At a recent tech conference, Bill Gates argued that the value of non-fungible tokens (“NFTs”) is “100% based on a bigger silly theory” – the idea that money can be made on overvalued assets as long as people are willing to bid them higher.
There’s no doubt Gates was onto something. The massive rise in NFT values in 2021, and the subsequent crash in 2022, suggests that there was irrational optimism about the investment potential of these assets. But one of the things that’s often overlooked about NFTs is their utility beyond being a new asset class. NFTs perform many useful functions.
For example, in a case involving the theft of nearly $8 million in virtual assets, attorneys served a defendant with a temporary restraining order in the form of an NFT, following the approval of the “service token” by the New York Supreme Court. This approach makes it possible to serve legal process on a person who controls a blockchain address and who might otherwise remain anonymous.
Another practical and utilitarian use of NFTs is to use them as proof of ownership of physical assets. There are many assets in the physical world, such as jewelry, artwork, and trading cards, that are valuable, need to be stored safely, and can degrade or be damaged when transferred by sellers to buyers. NFTs for physical assets allow parties to use a digital asset to represent ownership of a physical asset. By using an NFT to represent ownership, a painting can be bought and sold multiple times without ever having to be moved from secure storage, and there is never confusion about ownership or fraud because each transaction is recorded on the blockchain ledger.
Such uses are becoming increasingly widespread. However, they are not without risk. One such risk, as demonstrated by a lawsuit brought by Nike against sneaker resale marketplace StockX, is a trademark infringement claim.
Context of the lawsuit
In February 2021, Nike filed a lawsuit against online resale platform StockX, a company that resells sneakers, among other goods. The complaint states, “Without Nike’s authorization or approval, StockX ‘mints’ NFTs that prominently use Nike’s trademarks, markets those NFTs using Nike’s goodwill, and sells those NFTs to heavily inflated prices to unsuspecting consumers who believe or are likely to believe that these “digital investable assets” (as StockX calls them) are in fact authorized by Nike when they are not. »
StockX argues that each of its NFT Vault is tied to a specific product, such as a pair of Nike sneakers bought second-hand from its rightful owner, which is sold on its marketplace. The Vault NFT also allows the owner to resell the NFT and the right to exchange it for the physical sneaker, without paying any shipping or storage fees. Unlike a typical transaction for sneakers or other physical goods, the product does not need to be shipped from one party to another, or re-authenticated, when a transaction takes place. NFT can simply be sold on the blockchain.
StockX argues that its use of the Nike branding and imagery in connection with its display and sale of Vault NFT is appropriate under the first-sale doctrine. Under the first-sale doctrine, an entity may resell goods bearing a trademark, such as a logo or brand name, after the trademark owner has sold those items. In other words, under the first-sale doctrine, the trademark owner’s right to control the distribution of the product does not extend beyond the first sale of the product. There are, however, limitations to the first-sale doctrine, including situations where resale is likely to confuse or mislead consumers.
Regarding its NFT Vault, StockX says its stock is “no different from major retailers and e-commerce marketplaces that use product images and descriptions to sell physical sneakers.”
In short, StockX claims that Vault NFTs are a means of authenticating the physical products it is authorized to sell under the first-sale doctrine. Nike argues that these are distinct digital products with their own value, and that StockX “chose to compete in the NFT market not by taking the time to develop its own intellectual property rights, but rather by doing blatant freeriding, almost exclusively, on the back of Nike’s famous trademarks and associated goodwill.
The problem of price disparity
The Nike vs. StockX case, in the event of a lawsuit, will help lay the groundwork for how intellectual property rights will be handled in connection with the creation, purchase and sale of NFTs, including the extent to which NFTs for physical assets are distinct from the physical assets to which they correspond.
One of the issues that could weigh heavily on the court’s decision is that, according to Nike, a number of Vault NFTs sold for a significantly higher price than the physical shoes to which they are ostensibly linked. According to Nike, “StockX sold Nike-branded NFT Vaults at prices well above the price of the physical Nike shoe.”
For example, Nike alleges that the 2022 version of its Nike Dunk Low sneaker will retail for $100 on Nike’s website and that the average resale price of the 2021 physical version on StockX’s website was $282 as of February 2, 2022. However, the average Vault NFT price linked to Dunk Low 2021 shoes on the same date was $809, with the highest trade being $3,500.
In other words, there is a major disconnect (almost 1000%) between the price of the physical shoe and the price of the digital option that can be exchanged for the physical shoe (i.e. the Vault NFT).
This price disparity suggests that, at least in the minds of some consumers during the heady days of 2021, there was confusion over whether NFT Vaults were merely a way to authenticate and demonstrate ownership of physical sneakers. or were a unique asset with a distinct value from their physical counterparts. If Vault’s NFTs are determined to be separate assets, StockX’s argument that it is protected against Nike’s trademark infringement claims by the first-sale doctrine becomes more tenuous.
NFT and unanswered IP questions
The issue of price disparity between NFTs and their corresponding physical assets is by no means the only complicated and novel issue raised in this case, as well as other NFT-related intellectual property disputes, such as the lawsuit. of Hermès against the artist Mason Rothschild. These cases will help lay the groundwork for how intellectual property rights, especially trademark rights, will be handled in the creation, purchase and sale of NFTs in the future.
But it is not just the judiciary that will weigh in on these issues. In response to a request from U.S. Senators Patrick Leahy and Thom Tillis, the U.S. Copyright Office and the U.S. Patent and Trademark Office recently announced that they would jointly review issues related to NFTs in the context of increase in issues and disputes such as those raised in the Nike and Hermès cases.
Here is a sample of the questions the senators asked the USPTO and the Copyright Office to address:
“For current and potential future applications of NFTs:
- How are the transfers of rights applied? What is the impact of the transfer of an NFT on the intellectual property rights of the associated asset?
- How are license fees applied? Can and how can intellectual property rights in the associated asset be licensed in an NFT context?
- How does the offense apply? What is the analysis of potential infringement when an NFT is associated with an asset covered by the intellectual property of a third party? Or when the underlying asset associated with an NFT belongs to the creator of the NFT and is violated by another?
- What intellectual property protection can be granted? What IP protection can be granted to the creator of NFT? What if the creator of the NFT is a different person or entity than the creator of the associated asset? »
All good questions. No obvious answers yet. What is clear is that a combination of legal, regulatory and legislative actions will help shape the IP and NFT landscape in the years to come. As the senators note in their letter, “[I]It is imperative that we understand how NFTs fit into the world of intellectual property, as said rights apply today and as they may evolve as we move into the future. Without such clarity, it will become increasingly difficult for businesses to innovate and protect their rights in the digital world.