On February 3, 2022, Nike, Inc. started a federal lawsuit against online marketplace StockX LLC over StockX’s use of NFTs. The lawsuit marks another chapter in the emerging area of NFT litigation that includes Miramax, LLC’s suit against Quentin Tarantino (over “Pulp Fiction” NFTs) and Hermès International, S.A.’s suit against artist Mason Rothschild (concerning “MetaBirkin” NFTs). The Nike lawsuit presents new issues of interest to manufacturers, resellers, retailers and NFT promoters.
What are NFTs?
NFT is short for “non-fungible token.” “Fungible” assets are replaceable, like dollar bills. One dollar bill is essentially identical to any dollar bill, just as a bitcoin is basically identical (in value and use) to any other bitcoin. An NFT is non-fungible, like a piece of sports memorabilia, which is unique and cannot be replaced for an identical item. As a “token,” an NFT is a digital token on a “blockchain.” NFTs are typically stored on the Ethereum blockchain.
An NFT usually corresponds to a digital or real-world object. Like a stock certificate showing the holder of the certificate owns certain shares, an NFT shows that its holders also have ownership of a corresponding asset. For example, an NFT could correspond to an audio file, an image file, a video file or a collectible item, and the owner of the NFT would also own an original of the song, picture, movie or item.
What can NFTs be used to sell?
NFTs have been used to sell a variety of digital goods. For example, Beeple’s digital artwork “Everydays: The First 5000 Days,” sold at a Christie’s auction for $69 million dollars; “Clock,” a timer that depicts how many days Wikileaks founder Julian Assange has spent in prison, sold for $52.7 million dollars; Snoop Dogg, under the moniker “Cozomo de’ Medici” purchased an NFT of the digital artwork “Right-click and Save As Guy” for approximately $7 million dollars; and a tweet by Twitter founder Jack Dorsey sold for $3 million dollars. NFTs can also authenticate or correspond to real-world goods.
What Rights do NFT Holders Have?
NFTs usually do not transfer copyrights or reproduction rights in an asset. Digital assets can usually still be freely copied and stored even when someone owns a corresponding NFT. For example, owning an NFT corresponding to a digital image typically would not prevent others from copying and storing the image. Rather, the NFT owner would have proof of ownership of the image’s original copy. This concept is similar to traditional art markets, where an original painting usually has a much higher selling price than a print.
Why are Brands Interested in NFTs?
Designers and creators are often interested in a feature of some NFT marketplaces which ensures the creator receives a percentage every time the NFT sells or changes ownership. This can be lucrative for artists and other designers of an NFT that becomes popular and sells frequently or at increased prices. For major brands, NFTs represent new ways to engage with their customers or product consumers. Luxury brands can use NFTs to create parallel markets distinct from the general goods. For example, NFTs could be used to track and sell limited edition and high-end versions of generally offered products. NFTs can support digital registries to manage product inventory for luxury or collectible goods. NFTs can also be used for authentication of rare or limited-edition items.
What is StockX?
StockX is an online marketplace for sneakers, streetwear, trading cards, handbags and other similar rare or limited items. It heavily markets sneakers and attracts sneakerheads and enthusiasts looking for limited edition sneakers that sold out before they could purchase them from the manufacturer. Much of StockX’s sneaker inventory is “deadstock,” meaning authentic, new and unworn and StockX’s tagline promises a “Buy/Sell Authentic Guaranteed.” StockX facilitates resale of many Nike sneakers and created “Vault” NFTs to track ownership and resale of these sneakers. These NFTs were redeemable for physical shoes stored in a vault.
Why is Nike Suing StockX?
Nike was one of the first innovators in connecting NFTs to real-world objects, using its now patented “CryptoKicks” method to authenticate sneakers. Nike has used CryptoKicks specifically with limited edition sneakers that it releases in “drops.” These limited-edition sneakers often have large value in resale markets due to limited supply and high demand.
In February of 2022, Nike sued StockX alleging that StockX’s NFTs infringe on Nike’s trademarks because they use unauthorized images of Nike shoes. Nike also alleged that StockX’s sales of NFTs inflated prices, hurt Nike’s reputation and interfered with Nike’s plans to market and sell its own NFTs, such as CryptoKicks. StockX answered and argued that it is allowed to use Nike images in the resale of Nike sneakers as a “fair use,” especially since it is using the NFTs only to authenticate and track physical shoes and is not selling standalone NFTs. According to StockX, the NFTs are “no different than major e-commerce retailers and marketplaces who use images and descriptions of products to sell physical sneakers and other goods, which consumers see (and are not confused by) every single day.”
In May of 2022, Nike amended its complaint, alleging that StockX had sold counterfeit Nike sneakers and that StockX’s authentication process is not “100% Verified Authentic.” Nike added claims for false advertising and counterfeiting. StockX answered and denied selling any counterfeit sneakers, questioning the timing of Nike’s new filing. StockX also publicly stated that Nike has praised StockX’s authentication system in the past and that Nike employees and senior executives buy Nike products from StockX.
What Does the Nike Lawsuit Mean for Resellers and NFT Marketers?
The Nike v. StockX lawsuit is one of the first major lawsuits concerning use of NFTs in connection with physical goods. It raises new issues relating to NFTs alongside traditional trademark and copyright questions. The lawsuit is still in its early stages and may settle before a Court ruling on any of these questions. Even so, brands should be aware of several issues highlighted by this lawsuit. First, as a lawsuit by a manufacturer against a retailer, this lawsuit is unusual and is a reminder to retailers and resellers to use best practices in handling manufacturer trademarks. Second, the lawsuit raises new questions about what existing intellectual property can legally be used in making and selling NFTs. Third, the lawsuit presents novel issues about NFTs used to authenticate physical products and may guide NFT promoters in this emerging market.
Laws governing emerging technologies like NFTs are evolving as their use becomes more widespread. Creators, purchasers and sellers of NFTs and the physical products they are tied to should consult legal counsel to help avoid liability and protect against substantial financial losses.
Photo by Rick Govic on Unsplash
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