(By Lv Xuanxuan)

I. Civil right protection

As stated above, digital derivatives are virtual property because of its form and value. In Section 5 Civil Rights of Chapter I General Provisions of Civil Code include general provisions about digital and internet based virtual property, stating that digital and internet based virtual property should be protected according to relevant legal provisions, if any. Pursuant to Articles 240 and 241 of Civil Code, real property or property owner is legally entitled to possess, use, receive profits from, assign or create a right to use or security interest in the property, but the person with a right to use or security interest in the property cannot exercise their rights by harming the property owner’s rights. In Article 323 of Civil Code which sets out five rights relating to use of property, the person with a right to use other person’s real property or property can legally possess, use or receive profits from the property. In addition, Civil Code also includes security, pledge, lien and occupation related rules. Because of the legality of rights in property, ownership and the right to assign internet based virtual property is based on creditor’s right to ask for payment of debts owed to them, not directly coming from the property related provisions of Civil Code.

For example, in the online infringement case of Wang, Guangzhou Star Huyu Information Technology Ltd.[1] , as the court of first instance, Guangzhou Internet Court found that virtual property was a new type of digital property whose value could be measured by using criteria now available and should be included in the protection scope of property. In broad terms internet based property include electromagnetic records on the internet with characteristics of property in nature. In the absence of explicit related legal provisions, ownership of virtual property related rights should be decided on the basis of legal agreement between parties involved in order to fully respect true intentions of civil entities.

We believe that digital derivatives are transacted and shared by users registering and entering their account on the platform’s website. User service agreement, transaction rules and other standards formulated by a digital derivative website are current rules on protection of civil rights in internet based virtual property, based on which the seller (publisher) protects the purchaser’s rights in a digital derivative transaction.

(I) Registered account use rules

Upon user registration the user agreement usually stipulates that registered user only have the right to use the account while the company is its owner and that user cannot purchase or sell (ownership), transfer (user right) or lease (assign) the account. For example, Tencent owns and users can only use QQ IDs. An ID that is not accessed for a long time may be automatically revoked and owned by Tencent[2]. In “Bigverse platform user agreement”[3] , for example, the platform use rules are highlighted in conspicuous characters (underlined or blackened) to attract users’ attention, under which in the event set out in Article 1, 4 or 6[4] of the platform user rules on the right to use their registered account, the user may became ineligible to use the registered account. In this case, the court generally decide based on the user agreement whether the platform’s management acts are proper and non-breaching.

In the online infringement case between Wang and Guangzhou Star Huyu Information Technology Ltd., Guangzhou Internet Court found that Wang leased the live stream account to Wang by violating the user agreement, which should be deemed as default, in case of which “Kugou” had the right to restrict, freeze or terminate the user’s use of the Kugou account at any time based on its own judgement. Star Company had the right to take corresponding measures as agreed. The termination of further use of the account that Star Company found was actually used by a person other than its registrant was an exercise of the company’s contractual rights and should not be deemed as infringement of Wang’s right to use the account. In addition, in the online service contract case between Cui and Guangzhou Netease Computer System Ltd.[5], the court found that the whether user account was stolen because of a defect in the program or user disclosure should be decided pursuant to Article 2 Evidence Rules of the Several Regulations on Evidence in Civil Proceedings by the Supreme People’s Court. Based on the fact that there was no defect in current validation and access approaches and Netease took back online game items for users within a reasonable period of time (10 hours), it could be concluded that Netease took necessary measures in a prompt manner and had no default during the performance of the online service contract.

The above rules on deciding the responsibilities for use of the user account also apply to digital derivative transaction platforms with a similar agreement. Before starting a transaction on a platform, users need to read the registration agreement carefully and repeatedly to understand limits on the right to use the account and keep evidence when taking important steps to use the account.

(II) Platform service and transaction rules

In the Ant Chain Digital Collectible Platform User Service Agreement (23rd December 2021 Edition), for example, digital collectible services mainly involve three parties. The services under Article 1.4 are based on the internet and the block chain and include information services such as digital collectible display, browsing, purchase, transfer, dispute settlement, order management, etc. provided in various forms, including the digital collectible platform, app services connected with digital collectible application scenarios and storage services such as digital collectible certification, management, recordation, handover, collection, etc. on the ant chain. The transaction is done between the seller and the user (purchaser and transferee). The former refers to an entity or an individual that issues digital collectible on the platform and sells and provides it to the user. The issuer should provide information about digital collectibles, including writings and pictures, introduction, creator, etc. and solely responsible for anything contained and all copyrights in digital collectible. The platform requires users authenticate their identity in their own name as a person who is 14 years old or above and lives in the Chinese mainland. The flow chart of “digital platform” involving three parties is as follows. According to similar rules, the actual sale of digital collectibles is not connected with sale of copyright in the original work. Copyright related issues are discussed in the fourth part.

Flow chart of (ant chain) digital collectible platform
	User (purchaser/transferee)		Developer or operator (Hangzhou Ant Chain Technology Ltd. and Shanghai XKT Digital Technology Ltd.)		Issuer
User registration	Digital collectible platform account registered in the account user’s real name
Digital collectible launch			“Digital collectible” generation and launch means specific virtual works, artworks or products digitalized with a unique mark by using ant chain block chain technology, including not limited to digital pictures, music, video, 3D models and other forms of virtual digital collectibles.		“Specific works and artwork”
					Writings and pictures, introduction, author and other information about the digital collectible should be provided by the issuer. The issuer should be solely responsible for anything contained and copyright in the digital collectible.
Digital collectible purchase	Purchase or exchange for digital collectible		Pay by the payment platform	Digital collectible transaction	Copyright in the digital collectible should be owned by the issuer or the author. No change of ownership of the copyright.
	Successful
	1.User has “access” to the platform’s information technology services connected with digital collectible browsing, purchase, sharing, transfer, dispute settlement, order management, access, appreciation, presentation, information consultation, etc. 2. Certain digital collectibles can be used in application scenarios with the platform. Details of the services and functions are subject to illustrations for “users” on the platform’s website.		“Issue digital collectible certificate” through the platform	“User” purchase information will be recorded in digital collectible’s metadata as “user’s” digital collectible certificate.	Receipt of payment or profit distribution
Free transfer and subtransfer	Free transfer		Free transfer and subtransfer of digital collectible certificate registration
	having the digital collectible for 180 or more days	having the digital collectible for less than 180 days
	subtransferable	Non-subtransferable
	Free subtransfer
	having held the digital collectible for 2 or more years after the free subtransfer	having held the digital collectible for less than 2 years after the free subtransfer
	subtransferable	Non-subtransferable

 

(III) Law application to platform services

Digital collectibles differ from products sold by general e-commerce platforms. Functions of digital collectible transaction platforms may not equal to those of general e-commerce platforms. They should be analyzed in different ways.

In Article 2 of the E-commerce Law and the answers by the National Congress to journalists’ questions about the E-commerce Law, e-commerce means business activities of selling products or providing services on the internet or by other information network. Financial products and services and information network based services in connection with news information, audio and video programs, publication, cultural products, etc. are not included in the E-commerce Law.

Cultural products can be construed by referring to the Cultural Product and Service Exportation Guide Catalogue (published on February 1st, 2012), in which cultural products similar in appearance to digital derivatives include “animation and cartoon products mean animation and cartoon products and their derivatives that are creative in essence and look like animation or cartoon, including books, newspapers, movies, TV programs, audio products, stage dramas, software, software and new types of animations and cartoons that are broadcast in modern information technology based ways” and other digital collective related cultural products such as “original painting, calligraphy, carving, sculpture, statue, art photography and installation art works, limited reproductions with a license for the above arts, limited imitations of cultural relics, decorative items made by hand with traditional craftsmanship, art and crafts, etc.”

Based on current e-commerce laws, we believe that digital derivatives are cultural products and sale of and provision of services relating to digital The derivatives are governed by provisions of the chapter “Contracts” of Civil Code, not E-commerce Law and related rules. The related services include sales, art license, brokering, restoration, assessment and guarantee, design and creative work, manufacturing and marketing, brand license, agency, etc. As stated above, in the absence of explicit related legal provisions, as a rule on dealing with internet-based virtual property, agreement between the platform and the user is an important basis for decision making and electronic data (evidence) rules and related provisions of copyright law should be in the first place in the order of provisions governing copyright ownership issues.

II. Copyright and related right protection

Copyright related objects include digital collectives available, including copies of works available and digital works and mainly involve copyright owner’s rights of reproduction, exhibition, dissemination through information network, etc. Attention should be specially paid to restrictions under user agreement and application of provisions relating to fair use of copyright law. NFTCN website, for example, attempted to deal with disputes arising from copyright in digital derivatives based on legal provisions and user agreement.

(I) Fair use cannot be an argument for appropriate use.

In copyright infringement cases, the defendant usually cites Article 24 (Fair Use) of Copyright Law to support their claims. In the copyright ownership and infringement case between Guilin Weiwen Nanometer Material Co., Ltd. and a Zhao[6], Beijing Intellectual Property Court restated that prerequisites for “fair use” were “identification of author’s and worker’s names and no infringement of other rights of the copyright owner hereunder”, “internal use for personal study, research or appreciation to a limited extent and with no disclosure to the general public and no availability or dissemination of the work used in the public domain” and “fair use with no damage to others’ interests in the work used in a similar way with the copyright owner’s authorization”.

People with copyright in digital derivatives usually sell the works and their copies by granting an exclusive license on a specific transaction platform. This is an industry-accepted profitable business model. Any use before completion of a transaction could infringe the right to reproduce or disseminate through information network digital derivatives. In similar digital collective transaction website user agreement, digital works, licensed digital works and digital derivatives are independently defined and bound by a different set of rules[7], under which the purchaser and the free transferee (user) have the rights to possess, use, transfer and deal with digital works after completion of the transaction, with no transfer or sharing of intellectual property rights in the works arising from the transaction and no use of the works for commercial (unless with written consent of the intellectual property owner) or other purposes.

The digital derivative purchaser’s and free transferee’s interests in the digital works and derivatives are based on online transactions and cannot be decided by directly citing Article 24 (Fair Use) of Copyright Law.

(II) Accurately identifying legal nature of work digitalization

In Article 10.1.5 of Copyright Law, the right of reproduction in the property right in a work is granted to prevent acts of making one or more copies of the work by printing, copying, rubbing, audio recording, video recording, pirate recording or photographing, digitalization, etc. To a large extent, the exercise of copyright is based on exhibition or sale of the original copy. In addition to copyright to the work, the author also owns the property of the original copy. Selling the original copy may not mean allowing it to be copied, used in a performance, etc. Transfer of copyright to or grant of a license to use the work may not involve transfer of the property. Article 10.1.6 of Copyright Law (Revised in 2020) provides that “issuance” means providing the original copy or a reproduction of a work to the general public by sale or free transfer of the same or providing the work or a tangible object containing the work[8]. The right of issuance under 5192 is subject to the “initial sale rule”.

If a similar transaction website calls the seller’s act of providing a work to the general public as “issuance”, they could fall within the protection scope of the copyright owner’s acts of controlling the rights of reproduction and issuance. In a digital collective application scenario, how digital collectives are produced should be considered when deciding whether the seller was providing copies of the work or the work to the general public. There are two ways to create a digital art work. In one way, the author directly uses computer and other digital terminal to create a digital work and encrypts the work with NFT. It is easy to do so. In the other way, an offline art work is transformed to a digital form through a digital photograph, dynamic visual image, 3D video, etc. and encrypted with NFT. In nature, making an NFT product is showing specific data in a digital form. We believe that in the first event each digital collective is an original copy of a work, but is not bound to be an original work. An original copy of a work refers to a work retained in a tangible form at the first time the work is finalized[9]. In the second event offline artwork digitalization is an exercise of the copyright owner’s right to reproduce the work. If digital derivatives made with NFT are a copy of a work, this is an exercise of the copyright owner’s right to reproduce the work. If they meet the issuance conditions, they are protected and bound by the right of issuance. It is more appropriate to protect rights in digital collectives by special rules on original artworks, especially in the event of limited sales.

(III) Digital derivatives should respect prior copyright in the work.

Digital derivatives relating to performances usually contain unique elements of a drama performance, for example, characters, stage design, scenery, items designed for a performance, music to a performance, etc. Any form of digital derivatives with elements of a performance that could form an independent work are bound by restrictions on derivative works under the Copyright Law. For example, NFT products containing two/three dimensional animation images created on the basis of the stage design or image of a character in a performance could be related to the right to adapt the clothing design and require a license from the design owner.

Summary:

According to statistics disclosed in the National Performance Market Report of 2021, revenue from performance derivatives and sponsorship reached 2.206 billion RMB, one of the three largest parts of total revenue of the performance market. The legal nature of performance derivatives is internet based virtual property and substantially different from virtual currency. A person with rights in performance derivatives are entitled to claims under Chapter Contracts of Civil Code and the platform user agreement. The application of copyright owner protection rules to people with intellectual property rights in performance derivatives depends on how such derivatives are generated. We will continue paying attention to performance and performance derivative related cases and law application and look forward to exchanging ideas with our fellow professionals.

 

Footnote:

[1] Case No. (2020) Y0192MC38173

[2] Is Digital Property Heritable? by Wang Shuangfeng that appeared on page 78, 5th issue of 2019, Information Technology in Shanghai

[3] Bigverse is a brand of Hangzhou Metaverse Technology Ltd. incorporated on September 27th, 2021. [1] is metaverse Web3.0 and has NFT China (NFTCN) digital art business platform, Bigverse DAO, NFTCN STUDIO, Bigverse Fund, Metaverse Gallery and Metaverse Action House.

[4] User should guarantee the authenticity, legality and validity of their information registered with Bigverse platform and should not abuse other person’s name, publish any information in other person’s name or use the registered account in bad faith, misleading other users. The platform has the right to stop providing the services and withdraw the user’s account and the user should be solely responsible for all legal outcomes arising therefrom (Article 1). The platform has the right to remove anything that is related to user’s acts of directly or indirectly violating law or social ethics by using Bigverse platform (Article 4). 3. The platform has the right to examine and supervise the user’s use of Bigverse platform. If the user use Bigverse platform by violating any of the above provisions, Bigverse platform or its authorized person has the right to require the user correct it or directly take all necessary measures, including not limited to changing or removing the content published by the user or suspend or terminate the user’s right to use the platform. (Article 6)

[5] No.(2019) Y0192MC271 case is one of “ten classic cases involving data and virtual property decided by Guangzhou Internet Court” published on September 26th, 2021

[6] Case No. (2021) J73MZ4707

[7] https://www.nftcn.com.cn/link/#/pages/index/userAgreement visit date: April 21st, 2022

[8] The Course of Intellectual Property Law (7th Edition) by Wang Qian, 7th edition published by Chia Renmin University Press in August 2021

[9] Page 170 of A Compilation of Legal Terms of Copyright and Neighboring Rights by the World Intellectual Property Organization, translated by Liu Bolin

 

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