Nike, Inc. has filed a federal complaint against StockX, LLC, an online resale marketplace, in the Southern District of New York, alleging that StockX manufactures and sells non-fungible tokens (“NFTs”) that infringe the intellectual property of Nike. StockX counters, arguing that because its NFTs are inextricably linked and intended to certify ownership of actual physical Nike sneakers, the NFTs are non-marginal fair use and a legal exercise of the first-sale doctrine.
As one of the first documented challenges against NFTs used to certify ownership of physical goods, this case raises first impression questions and may provide greater clarity on the line between infringement and fair use. when NFTs are linked to physical products.
StockX is a global online marketplace that allows its users to buy and sell “current culture items” including sneakers, apparel, collectibles, trading cards, and coveted accessories, among others. products. According to the company, the StockX platform has attracted a significant number of customers who wish to acquire and trade these products solely for investment purposes and without any interest in immediately or ever wearing these products or taking physical possession of them. For such Clients, StockX offers to store Investment Products in a climate-controlled, high-security vault (“Stored Items”). It also uses a proprietary multi-step authentication process to verify the authenticity of products sold on its platform.
StockX uses NFTs to track ownership of stored items that are kept in the StockX vault. According to the company, these “Vault NFTs” “represent and follow proof of ownership of the actual sneaker stored in [the] StockX Vault. Consumers who purchase Vault NFTs can either retain digital possession of the Vault NFT and leave the authenticated physical asset in the StockX vault, or take possession of the vault physical asset at any time, in which case the Vault NFT is removed. customer’s digital. wallet and withdrawn from circulation. StockX claims that when a user buys a Vault NFT, they are buying the underlying stored item and that there is no markup for the Vault NFT itself. Additionally, StockX claims that Vault NFTs cannot be traded separately or disassociated from ownership of the underlying stored item – it is merely a “claim ticket” or “key” to access the underlying stored item.
The disputed NFTs
The NFT Vaults at issue in this case feature images of several Nike-branded sneakers, including the Nike Dunk Low Black and White sneakers featured in the image.
Nike claims that these NFTs are likely to confuse consumers, create a false association between StockX and Nike NFTs, and dilute Nike’s trademarks, among other related disadvantages. Additionally, Nike argues that StockX’s product hinders Nike’s success in the NFT market, citing, among others, their recent acquisition of an NFT company in December 2021 as evidence of its expansion in the market.
Additionally, Nike disputes the argument that StockX’s NFTs have no independent value outside of the physical products to which they relate due to a right of withdrawal listed on StockX’s website. Specifically, Nike points to the Vault NFT Terms, which state that NFT holders can be granted the right “to obtain certain additional products or benefits for engaging in certain experiences, such as unlocking a reward. or access and exclusive sales”. The independent value of such NFTs, if any, will be an important factual determination for the court and may materially impact StockX’s fair use defense.
According to Nike, StockX has already sold 600 of these NFTs, earning thousands of dollars in the process. Nike further alleges that StockX is misleading consumers by claiming that the NFTs are “100% genuine”, when Nike has not authorized the sale of these NFTs.
In its response, StockX argues that its use of resale product images and descriptions as part of its NFT Vault is “no different from major retailers and e-commerce marketplaces that use product images and descriptions to sell sneakers and other goods, which consumers see (and aren’t fazed by) every day. StockX also asserts the affirmative defenses of the first sale doctrine and fair use.
The first-sale doctrine is a legal principle that generally limits an intellectual property owner’s rights to assert infringement claims in connection with products already sold to a consumer. StockX claims that its actions do not constitute a violation of trademark law because each NFT corresponds to a specific physical Nike shoe in its rightful possession. Under established case law regarding the first-sale doctrine, StockX could resell these physical shoes without infringing Nike’s intellectual property rights if the limited use of Nike’s intellectual property does not result in consumer confusion. The question remains whether the first-sale doctrine allows consumers to sell virtual images of the shoe without infringing the rights of the intellectual property owner.
The doctrine of fair use is a legal principle that generally permits third parties to use the trademarks of others without liability in limited circumstances. For example, StockX argues that its actions do not constitute a violation of trademark law because the images of the shoes and the descriptions of the resale products in connection with the NFT Vault have been used in an authorized manner to refer to specific physical products. (Nike shoes). Under generally applicable name-based fair use case law, StockX could resell these tangible shoes (i.e., genuine Nike shoes) using Nike’s trademarks without infringing intellectual property rights. of Nike if, among others, use of Nike’s trademarks was in a manner and to the extent necessary to describe or refer to Nike’s product without causing consumer confusion.
Whether Nike will succeed in enforcing its intellectual property rights or whether StockX will succeed in maintaining the legality of its actions remains to be seen.
Importance of the case
Given the unique set of circumstances involved, this case should shed light on the key intellectual property issues surrounding NFTs, particularly when and if NFTs relate to physical goods. As the first major law firm to purchase land in the Metaverse, ArentFox Schiff is closely monitoring developments in this case and other key IP considerations in the Metaverse.