Over the last year, there has been a significant rise in the number of lawsuits concerning NFTs. In this post, I discuss the kerfuffle between Nike and StockX. StockX is a marketplace where consumers can buy and sell streetwear and sneakers. StockX’s value-add is that they authenticate the goods sold so that the buyer can be assured it is receiving an authentic product.
Recently, StockX has entered the legion of businesses offering NFTs. For some context, NFT stands for “Non-Fungible Token” which is fancy terminology for a unique digital ledger entry on the blockchain that is generally intended to indicate the ownership of a digital asset. Here, StockX claims that it is using NFTs as a digital receipt of a physical product — namely, sneakers that are being bought and sold through StockX.
StockX claims it holds a purchaser’s kicks in a “vault” and whomever owns the corresponding NFT owns the pair of shoes in the vault. If you sell the NFT, you are supposedly selling the right to “redeem” the NFT and claim the physical product. StockX claims this reduces transaction costs because a purchaser can immediately re-sell a product without having to wait for the product to be shipped.
On its face, this business model does not necessarily raise any legal red flags, but here’s where things get tricky: Nike alleges that StockX does not actually have the actual shoes in stock and can essentially “trade out” the NFT with an “Experiential Component” (whatever that means) in place of the shoes that a buyer thought they were purchasing. Further, StockX can exercise that right to essentially negate a buyer’s NFT unilaterally.
So, if there are no real shoes in StockX’s vault, what exactly are consumers purchasing? According to Nike, StockX is selling completely illusory goods, and doing so by trading off of Nike’s goodwill and trademarks. This is somewhat of a novel argument in NFT litigation. Many NFT lawsuits are rooted in copyright infringement, whereas here Nike is bringing trademark infringement and dilution claims under the common law and the Lanham Act.
Using trademark law here may be a tactical move by Nike to avoid the defense of the “first-sale” doctrine, which allows purchasers to display images of the goods they bought and wish to resell without the permission of the copyright holder. Here, Nike makes the argument that the NFT is a product in and of itself and, by bearing the Nike trademarks, is causing customer confusion.
As evidence for this, Nike points to the difference in the purchase price of the physical shoe and its associated NFT. For example, StockX will sell you Nike Blazer KAWS lowtops for $205. Alternatively, StockX will sell you an NFT of the same shoe, with the right to “redeem” the NFT for the shoes, for $590. This same NFT traded on the blockchain at $3,995, resulting in a “digital receipt” for a product having significantly more value than the actual product itself.
Another interesting aspect of this case is that Nike not only relies upon its trademarks on its physical goods — it also cites to its recently-filed trademarks for digital goods, like NFTs, indicating that Nike is potentially worried about the court making a distinction between enforcing a trademark on physical goods versus one on digital goods.
Ultimately, I suspect this matter will come down to whether StockX’s NFTs function as a digital receipt or whether they are a separate product from the goods they purportedly represent ownership in.
Although NFTs have been around for some time, there is now a booming market for NFTs, and many businesses are starting to dip their toes into the NFT space. As the Nike/StockX dispute shows, there can be significant legal traps for the unwary. New entrants into this market would be well served to consult with an attorney familiar with intellectual property, blockchain, and Web3 issues before any minting occurs.
For more information on this article and this topic, contact Christopher L. Harbin.