In a recent landmark ruling concerning trademark rights in the realm of digital assets, the Court of Appeals delivered its decision in the case of Yuga Labs, Inc. v. Ripps, affirming that non-fungible tokens (NFTs) qualify as “goods” under trademark law. However, the court noted that it would be inappropriate to grant summary judgment on the likelihood of confusion without further factual examination. This indicates that while companies involved in NFTs can claim trademark rights to mitigate consumer confusion, securing a quick resolution on trademark infringement issues may still be complicated.
Background of Yuga Labs and the Bored Ape Yacht Club
The plaintiff, Yuga Labs, is the creator of the Bored Ape Yacht Club (BAYC), a well-known collection of 10,000 NFTs, each featuring a unique digital artwork of an ape characterized by distinctive traits, facial expressions, and attire. Ownership of a Bored Ape NFT also grants access to an exclusive online community that offers various benefits, including access to private virtual events, parties, and special content. Initially priced at about $200 each, these NFTs ignited a cultural movement that blended art, social standing, and blockchain technology, resulting in a thriving secondary market where some NFTs have sold for upwards of $24 million, with a 2.5 percent royalty going to Yuga Labs.
Controversies Surrounding BAYC
Despite its rising fame, BAYC has not been without its controversies. The defendant, Ryder Ripps, who is both an artist and social activist, criticized Yuga Labs for alleged racist undertones on his personal platform. Alongside Jeremy Cahen, a prominent figure in the crypto community, Ripps introduced a competing NFT series called the “Ryder Ripps Bored Ape Yacht Club” (RR/BAYC), where each NFT was tied to the identical Yuga cartoon images and identifiers. Ripps included a disclaimer stating that these NFTs served as “a new mint of BAYC imagery, recontextualizing it for educational purposes, as protest and satirical commentary.” Yuga Labs subsequently filed a lawsuit for trademark infringement and cybersquatting.
Arguments Over Trademark Validity and Use
In their defense, Ripps contended that Yuga Labs lacked enforceable trademark rights, asserting that even if such rights existed, his use of the BAYC marks fell under the protections of nominative use and the First Amendment. The district court ruled in favor of Yuga Labs, prompting Ripps to appeal the decision.
Understanding NFTs and Their Legal Classification
In its ruling, the Court recognized that NFTs represent emerging technology and provided an overview of their function, describing them as software code that authenticates uniquely associated fungible digital content. This tokenization of the authenticating code creates scarcity within the market, bestowing NFTs with proprietary value. Each NFT is assigned a contract name and symbol upon its creation, which are embedded in the metadata and facilitate tracking ownership changes. Importantly for Yuga Labs, Ripps utilized identical identifiers as those used by Yuga (the contract name Bored Ape Yacht Club and symbol BAYC) and associated his NFTs with the same artwork as Yuga’s offerings. Yuga Labs argued that this demonstrated Ripps’ intention to mislead consumers into believing his NFTs were affiliated with Yuga’s BAYC NFTs.
NFTs as Goods Under Trademark Law
To succeed in its trademark infringement claim, Yuga Labs needed to establish that it held a valid and enforceable trademark. The Lanham Act, which governs trademarks in the U.S., forbids any entity from using terms or symbols in commerce that could confuse consumers regarding the origin of goods. In an attempt to dismiss Yuga’s trademark claim, Ripps argued that NFTs do not constitute “goods” under the Lanham Act, referencing previous case law involving physical goods that contained intangible expressive content, such as video tapes and CDs. In these instances, courts determined that the origin of a product was attributed to the manufacturer of the tangible item, not to the creator of the content it contained. Ripps suggested that such precedent implied that all intangible items, including NFTs, should not be classified as “goods” under the Lanham Act and thus were ineligible for trademark protection. However, the Court clarified that NFTs can possess both tangible and intangible characteristics with different origins and protections. Unlike the intangible content on physical media, NFTs exist solely as digital entities in a digital marketplace. Since the Lanham Act does not explicitly exclude intangible goods, the Court ruled that NFTs are indeed trademarkable goods.
Challenges to Trademark Validity
Ripps further attempted to undermine Yuga’s trademark rights by claiming that the BAYC marks were not eligible for protection due to the alleged sale of NFTs in violation of securities laws (marketed as unregistered securities) and that Yuga had abandoned its trademark rights through failure to maintain quality control over third-party use—commonly known as “naked licensing.” The Court rejected these claims, determining that there was no clear link between the source-identifying function of NFTs and the purported illegal activities, and noted there was no evidence of any trademark license being granted or intended between Yuga and NFT purchasers. Additionally, the Court did not favor Ripps’ defenses of nominative fair use and First Amendment, concluding that Ripps had not merely used the BAYC marks for descriptive purposes but instead integrated them into the RR/BAYC NFTs, thereby using them as identifiers for his own NFTs—a use that goes beyond the protections these defenses offer.
Need for Further Examination of Consumer Confusion
After addressing Ripps’ defenses against trademark validity, the Court shifted focus to the core issue of Yuga’s trademark infringement claim, which hinged on demonstrating that Ripps’ use of the BAYC mark was likely to confuse a substantial number of reasonable consumers. Courts typically evaluate the likelihood of confusion using a multifactor analysis, exemplified by the eight-factor analysis from AMF Inc. v. Sleekcraft Boats. The Court highlighted the legal precedent that advises against resolving likelihood of confusion through summary judgment. Upon evaluating the relevant Sleekcraft factors, the Court reversed the district court’s summary judgment in favor of Yuga Labs. While certain factors indicated a potential for confusion—such as the strength of the BAYC marks and the similarity of goods—other factors were neutral or slightly favored Ripps, leading to insufficient evidence for a summary judgment verdict for Yuga, thereby leaving the matter to be examined by a jury at trial.
Implications for the Future of Trademark Law and NFTs
This case establishes a significant appellate framework for the application of trademark law to NFTs, reinforcing the classification of NFTs as “goods” under the Lanham Act while emphasizing that determining the likelihood of confusion requires a detailed factual inquiry. This ruling underscores the necessity for brand owners and NFT developers to fortify their trademark portfolios, ensure proper registrations, and implement comprehensive brand enforcement strategies. Moreover, any agreements related to the transfer of digital assets should be meticulously crafted to maintain trademark ownership while granting users appropriate rights, thereby avoiding the pitfalls of “naked licensing.” For digital artists, the incorporation of existing trademarks into NFT projects carries inherent risks; even works intended as commentary or protest may not safeguard against infringement claims if they mislead consumers regarding the source. Artists should explore alternative methods of expression that do not create confusion or imply source affiliation.
