The metaverse, NFTs and IP issues in China

Over the past few years, the terms ‘metaverse’ and ‘NFT’ have become global buzzwords. Simply put, the metaverse describes a virtual environment where people can play, create, interact, and buy things. Contrary to popular belief, it is not a single digital ‘place’, but an ecosystem comprising several metaverses. NFTs (non-fungible tokens) are digital records that are used to track ownership and rights over digital or physical assets, and they are by definition unique and rare (in contrast with cryptocurrencies).

In China, a number of local and international brands have already taken the leap into the metaverse and started to establish a presence on various metaverse platforms. Some local governments are also keen to embrace the new metaverse and NFT technology, and have included them as one of the focal points in their government work reports.

This article will discuss some of the pertinent intellectual property (IP) issues that brands should watch out for when venturing into this new space.

Trademark registration strategy

As brands start to conduct business activities in the metaverse space, they may wish to register trademarks covering metaverse and/or NFT-specific goods and services. However, the trademark registration system in China makes this inherently challenging.

In China, the specification of goods and services claimed by trademark applications should conform with the list of standard goods and services published by the China National Intellectual Property Administration (CNIPA). Non-standard goods or services are usually not accepted, though there is discretion for trademark examiners to allow non-standard descriptions.

Currently, goods and services such as “downloadable virtual goods”, “downloadable multimedia files containing artwork authenticated by non-fungible tokens (NFTs)” and “online retail store services featuring virtual goods” are considered non-standard and therefore cannot be readily registered in China. This is different from the practice in a number of other jurisdictions.

That said, we have recently seen some cases where non-standard specifications such as “computer programs for use in online virtual worlds” (Class 9) have managed to be preliminarily approved by the CNIPA. While this may not be the norm yet, it does indicate that the trademark examiners may be willing to exercise their discretion in favour of non-standard descriptions from time to time.

The 12th edition of the Nice Classification (which will enter into force on January 1, 2023) includes “downloadable digital files authenticated by non-fungible tokens [NFTs]” as a standard description in Class 9. As China generally adopts the Nice Classification which is published by the World Intellectual Property Organization, it is hopeful that the CNIPA will incorporate this new NFT-related description as a standard item in China in due course. Before that happens, trademark applicants may designate standard goods and services that are closely relevant, such as “computer programs, downloadable”, “downloadable image files”, “virtual reality game software”, “virtual reality headsets” and "electronic wallet (downloadable computer software)” in Class 9.

Another option would be to consider filing trademark applications by way of international registrations (IR) designating China. As the CNIPA is generally more relaxed on the specifications of IRs (as compared to national applications), there may be a better chance for non-standard items to be accepted this way.

That said, it appears to be the CNIPA’s current position to reject applications on goods or services that relate to ‘tokens’ (including NFTs), ‘virtual currencies’ and ‘cryptocurrencies’ instead of requesting amendments to the said items as such items are considered non-standard under local practice. As for goods and services that relate to the metaverse, the CNIPA’s attitude is less clear. We see that the CNIPA recently approved an IR for metaverse-related software goods in Class 9 in August 2022, but rejected an IR in respect of metaverse-related software services in Class 42 in the same month.

In addition to the hurdles in registering trademarks that claim metaverse- or NFT-related goods or services as discussed above, it is generally difficult to register trademarks containing the word ‘metaverse’ or its Chinese language equivalent (元宇宙 [Yuan Yu Zhou]) in China. In February 2022, the number of these metaverse-related trademark applications reportedly reached 16,000, doubling the number recorded just two months prior in December 2021. Despite the large number of new applications, very few of them have been approved for registration.

In fact, the CNIPA has expressed a clear intention to severely crack down on improper trademark squatting and trademark applications that piggyback on the metaverse hype. It will likely be difficult for companies to obtain trademark registration for marks that contain the word ‘metaverse’ or 元宇宙 [Yuan Yu Zhou] for the time being.

IP rights in NFTs

When venturing into the metaverse, a lot of brands have begun harnessing the power of NFTs—such as by creating branded digital collectibles. The legal issues surrounding NFTs are complex and remain evolving, but a few essential concepts are highlighted below.

The most important thing to understand is that ownership of an NFT is unlikely to equate to owning the IP rights (such as copyright or trademark rights) of the underlying asset, unless the transfer of such IP rights is also expressly agreed. This is because the purchase of an NFT does not mean that there is an automatic acquisition of the underlying asset or the artwork in the NFT and all of their associated rights.

The terms and conditions of the agreement for the sale and purchase of an NFT (often in the form of a smart contract) will govern the NFT owners’ ability to replicate or profit from the artwork. If brands wish to mint and sell their own NFTs, they should ensure that the contractual terms are drafted with clarity and precision, so that the scope of the buyers’ rights are clearly defined.

Companies that engage external designers and creators are advised to audit the existing service agreements if they wish to use the commissioned designs as NFTs or in the metaverse, to determine whether such use is permissible under the agreements. The agreements should allow for all rights in the commissioned work to be owned by the company, including the right to create NFTs based on such work and to use such work in the metaverse.

IP rights infringement: a case study

Given the novelty of the metaverse and NFT, it is understandable that some brands may choose to remain observant and not become direct participants yet. However, these brands would still be strongly advised to continue to monitor developments in this area, and particularly in the NFT market. This is due to the risk of third parties minting NFTs from existing artwork, designs or trademarks without obtaining prior authorisation from the brands involved, which may constitute trademark or copyright infringement. Brands may wish to start monitoring key NFT trading platforms in order to detect infringement activities, and explore enforcement options as necessary.

In China, there has recently been a case concerning intermediary liability, where a rights holder successfully sued an NFT platform for copyright infringement with regard to an NFT artwork sold on its platform. This ruling from the Hangzhou Internet Court is the first court case involving an NFT dispute in China.

Shenzhen Qicediechu Culture Creativity v Hangzhou Yuanyuzhou Technology (2022) Zhe 0192 Min Chu 1008

Background and facts

The plaintiff, an exclusive copyright licensee (with enforcement rights) of a picture depicting a cartoon tiger getting vaccinated, sued the defendant, the operator of the NFT platform Bigverse, for copyright infringement. The plaintiff sought compensation of RMB 100,000 ($14,000).

The plaintiff claimed that a user of the defendant’s NFT platform used the picture without authorization to mint an NFT and sold it to another user through the platform. The plaintiff argued that the defendant, as a professional NFT platform operator, should have conducted a review of the ownership of NFT digital works published on its platform.

On the other hand, the defendant claimed that its NFT platform was a third-party platform and that the works were uploaded by platform users. On this basis, the platform itself should not bear responsibility. It also stated that the platform had already fulfilled the ‘notification-and-takedown’ obligation, and sent the disputed NFT address to a ‘black hole’ which swallows all tokens sent to it irrevocably.

Outcome

The court held that the liability of a network platform providing NFT digital works trading services should be considered with reference to the particularities of the NFT digital works—including the trading mode, technical characteristics, platform controls, profit-making model, and so on.

Although the defendant had sent the infringing NFT address to a ‘black hole’, the court held that the defendant should bear a stricter duty of care and establish a comprehensive and more specific review mechanism to assess the copyright ownership information before an NFT is minted.

The defendant was ordered to cease infringement and pay RMB 4,000 to the plaintiff as compensation.

Takeaways

NFT trading platforms bear a higher duty of care in addition to the general ‘notification-and-takedown’ duty. This may be because an NFT platform, unlike a traditional e-commerce platform that merely provides a place for trading, is involved in the whole process by offering the technology for creating an NFT and automatically drafting smart contracts for every sale.

In this case, the court suggested that NFT platforms should establish vetting mechanisms, and that reasonable efforts should be made to verify the copyright ownership of each underlying work—for example, by requesting certain evidence or proof before allowing an NFT to be minted.

Conclusion

The metaverse and NFTs present new opportunities and venues for companies to commercialise their goods and services and to interact with customers. Given the high level of commercial activity in this area, it is expected that more regulations will be issued in the future, whether statutory or self-regulatory, and many more court cases will come. Brand owners should ensure that they watch this space for future developments.

Loke-Khoon Tan is a partner at Baker McKenzie in Hong Kong. He can be contacted at lkt@bakermckenzie.com

Bertha Ho is special counsel at Baker McKenzie in Hong Kong. She can be contacted at bertha.ho@bakermckenzie.com

James Lau is special counsel at  Baker McKenzie in Hong Kong. He can be contacted at james.lau@bakermckenzie.com

Harrods Wong is an associate at Baker McKenzie in Hong Kong. He can be contacted at Harrods.Wong@bakermckenzie.com

Jennifer Lau is an associate in the IP and Technology Practice at Baker McKenzie in Hong Kong.