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Bored Apes, Hermès Suits Foreshadow What Is Coming in NFT Claims

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by Jana Farmer, John Cahill and Eian Weiner on January 31, 2023

image-3-440x294In June 2022, Yuga Labs Inc., the parent company of the Bored Ape Yacht Club non-fungible token collection, filed a federal lawsuit against artist Ryder Ripps, one of most vocal critics of the BAYC NFT project.

Ripps created his own NFT project around May 2022, which he called RR/BAYC, using online digital images from the BAYC NFT collection by generating new NFTs using URLs embedded in Bored Ape Yacht Club smart contracts.

Yuga claims that Ripps and co-founder Jeremy Cahen used some of the same digital art images as the BAYC collection, and relied on Yuga’s trademarks for promotion in an alleged scheme to mislead consumers, harass Yuga and enrich themselves.

Yuga’s complaint asserted causes of action sounding in false designation of origin, false advertising, cybersquatting, trademark infringement, unfair competition, unjust enrichment, conversion and tortious interference against RR/BAYC founders. Notably, the complaint doesn’t mention copyright infringement.

Ensuing Litigation
Whether Ripps’ copycat project transpired as alleged or is an example of protectable artistic expression, this lawsuit has plenty of precedent-setting potential and is worth following.

A notable development came from the court’s decision on the defendants’ motion to dismiss Yuga’s suit, where they argued that RR/BAYC was protected free speech under the test of Rogers v. Grimaldi, as well as that the project is entitled to nominative fair use protection.

In deciding the motion to dismiss, the U.S. District Court for Central District of California held that the defendants failed to meet the threshold showing under Rogers because the Ninth Circuit requires the “artistic expression” be at issue and the allegedly infringing use must be part of the expressive work.

The defendants argued that they meet the artistic relevance element under Rogers because their activity, taken together – website, NFTs offered for sale, social commentary the NFTs entail – should be viewed as an expressive artistic work.

The court disagreed, observing that the defendants’ NFT sale was the only conduct at issue and that the conduct did not constitute an expressive artistic work meriting First Amendment protection.

In fact, the court found that RR/BAYC does not express an idea or point of view and only uses an exact copy of Yuga’s BAYC marks without any expressive content.

The court described the defendants’ conduct as commercial activities designed to sell infringing products, rather than expressive artistic speech protected by the First Amendment.

The California federal court’s decision in Yuga Labs contrasts with the Southern District of New York’s opinion in the Hermes v. Rothschild matter, where the New York court declined to resolve on a motion to dismiss whether the “MetaBirkin” NFTs satisfied the low artistic relevance prong of the Rogers test.

The SDNY court did hold that that sufficiently alleged that Rothschild’s use of the name “MetaBirkin” was explicitly misleading to the public and thus still actionable under the Lanham Act. In Yuga Labs, the defendants could not get past the low artistic relevance threshold under Rogers.

The Yuga Labs court also noted that the Rogers test also would have failed because the RR/BAYC marks are sufficiently misleading, and Yuga has alleged sufficient facts to withstand a motion to dismiss.

The Yuga Labs and Hermes decisions are important because many creators are often quick to duplicate successful projects without considering the potential legal ramifications.

In light of decisions in Rothschild, and now Yuga Labs, NFT copycats are on notice that their First Amendment defenses may not succeed at the motion to dismiss stage and that they cannot easily escape litigation at an early stage.

The holding in Yuga Labs may act to dissuade copycats from stealing intellectual property for use in other NFTs for monetary gain.

The Yuga Labs court also held that the defendants were not entitled to the nominative fair use defense, which is available where the defendant uses a trademark to describe the plaintiff’s product rather than its own. In Yuga Labs, the defendants used Yuga’s trademarks to sell their own competing NFT collection.

An NFT copycat therefore may have difficulty being protected by the nominative fair use doctrine unless they are selling the works on behalf of or in conjunction with the original project – i.e., the trademark owners – rarely ever the case in the NFT space.

The litigants in Yuga Labs appear determined to litigate this matter to its fullest extent, as the recent volley of motions and the defendants’ recent appeal to the Ninth Circuit suggest.

In the continuing absence of NFT regulation, the legal landscape for the greater NFT marketplace will continue to be shaped by judicial precedent and regulatory decisions.

Yuga Labs is poised to remain one of the key cases to watch. And although the holdings from this and similar lawsuits will not eliminate bad actors, the risk of costly litigation may dissuade enough of them, perhaps helping NFT projects gain further legitimacy in the eyes of consumers.

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