Art disputes – NFTs are heading for court

By Rebecca Attree & Paddy Kelly

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Earlier this year, Rebecca Attree, Civil and Commercial Mediator with IPOS Mediation,? convened the third Libralex Christie’s Art Law Conference as part of London International Disputes Week (“LIDW”). The theme of LIDW was “Adapting to a changing world” and this motif was picked up by Rebecca asking each of the speakers to address “what’s new and what’s to come?” regarding resolving art related disputes. During an informative afternoon, we heard from Laytons’ Paddy Kelly on areas of dispute around Non-Fungible Tokens (NFTs). It was such a fascinating subject we felt it worth exploring further here.

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NFTs are relatively new. Christie’s offered its first ever NFT artwork for auction in March 2021 (Everydays: The First 5000 Days by the artist Beeple sold for $69 million, and was paid for in cryptocurrency). A year later, Europe’s first NFT art gallery opened in London. And, in between these two events, the first NFT-related claim was filed in a UK court – more on that later.

Potential for litigation may start with the very nature of NFTs. Put simply, a Non-Fungible Token is a unique digital token that links to a digital asset such as an artwork, song or video. When purchased, ownership of the NFT is logged and recorded on a blockchain. Ownership of the digital work itself, or even the real-life physical work, may or may not be included in the purchase of the NFT token.?

Uninformed buyers may believe they have bought a copyrighted artwork, when in fact they have solely bought an NFT token – a misunderstanding that will potentially lead to all manner of disputes concerning ownership and IP rights.?

Throw in the fact that NFTs are currently unregulated and there’s no harmonisation of legal rules and regulations internationally – not to mention that the law is lagging behind NFT technology – and it’s clear there’s going to be trouble ahead.

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NFTs and a legal minefield

Given the lack of regulatory clarity for digital assets, disputes around copyright infringement are likely to be interesting. One such case – Tom Kabinet – concerned a lawsuit brought by two Dutch copyright organisations against the owner of a reading group who was reproducing e-books. In its 2019 judgement, the Court of Justice of the European Union denied the application of the distribution right and ruled that the digital work in question should be covered by the communication to the public right – and was therefore not subject to the principle of exhaustion.

While this case centred on e-books, the landmark ruling highlights how digital assets are being interpreted differently to physical works within the realms of the law.?

Trade mark infringement is in the spotlight, too. In a recent US case, Yuga Labs, who created the Bored Ape Yacht Club NFTs, sued two artists who had allegedly created NFTs using the company’s original NFT images and trademarks. Yuga Labs won the lawsuit, with the judge ruling that the artists’ use of the Bored Ape logo violated federal trademark law.

These are just two examples of where NFTs have made it into the courts – and with ambiguity on where NFTs stand in regard to property law, royalties and privacy/data protection laws, there are likely to be plenty of complex disputes to come.?

And let’s not forget consumer protection laws – which brings us nicely onto that UK court case.

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Amir Soleymani v Nifty Gateway

In 2021, in the case of Amir Soleymani versus Nifty Gateway, Amir Soleymani, a Liverpool-based NFT art collector, sued NFT marketplace Nifty Gateway, claiming their auction terms were unclear. Mr Soleymani had bid $650,000 for an NFT, allegedly unaware that it was a ‘ranked’ auction and that his bid had secured him a third edition, rather than a more valuable first edition, of the digital asset.?

Mr Soleymani withdrew his cryptocurrency from his account to avoid paying for the NFT, to which Nifty Gateway instigated an arbitration against Mr?Soleymani for breach of contract and payment of the $650,000.?

According to Nifty Gateways’ terms, disputes had to be resolved in the jurisdiction of New York. This was challenged by Mr Soleymani, who went on to bring proceedings in England against Nifty Gateway. Mr Soleymani also argued that he was a consumer within the meaning of the Consumer Rights Act 2015 and the Civil Jurisdiction and Judgments Act 1982.

To cut a very long story short, Nifty Gateway countered that the English courts had no jurisdiction to determine the validity of the arbitration clause, the High Court granted a stay of the proceedings and Mr Soleymani appealed, successfully. Well, semi-successfully.

As the case stands, there will be a trial in England to hear some aspects of the dispute, including the consumer rights claims. But the New York arbitration will also still go ahead.

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Navigating NFT disputes

Around one fifth of the UK population now owns at least one form of digital assets. As NFT art continues to grows in popularity, we’re likely to see more NFT-related disputes enter the courtroom. But, of course, there is another way – mediation.

Mediation can cut through multiple jurisdictions and get to the heart of a dispute. As Rebecca Attree said at the conference in her concluding remarks, “ the art world is famously private. Reputations are closely guarded. A main issue when a dispute arises is the very fact that the dispute may devalue the art. If the dispute relates to the authenticity of an artwork, court proceedings can have disastrous implications for that work’s value: where authenticity has been called into question, however weak the arguments, any future prospective buyer is bound to hesitate, and certainly not offer the price they might have done prior to public court hearings. Privacy can be paramount, and that is where mediation, that is a confidential process, can provide an excellent solution”.