[Guest post] Can injunctions be enforced in the case of NFTs? Do not take it for granted…

The IPKat is pleased to host the following guest post by Katfriend Paolo Maria Gangi (Studio Gangi) as a “sequel” to last week’s IPKat post on the recent Rome decision on NFTs and trade mark infringement.

Here’s what Paolo writes:

Can injunctions be enforced in the case of NFTs? Do not take it for granted

by Paolo Maria Gangi

Eleonora Rosati explained, on November 11, 2022, in a very good article on this blog, how the Rome Court of First Instance issued an injunction in favour of the Juventus soccer team because “an unauthorized third-party, blockchain-based platform Blockeras, had minted, advertised, and offered for sale NFTs and other digital content relating to images representing said Juventus trade marks, as well as the image of former Juventus footballer Bobo Vieri wearing his Juventus uniform”. In this case “Juventus claimed that the realization and commercialization by Blockeras of its Coin of Champions and NFT-based cards would infringe its trade mark rights” (from Eleonora’s article).

It is worth noting that in its final decision, issued on July, 20, 2022, the Court ordered to the defendant, inter alia, to remove from commerce and delete and/or make it inaccessible from any website and/or from any page of the website where the NFTs and/or the digital content linked to them are put on sale and/or published and, in any case, to take action in order to or block the relative webpages be removed or blocked. At the time of writing, the NFTs injuncted by the Rome Court are still displayed on Opensea right with Vieri’s Juventus shirt. It is useful to highlight that the owner of an NFT present on OpenSea may simply keep it in their profile without putting this NFT on sale and, in this case, if someone visits said profile they will spot a “Make offer” button. This means that people are allowed to make an offer to the owner for that NFT, but it also means that that offer can be accepted or refused by the owner. Alternatively, a NFT owner may put it on sale on OpenSea for a specified amount of money. In this latter case, a “Buy” button will appear in OpenSea website indicating that other people may directly buy the NFT from their wallet in exchange for Ethers – this is an automatic transaction that, when triggered by the buyer (and, of course, the buyer needs to have in their wallet enough funds to pay for the price plus the required gas fee), is automatic and does not require any additional activity by the seller. In relation to the Vieri’s NFTs on OpenSea, it appears a “Make offer” button so that it can be said that the owner retired from commerce, but it did not destroy them.

Enforcement in blockchains

The classical definition of blockchain is that of a distributed ledger technology whose main feature is to be immutable: it is impossible to manipulate or delete data after it’s been validated and placed into the Blockchain.

This feature becomes particularly challenging when the execution of judicial orders is at issue. NFTs are created through smart contracts, pieces of code (a smart contract is a software, in other words) which are deployed on a blockchain through specific transactions (technically speaking, a transaction is a record written on the blockchain’s distributed ledger). As anything else which is written on a blockchain, the smart contracts, once deployed (i.e., registered in the distributed ledger), becomes immutable, which therefore means that, in principle, the NFTs which are created through a smart contract cannot be, by default, destroyed. In other words, Satoshi Nakamoto, Vitalik Buterin and the other creators (fictitious or real) of the blockchain ecosystem had not considered how to integrate the legal remedy of granting an injunction when they designed the immutable universe of digital data known as blockchain – this is because the blockchain technology was built around the immutability to prevent fraud and make auditing easier for enterprises.

The broader technical scenario

As already noted, smart contracts are lines of code, usually written in Solidity, Rust or in other complex programming language. Usually, it’s normal practice among developers not to write code from scratch, but to use packages available on public code repositories on the basis of an open source licence instead. In the case of Ethereum, there is an established standard for NFTs known as ERC721 which is accessible through OpenZeppelin, a Solidity library of reusable and fairly secure smart contracts. Therefore, generally developers who need to deploy a smart contract on the blockchain to generate some NFTs import the OpenZeppelin ER721 standard modules and then make some slight changes based on the needs of each specific case. ERC721 does not include any function to “destroy” or “delete” an NFT once has been minted and this is coherent with the immutable principle of the blockchain that has been above examined: once an NFT has been minted there is no way to delete it.

A couple of technical tricks

If the immutable feature of the blockchain remains a cornerstone, a couple of technical tricks can be envisaged.

First, once a NFT has been minted, it can be sent to a “null” address, i.e., an inaccessible address which is like a black hole from which they cannot be taken out or, in other words, rescued. They are, therefore, removed from circulation. There are two such main null addresses:

https://etherscan.io/address/0x000000000000000000000000000000000000dead 

and https://etherscan.io/address/0x0000000000000000000000000000000000000000

Note that the power to destroy a NFT sending to a null address only vests with the current owner - once an NFT creator has sold or transferred an NFT, this “power” is, therefore, irrevocably transmitted to the purchaser or transferee of the NFT. This means that if a court orders to a creator of a NFT to destroy it, but the NFT has been transferred to a third subject, it is only this third subject who is in the position to enforce the court order and not the NFT creator. Generally speaking, and without a reference to any specific jurisdiction, there are cases in law where a bona fide purchaser of a good may be subject to the legal effect of an injunction order issued to their seller or transferor. Although there have already been issued various injunctions orders in relation to NFTs around the world, it is not known to the author of this article a case where an injunction has been enforced against a bona fide purchaser of an NFT. It is also worth noting that, if an NFT is sent to a null address is permanently remove from circulation but it is still perfectly visible in OpenSea and in all other NFTs marketplace of the blockchain, unless each marketplace removes it “manually” from its website (i.e., from the web 2.0 layer, while the web 3.0 layer will remain untouched according to the immutability principle).

A second trick would be to delete the digital image which is linked in the NFT – this is the image which is “seen” when someone looks at the NFT, but which is in many cases, although not always (in fact, it is also possible to store the image directly on blockchain like the well-known Cryptopunks collection), external to the non-fungible token written “immutably” on the blockchain. The smart contract which generates the NFT contains a link (immutable then, like everything else is contained in the smart contract) which might point to an old-style cloud like Google drive or One drive or, as it happens more frequently, to a peer-to-peer cloud like IPFS or Arweave. The digital image can be simply deleted by the cloud where is contained and this will automatically block the view of the NFT in the marketplaces. This solution, however, presents a couple of shortcomings too. Firstly, if the digital image attached to a NFT is deleted from the cloud where is stored, the NFT itself remains untouched and this, in the case of the decision of the Rome court, is in direct contrast with the specific content of the injunction. Secondly, in most cases, even if a digital image of a NFT is deleted, it can be later re-introduced into the cloud to which the link contained in the smart contract points – this means that, if today the digital image attached to a NFT is deleted, tomorrow could simply be reintroduced so that the NFT would be automatically restored.

Conclusion

Although the author of this article is definitively a blockchain and NFTs supporter, the rule of law is a value which cannot be disputed, and it cannot be seriously objected to the fact that court orders must be enforced. This said, the immutable feature of blockchains and the ensuing technical complexity of enforcing court orders should be considered by the legal community when preparing complaints or writing rulings with reference to the enforcement of injunctions and other judicial remedies related to NFTs.

(A special thanks to Simona Panzica, blockchain cybersecurity expert, for her help in relation to the technical part of this article; every mistake in this article is only of its author.)