NFT Litigation Round-Up | Ingram Yuzek Gainen Carroll & Bertolotti, LLP

Friel v. Dapper Labs, Inc. et al, 1:21-cv-05837 (S.D.N.Y.)

Lead plaintiff Gary Leuis, and named plaintiff John Austin, individually and on behalf of all others similarly situated, brought this class action lawsuit against defendants Dapper Labs and its CEO, Roham Gharegozlou, for operating an application called NBA Top Shot that allegedly promoted, offered, and sold securities known as NBA Top Shot Moments (“Moments”), throughout the United States, in violation of federal securities laws.

First announced in July 2019 as a joint venture between Dapper Labs, the NBA and the NBA Players Association, NBA Top Shot is a platform built on Dapper Labs’ Flow blockchain that allows investors to purchase Moments. Moments are NFTs of basketball cards that depict video clips of highlights from NBA games. Plaintiffs allege that since June 15, 2020, Defendants sold the Moments NFTs as unregistered securities in violation of federal law.

Under Section 2(a)(1) of the Securities Act of 1933, the definition of a “security” includes an “investment contract.” The determination of whether a particular offering qualifies as an investment contract – and, in turn, a security – is governed by the three-prong test set forth in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Under Howey, an offering is an investment contract where there is (i) an investment of money; (ii) in a common enterprise; (iii) with the expectation of profits to be derived solely from the efforts of others. Plaintiffs argue that Moments are securities due to the way Dapper Labs structures and sells Moments to investors and further allege that purchasers of Moments are entirely reliant on the managerial efforts of Dapper Labs for their potential profits.

On August 31, 2022, the Defendants moved to dismiss the lawsuit, arguing that basketball cards are collectibles, and the law rejects the idea that collectibles are securities.

Hermès International and Hermès of Paris, Inc. v. Mason Rothschild, 1:22-cv-00384 (S.D.N.Y)

In December 2021, defendant Mason Rothschild created digital images of faux-fur-covered versions of the luxury Birkin handbags of plaintiffs Hermès International and Hermès of Paris, Inc. (collectively, ” Hermès “). Rothschild titled these images “MetaBirkins” and sold them using NFTs. In response, Hermès filed a complaint claiming trademark infringement, trademark dilution, and cybersquatting.

It’s no dispute that Hermès owns trademark rights in the Hermès and Birkin marks as well as trade dress rights in the Birkin handbag design.

Hermès argues that Rothschild used the “MetaBirkins” mark, in commerce, to brand a product line, and to attract public attention and signify source. See 15 U.S.C. § 1127 (noting that use in commerce includes when the mark “is placed in any manner on the goods or their containers or the displays associated therewith or on the tags or labels affixed thereto, or if the nature of the goods makes such placement impracticable, then on documents associated with the goods or their sale”).

Rothschild argues that because he used “MetaBirkins” as the title of artwork — the digital images of the fur-covered Birkin bags — and not as a source identifier of his products, his use of Hermès’s mark is therefore entitled to First Amendment protection. Rothschild further argues that his marketing and sale of the “MetaBirkins” NFTs is not copyright infringement because he is using the “MetaBirkins” trademark in noncommercial speech, that use of the trademark has some artistic relevance, and the use of the trademark does not explicitly mislead as to the source or content of the work.

On May 18, 2022, the Court denied Rothschild’s motion to dismiss on the basis that Hermès’s allegations that he was using its trademarks in a way that is not artistically relevant and that the title of the artwork “explicitly misled” the public into thinking the NFTs were associated with Hermès, created a factual dispute.

The highly anticipated trial began in New York on Monday, January 30, 2023.

Miramax, LLC v. Quentin Tarantino et al., 2:21-cv-08979 (C.D. Cal.)

On November 16, 2021, Miramax, LLC filed a Complaint asserting claims for breach of contract, copyright infringement, trademark infringement, and unfair competition against Defendants Tarantino, VRI, and others, in a lawsuit regarding NFTs related to the motion picture Pulp Fiction. The Pulp Fiction NFTs provided access to digital copies of portions of the original, hand-annotated screenplay for Pulp Fiction

In 1993 and 1994, Miramax Film Corp. and Tarantino entered into a series of agreements governing their respective rights in and to Pulp Fiction.

Miramax alleged that the agreements granted to Miramax all rights in and to the motion picture, including the right to distribute it in all media now or hereafter known, and excluding only a set of limited “Reserved Rights” retained by Tarantino. Miramax asserted that the development, marketing, and sale of the Pulp Fiction NFTs infringed its rights under those agreements.

Tarantino and VRI denied the allegations, claiming Tarantino has always reserved all print publishing rights in his screenplay (including in electronic form) and may therefore develop, market, and sell the NFTs. By and through his agreements with Miramax Film Corp., Tarantino provided Miramax Film Corp. only with certain limited rights; that he reserved to himself all publishing rights in his screenplay; that he has published the screenplay for years without complaint from Miramax; and that he has the right to publish digital copies of his screenplay using and through the sale and distribution of NFTs. Tarantino further asserted that the name of the screenplay is and always has been “Pulp Fiction,” that he has marketed and sold the screenplay under that name for many years, and that his use of that name does not, in any way, violate any trademark rights owned by Plaintiff.

After a period of brief discovery, Miramax filed a Notice of Settlement on September 8, 2022.

Nike, Inc. v. StockX LLC, 1:22-cv-00983 (S.D.N.Y.)

On February 3, 2022, Nike filed a Complaint against StockX LLC due to StockX’s alleged: (1) infringing and dilutive use of Nike’s marks in connection with minting and sale of Nike-branded NFTs; (2) sale of counterfeit “Nike” goods purportedly verified by StockX as authentic; and (3) knowing deception of consumers with advertising claims about the verified authenticity of the goods sold on its platform.

The Complaint alleges that without Nike’s authorization or approval, StockX mints NFTs that prominently use Nike’s trademarks, markets those NFTs using Nike’s goodwill, and sells the NFTs at heavily inflated prices to unsuspecting consumers who believe or are likely to believe that the digital assets are, in fact, authorized by Nike when they are not.

StockX, an online global platform that provides access to items of current culture (coveted sneakers, apparel, collectibles, trading cards, and accessories) by connecting individual buyers and sellers from around the world, argues that its recent introduction of NFTs to track ownership of, and essentially serve as a claim ticket for, frequently traded physical products, is transforming the trading experience on its platform by increasing efficiencies and decreasing transaction costs for buyers and sellers. Using NFTs in this manner is lawful and violates no legitimate right of Nike or any of the manufacturers of the underlying physical goods.

The parties have until late-February to complete fact discovery before the litigation proceeds.

Roc-A-Fella Records, Inc., v. Damon Dash, 1:21-cv-05411 (S.D.N.Y.)

On June 18, 2021, Roc-A-Fella Records, Inc., filed a Complaint against Damon Dash, contending that Dash wrongfully attempted to auction off the copyright to Rapper Jay-Z’s debut album Reasonable Doubt through NFTs.

According to the pleadings, on or around October 1, 1995, Jay-Z inked a record deal with Roc-A-Fella Records, Inc. under which Roc-A-Fella Records, Inc. would own, among other things, “[t]he Masters and the LP, from the inception of recording thereof, and all Phonograph Records and other reproductions made therefrom, together with the performances embodied therein and all copyrights therein and thereto (excluding the copyright in the underlying compositions) throughout the world, and all renewals and extensions thereof . . . .”. In 1996, pursuant to this agreement, Jay-Z released the album Reasonable Doubt. Jay-Z, Kareem Burke, and Damon Dash each own one-third of the shares in Roc-A-Fella Records. The shares are not publicly traded.

The Complaint alleged that Dash, as a minority shareholder, unlawfully sought to cash in on the emerging NFT market by attempting to auction the copyright to Reasonable Doubt as an NFT. In his Answer, Dash responded that after he was made aware of the NFT marketplace, he decided to explore the idea of an NFT auction for his 1/3rd interest in Roc-A-Fella Records, not the copyright to Reasonable Doubt.

The NFT auction did not occur. The parties reached a settlement and stipulated that the label owns Reasonable Doubt, including its copyright, and no shareholder has any individual rights to the album.

SEC v. Ripple Labs, Inc., 1:20-cv-10832 (S.D.N.Y.)

In December 2022, the Securities and Exchange Commission sued Ripple Labs, Inc., Bradley Garlinghouse and Christian A. Larsen for violations of Sections 5(a) and 5(c) of the Securities Act of 1933 by engaging in the unlawful offer and sale of unregistered securities. The SEC further alleged that Garlinghouse and Larsen aided and abetted Ripple in its violations.

In September 2012, Larsen (with others) founded Ripple Labs, Inc. Upon completion of the XRP Ledger, Ripple Labs created a fixed supply of 100 billion XRP (XRP is a digital asset (“cryptocurrency”) that can be issued or transferred using a distributed ledger—a peer-to-peer database spread across a network of computers that records all transactions publicly). Ripple Labs then transferred 80 billion XRP to itself and 9 billion to Larsen as compensation. Garlinghouse joined Ripple in 2015, and subsequently received at least 357 million XRP from Ripple as compensation.

The SEC claims that from 2013 to the present, Garlinghouse and Larsen offered or sold a portion of their individual holdings of XRP to the public in exchange for hundreds of millions of dollars (1.7 billion XRP netting $450 million for Larsen and his wife; 375 million XRP netting $159 million for Garlinghouse).

Although this lawsuit does not involve NFTs, if a decision is ultimately rendered we may have legal precedent regarding whether NFTs are considered “securities” under the federal securities laws.

Sections 5(a) and 5(c) of the Securities Act require that whenever an issuer of securities, its control persons, or affiliates offers or sells securities to the public, those securities must first be registered with the SEC, absent certain exemptions. See 15 U.S.C. §§ 77e(a), 77e(c). The SEC claims that XRP is an investment contract, and therefore a security. Accordingly, the SEC claims that Garlinghouse and Larsen violated Section 5 by offering and selling their XRP into the public market without first registering those offers and sales, and that they aided and abetted Ripple’s violations as well.

To prevail, the SEC will need to show that XRP is an investment contract under the Howey test. See SEC v. W.J. Howey Co., 328 U.S. 293, 298–99 (1946) (holding that an “investment contract . . . means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of a promoter or a third party. . .”). In order to prove its allegations that Garlinghouse and Larsen aided and abetted Ripple in offering or selling unregistered securities, the SEC must show that they knew or recklessly disregarded that Ripple’s offerings and sales of XRP required registration as securities and that those transactions were improper. See 15 U.S.C. § 77o(b).

In March 2022, the Southern District of New York charged defendants Ethan Nguyen and Andre Llacuna with violations of conspiracy to commit wire fraud and conspiracy to commit money laundering. The defendants were arrested in Los Angeles, California in connection with this “rug-pull” scheme.

In January 2022, the Department of Homeland Security Investigations and the Office of Internal Revenue Service, Criminal Investigation Division (the “Government”) began investigating an NFT fraud scheme after purchasers of a particular NFT publicly reported that they had been defrauded in what is colloquially referred to as a “rug pull.” As the term suggests, a “rug pull” refers to a scenario where the creator of a NFT and/or gaming project solicits investments and then abruptly abandons a project and fraudulently retains the project investors’ funds.

As alleged in the Complaint, the defendants created an NFT project advertised under the name “Frosties,” which sold NFTs in the form of various cartoon figures, often with an ice cream cone (a “Frostie”). According to the official Frosties website, Frostie purchasers would be eligible for holder rewards, such as giveaways, early access to a metaverse game, and exclusive mint passes to upcoming Frosties seasons. In reality, defendants, whose legal identities were disguised to Frosties purchasers, abruptly abandoned the Frosties NFT project within hours after selling out of Frostie NFTs and transferring approximately $1.1 million in cryptocurrency to various cryptocurrency wallets under their control, in multiple transactions designed to obfuscate the original source of funds.

Notable from this example are the techniques utilized by the Government to disclose the identities of the defendants and follow the Frostie NFT sale proceeds through numerous cryptocurrency wallets. The Government discovered that the same IP address posted on Discord and also accessed a crypto wallet that transferred assets to a fraudulent wallet.