Given the expanding importance and usage of NFTs (non-fungible tokens), litigation was inevitable. One of the first such cases is Nike, Inc. v. StockX LLC, a trademark infringement action in the Southern District of New York. Because there is so little legal precedent about NFTs, this will be an intriguing test case for attorneys, creators, and businesses alike.

Background

“An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos,” In recent years, NFTs have become a popular way to buy and sell digital artwork. (Id.).

StockX is an online resale marketplace that largely lists Nike sneakers and has no affiliation to Nike. Since January of 2022, StockX has been selling NFTs that display digital art of a physical sneaker from Nike, Adidas, Puma, and other brands as well. The NFT, also called a “Vault NFT”, is then linked to the ownership of the physical sneaker that is kept in a “vault” by StockX that allows the owner to trade in the NFT for the physical sneaker. The Vault NFT also allows the owner to resell the token, and  the right to receive the physical sneaker, without paying any shipping or storage fees. To date, the trade-in feature is unavailable, and StockX may also revoke ownership in the Vault NFT by burning it or redeeming it for a perk and/or experience instead of a sneaker. As a result of these Vault NFTs, Nike has commenced a lawsuit against StockX.

Complaint

In the complaint, filed on February 3, 2022, Nike alleges that StockX has displayed Nike sneakers and the distinctive markings without Nike's permission. Nike further alleges that StockX is trading upon Nike's reputation and brand popularity to increase its sales in listing NFTs, confusing customers, and diluting Nike's trademarks.

Having recently acquired a digital art creative studio, RTFKT in December of 2021 with the intention of entering the NFT space in full force, Nike alleges that it has been deprived of an opportunity to engage with the community of Nike customers. Specifically, in January of 2022, Nike announced the launch of Nike Virtual Studios as a sneaker NFT trading platform. Since Nike has trademarks pending for their own NFTs, Nike alleges these Vault NFTs are obstructing their ability to enter this digital marketplace. Additionally, Nike alleges that StockX is selling these Vault NFTs at inflated prices, well beyond the price of the physical sneaker, to customers who likely believe they are investing in digital assets authorized by Nike, which is not the case. The discrepancy in cost begs the question of why consumers are willing to pay more and if they believe the NFT carries additional value in the form of perks or experiences. Ultimately, Nike alleges that StockX never had consent to use their trademark in selling NFTs and asks the court to stop StockX from selling Vault NFTs with Nike's famous markings.

Answer

In its answer filed on March 31, 2022, StockX responds that Nike's lawsuit misses the mark in alleging a trademark infringement, adding that their claims “lack merit, disregard settled doctrines of trademark law, including the doctrines of first sale and nominative fair use, and show a fundamental misunderstanding of the various functions NFTs can serve.”

StockX alleges that their NFTs are solely Vault NFTs, analogous to an electronic trading card or electronic receipt, which  can then be redeemed for a physical sneaker. The Answer advises that the NFTs are not digital sneakers but that they are “tied to a specific physical good that has already been authenticated by StockX.” Even before Vault NFTs, StockX authenticated sneakers based on their employees' expert knowledge and enhanced technology. StockX alleges that they use the Vault NFTs “to track ownership of frequently traded physical products” and conduct sales, trades, and other transactions for the sneaker. Lastly, StockX argues that there is a disclaimer stating that the NFT is not affiliated or associated with Nike.

StockX also attacks Nike's allegations that these Vault NFTs will create consumer confusion by stating that the consumers are well aware that they are purchasing a physical good that has been authenticated by StockX, stored by StockX, and that the physical sneaker can either be redeemed with the Vault NFT or traded on the blockchain. According to the consumer's understanding of the Vault NFT, StockX alleges that there is no way the consumer would believe that the NFT comes from Nike specifically.   

As for affirmative defenses, StockX asserted fair use and the first sale doctrine to avoid trademark liability. As for fair use, StockX reiterates that the usage of the images of Nike sneakers on the Vault NFTs constitutes nominative fair use. In asserting this affirmative defense, StockX argues against Nike's infringement claim by alleging that they can permissibly use Nike's trademark in reference to their sneaker. Ultimately, StockX is equating their Vault NFTs to an actual picture of a physical sneaker on their website for re-sale which “consumers see (and are not confused by) every single day” arguing that there is no difference between the website and the Vault NFT. As for the affirmative defense pertaining to the first sale doctrine, StockX alleges that as a lawful purchaser of the sneakers, they are allowed to sell these goods under their original trademark if they are not materially different, even if the resale is without the owner's consent. Based on Nike's allegations in its Complaint, it seems likely that it would respond that these Vault NFTs are in fact materially different since StockX may sell promotions or other perks with the NFTs, possibly constituting a material difference in the goods.

Looking to the Future

The significance of the core question in this case— whether and to what extent an NFT is merely a means of transaction or a distinct digital asset– have implications beyond this specific case or trademark law.  Indeed, the way that the Court discusses NFTs may be as important as the ultimate ruling. This case will likely set standards for future litigation about issues including but not limited to contract law, tax law, and Constitutional law.

Since redemption of the Vault NFT is currently unavailable, and StockX has the right to revoke access to the asset (sneaker), it will be an issue of first impression for the court to determine the extent to which an NFT is distinct from the physical asset to which it corresponds. Will Vault NFTs be seen as a revolutionary way to trade authenticated physical sneakers? Or will Vault NFTs be considered a trademark infringement? Since there is no precedent, the court's decision in this action will set the tone for future NFTs in resale markets or sports markets, where they purport to use NFTs moreso as a key to a stored item rather than its own digital asset.

As the NFT market and legal implications surrounding it are so new and evolving daily, all litigation will be closely watched as any decision by a Judge at any stage of the case could have far reaching effect on future litigation.

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