In a major Web3 trademark infringement case, NFT creators prevail over those with a bad-faith intent to profit.

By Stephen P. Wink, Tiffany M. Ikeda, Adam Zuckerman, and Deric Behar

On April 21, 2023, Yuga Labs, the original creators of the Bored Ape Yacht Club (BAYC) non-fungible token (NFT) collection, successfully moved for summary judgment on two of its key claims arising under the Lanham Act against Ryder Ripps and Jeremy Cahen (collectively, the Defendants). The US District Court for the Central District of California (the Court) considered Yuga’s motions to determine that NFTs are goods for purposes of the Lanham Act of 1946 and that the Defendants had violated the Lanham Act through false designation of origin and cybersquatting.

Key Facts and Findings

The BAYC NFT collection is composed of 10,000 entries on the Ethereum blockchain, each one pointing to an algorithmically generated simian profile picture possessing unique characteristics and accessories. Beginning around May 2022, the Defendants created an NFT collection called the “Ryder Ripps Bored Ape Yacht Club” (RR/BAYC), purportedly as a form of “appropriation art,” to highlight content in the digital images of the BAYC NFTs that the Defendants found objectionable. The RR/BAYC used verifiably distinct entries on the Ethereum blockchain that referred to the same 10,000 digital images as the BAYC NFTs. The Defendants also operated sites at the domains “www.rrbayc.com” and “https://apemarket.com.” Sales of RR/BAYC generated over US$1.6 million.

On July 24, 2022, Yuga sued the Defendants for using the BAYC Marks[1] in the Defendants’ alleged copycat scheme, among other claims.

On March 15, 2023, Yuga filed a motion for partial summary judgment on the following issues:

  • Yuga owns the BAYC Marks, which are valid and enforceable
  • The Defendants used the BAYC Marks to sell the RR/BAYC NFTs without consent and in a manner that would cause confusion
  • Yuga is entitled to damages and injunctive relief
  • The instant case is exceptional
  • The Defendants had engaged in cybersquatting

Furthermore, Yuga sought summary judgment on several of the Defendants’ affirmative defenses and one counterclaim:

  • Free speech
  • Fair use
  • Unclean hands
  • Knowing misrepresentation of infringing activity (counterclaim)

The Court Applied the Hermès Reasoning

The Court found that Yuga possessed valid and enforceable trademarks. The Court cited with approval the 2022 Hermès v. Rothschild order on motion for interlocutory appeal from the Southern District of New York . This order set out that the Lanham Act applies to intangible goods if consumer confusion arises from the intangible goods for sale, and not just the idea underlying such intangible goods. The Court concluded that NFTs qualify for Lanham Act application since they internalize previously external labeling functions and grant intangible goods certain characteristics associated with tangible goods, including being individually transferable, storable for indefinite periods, and exclusively owned by a single entity. The Court additionally endorsed the reasoning in Hermès that purchasers of NFTs acquire their tokens in order to own important rights in the associated digital content and not merely the entry on a blockchain or “digital deed.”

From the reasonings in the Hermès order, the Court concluded that Yuga’s sale of the 10,000 BAYC NFTs, the use of the BAYC Marks in endorsement deals, and subsequent product launches featuring the BAYC Marks indicated that the BAYC Marks are used in commerce. Given that the Defendants based their “appropriation art” defense on using the BAYC Marks to convey the message of the project, the Court “easily” concluded that the Defendants’ use of the BAYC Marks, in the same market, would cause consumer confusion.

Cybersquatting

Additionally, the Court found that the Defendants used the BAYC Marks with minor alterations in domain names. This practice is a form of cyberpiracy known as cybersquatting that is prohibited under the Anti-Cybersquatting Consumer Protection Act. Minor alterations did not change the fact that the Defendants’ domain names were confusingly similar to Yuga’s trademarks and would mislead consumers as to affiliation. The Court also found that the Defendants acted with a bad-faith intent to profit, considering nine non-exhaustive factors.

Summary Judgment

The Court granted summary judgment for Yuga on three affirmative defenses raised by the Defendants:

  1. Free Speech: The Court found that the First Amendment does not protect the Defendants’ commercial conduct, which is the main issue in this case. The Court rejected the Defendants’ argument that the Rogers test for expressive works[2] protected the Defendants’ use of the BAYC Marks, holding that the Defendants’ infringing action was the sale of NFTs, rather than the larger appropriation art project. Selling NFTs is a purely commercial activity since such a sale does not contain any expressive content. The Court also concluded that even if expressive content existed in such sales and Rogers applied, the misleading nature of using the BAYC Marks in the sale of the RR/BAYC NFTs would outweigh the value of any artistic expression.
  2. Fair Use: The Court was unpersuaded by the Defendants’ nominative fair use affirmative defense. Nominative fair use applies when a defendant uses a trademark to describe and sell the plaintiff’s product, rather than its own. Here, the Court found that the Defendants’ prominent and frequent display of Yuga’s BAYC Marks without modification to sell the RR/BAYC NFTs does not constitute “fair use.”
  3. Unclean Hands: The Court rejected the Defendants’ arguments that Yuga’s claims were barred. The Defendants had based this claim on Yuga’s alleged unclean hands for “compensating celebrity endorsers without disclosing that compensation and by selling unregistered securities.” The Court dismissed this argument because the alleged misconduct was unrelated to Yuga’s enforcement of its trademarks and not relevant to the trademark dispute.

While the Court decided in favor of Yuga Labs on a number of its claims, the Court denied Yuga’s motion with respect to a calculation of damages, leaving that final issue to be resolved at trial. The Defendants may also appeal the ruling, and counsel for Ripps has already expressed the intention to do so.

Key Takeaways

This case endorses the reasoning set forth in Hermès v. Rothschild regarding how certain “virtual goods” should be treated for purposes of the Lanham Act. Both the Second and Ninth Circuits now provide persuasive authority that NFTs constitute “goods” under the Lanham Act, and may therefore enjoy its many protections.

Notably, in enforcing its BAYC Marks under the Lanham Act, Yuga showed that its BAYC Marks are “strong” — both conceptually (because the BAYC Marks are “arbitrary” and do not relate to NFTs) and commercially (because the BAYC NFT collection is successful and culturally prominent). Minters of NFTs should bear in mind that prominent brands with distinctive marks tend to enjoy the strongest protections under trademark law.

Additionally, although the Court rejected the Defendants’ First Amendment defense in this case, the defense may succeed under a different set of facts. In the Ninth Circuit, the Rogers test may protect artistic, expressive works against a claim of trademark infringement in certain situations. The Defendants in this action could not invoke this protection because they made commercial use of Yuga’s BAYC Marks to explicitly mislead consumers without adding expressive content.

The legal landscape for virtual goods continues to develop rapidly. However, this case (and the recent Hermès case) demonstrate that courts are willing to adapt traditional intellectual property laws, such as the Lanham Act, to address digital and virtual assets such as NFTs.

This post was prepared with the assistance of Sam Taylor.

Endnotes

[1] The BAYC Marks include “Bored Ape Yacht Club,” “BAYC,” “Bored Ape,” the BAYC Logo, the BAYC Bored Ape Yacht Club logo, and the Ape Skull Logo.

[2] The Rogers test requires the defendant to make a threshold legal showing that its allegedly infringing use is part of an expressive work with some artistic relevance protected by the First Amendment.