the key messages therein is that the requirements of marking posts as advertising depends on whether the influencer has received any kind of countervailing benefit from the company for the post. This is to be understood broadly and includes not only payments, but also other benefits of monetary value, such as covering the influencer’s organisational costs or the free provision of products and services.
In Yuga Labs’ case it is not yet clear if the celebrities’ actions were, in fact, subject to the receipt of any countervailing benefit. Under German law, this would be a key question that needs to be determined for each post in question. Assuming, solely for the sake of argument, that this is generally the case for all posts related to the case of Yuga Labs, such posts would qualify as commercial communication respectively advertising, which is subject to the following transparency rules:
In general, the posts need to be clearly recognizable as advertising. This serves the purpose to clearly demarcate commercial from non-commercial content, to put the motivation of the influencer behind the respective post (in particular, the receipt of a consideration) into perspective and to allow the audience a sceptical perception of the message brought forward. To the extent that the commercial character of the post does not emerge directly from the circumstances, such post needs to be clearly marked as advertising. In Germany, common practice does this with the emphasized term “advertisement”.
Further, the company which is responsible for the advertising needs to be clearly recognizable. In this context, it is required to make information about such company easily accessible (e.g. through a link to the company details).
It will be exciting to see how the Central District Court of California decides this matter under U.S. law and if there are any similarities to German case law. Presumably, it will play a role whether or not the celebrities did, in fact, receive a countervailing benefit for their promotion of BAYC’s NFTs.
In any case, the class action lawsuit brings additional unpleasant press for Yuga Labs and its NFT collection. It remains to be seen if this will have any negative implications or effects on the value of the NFTs and the popularity of the BAYC apes.
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