Appeals Court Delivers Dual Blows to NFT Legal Precedents

Landmark Rulings Shake Up Digital Asset Law

A U.S. appeals court has delivered significant rulings impacting the nascent legal landscape of Non-Fungible Tokens (NFTs). In two separate decisions, the court overturned the first NFT insider trading conviction against a former OpenSea executive and vacated a substantial trademark infringement award for the creators of the Bored Ape Yacht Club.

NFT Insider Trading Conviction Overturned

A divided federal appeals court has overturned the fraud conviction of Nathaniel Chastain, a former product manager at NFT marketplace OpenSea. Chastain was accused of insider trading by using confidential information about which NFTs would be featured on the platform's homepage to make profitable trades. The 2nd U.S. Circuit Court of Appeals in Manhattan agreed that erroneous jury instructions may have led to his conviction, potentially for unethical behavior rather than a crime involving property value.

• Key Takeaway: The court found that jury instructions were flawed, suggesting Chastain's conviction might have been based on acting unethically rather than on proof of stealing information with commercial value.

Chastain, who was sentenced to three months in prison, had argued that the jury was wrongly told they could find him guilty for departing from "fundamental honesty and fair play." The appeals court stated that fraud requires the misuse of a property interest, not just unprofessional conduct. It remains unclear if prosecutors will pursue a retrial.

Bored Ape Maker's Trademark Win Vacated

In a separate case, a U.S. appeals court overturned an $8.8 million judgment awarded to Yuga Labs, the creator of the Bored Ape Yacht Club NFTs. Yuga Labs had sued artist Ryder Ripps and his business partner for allegedly counterfeiting their NFTs under the guise of satire. The 9th U.S. Circuit Court of Appeals ruled that Yuga had not yet proven that Ripps's tokens would confuse NFT buyers, sending the case back for a trial on trademark infringement and cybersquatting claims.

• Key Takeaway: The court affirmed that NFTs are eligible for trademark protection but sent the Yuga Labs case back for a trial to determine if confusion among buyers occurred.

Despite vacating the award, the appeals court confirmed that NFTs are indeed goods protectable by trademark law, a significant affirmation for the NFT industry. Yuga Labs hailed the decision as a validation of their brand, while Ripps viewed it as a win for artistic appropriation. The original lawsuit accused Ripps of profiting from counterfeit NFTs that satirized alleged problematic imagery within Yuga's brand.

Sources

• US appeals court overturns first NFT insider trading conviction, Reuters.

• U.S. overturns NFT insider trading conviction of ex-OpenSea exec, Cryptopolitan.

• US appeals court overturns Bored Ape maker's $8.8 mln win in NFT trademark case, Reuters.