StockX is a leading online sneaker and streetwear marketplace that, like dozens of other retailers, recently plunged into the NFT pool. Earlier this year, StockX announced its VaultNFT collection of digital avatars of real-world sneakers. Not long afterward, Nike also ventured into the NFT universe when it mobilized RTFKT Studios, which it had acquired in late 2021. Nike filed a lawsuit against StockX for a host of intellectual property (IP) infringement claims. Welcome to the Metaverse, where blockchain and IP law collide in a cosmos of lawlessness.
As the case plays out, we look at the legal issues involved.
Background to the NFT Feud
StockX serves as an online marketplace where consumers can buy and sell high-end shoes and streetwear. It was founded in 2015 by Quicken Loans founder and CEO Dan Gilbert. He then purchased Campless from Josh Luber—an online repository for sneaker sales data that was the predecessor of StockX. Operating much like eBay, it has become one of the most popular online destinations for consumers to purchase hard-to-find luxury shoes and streetwear.
On January 18, 2022, StockX diversified into the NFT marketplace with the launch of its VaultNFTs collection. However, rather than selling NFTs based purely upon art such as photographs, drawings, paintings and the like, the online resale platform has created an NFT-based avatar system for physical sneakers held in its inventory. The sneakers are minted “under custodial authority” as ERC-1155 tokens on the Ethereum blockchain. While the e-commerce platform sells myriad brands, the VaultNFT avatars are a proverbial step forward as they tie the NFTs to physical items, primarily Nike-branded shoes.
Nike’s purchase of RTFKT Studios—an NFT sneaker brand where one sale earned it $3.1 million in seven minutes—launched the sportswear giant onto another plane of existence. The move was true to form: Nike has always been about style and substance, using forward-thinking engineering and innovative materials to always stay one step ahead of its competitors. In February, Nike filed suit against StockX in the New York Southern District Court, alleging that StockX committed trademark infringement, trademark dilution, and related causes of action with its virtual products registered on the blockchain.
The First Sale Doctrine and Minute Lawsuit Details
The overarching issue in this case is whether or how the “first sale doctrine” applies to digital goods. The first sale doctrine is a legal principle that states a copyright or trademark owner cannot prevent a consumer who has lawfully purchased a copyrighted good—such as a CD—from selling, lending, or giving that item to another person. This principle permits the distribution (or resale) of the copyrighted materials after the initial sale by the copyright owner. Without the first sale doctrine, no person, business, or non-profit entity would be able to resell their Nikes, lend a novel, or auction a Norman Rockwell. Federal copyright law has codified the first sale doctrine, stating “the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” With trademarks, the resale of an item bearing a trademark is permissible unless likely to confuse or deceive consumers—courts have recognized these limitations for trademarks and the first sale doctrine.
The first sale doctrine predates the digital era but is still applicable. While NFTs are digital assets, copyrights and trademarks still apply, especially if the NFT represents an image, slogan, song or a sports clip. For copyright purposes, does the first sale doctrine apply to NFTs minted in the image of Nike shoes, which are linked to the actual physical asset available for purchase? Does the trademark exception apply because consumers may be confused or deceived about the relationship between StockX and Nike? How should these rights be balanced? The issues are further complicated because there are no standard terms applicable to the grant of rights in the art underlying NFTs. Until general rules are promulgated, these issues will be resolved on a piecemeal basis.
To date, the Nike v. StockX case has generated more questions than answers regarding ownership, creative freedom, public domain, and fair usage in the NFT marketplace and digital assets in general. In its complaint, Nike raises five causes of action: 1) Trademark Infringement under 15 U.S.C. § 1114; 2) False Designation of Origin / Unfair Competition pursuant to 15 U.S.C. § 1125(a); 3) Trademark Dilution pursuant to 15 U.S.C. § 1125(c); 4) Injury To Business Reputation and Dilution under the New York General Business Law § 360-1; and 5) Common Law Trademark Infringement and Unfair Competition; it seeks a jury trial and monetary damages. Nike has several federally-registered trademarks for its shoes pursuant to 15 U.S.C. § 1065 that they claim StockX is using illegally because there is no collaboration between Nike and StockX, which the latter is “using Nike’s trademarks to market, promote, and attract potential purchasers to its Vault NFTs.”
Nike asserts that “StockX has chosen to compete in the NFT market not by taking the time to develop its own intellectual property rights, but rather by blatantly freeriding, almost exclusively, on the back of Nike’s famous trademarks and associated goodwill.” Further, Nike claims that the VaultNFTs based upon Nike footwear constitute an “unauthorized and infringing use of Nike’s famous marks.” Nike’s lawyers also contend that StockX “minted” a Nike-branded NFT as an “investable digital asset” that it sold at a “heavily inflated” market price to “unsuspecting consumers” who are buying these tokens likely thinking they are approved by Nike.
Nike argues that it owns the copyrights and intellectual property rights to its real-world sneakers and that VaultNFTs avatars infringe upon these rights. VaultNFT owners can “redeem” the avatars as coupons for lowering the cost of obtaining real Nike shoes unless StockX exercises its right to not redeem the shoes under the contract. Additionally, Nike possesses common law rights in asserted marks used in connection with its goods and services in interstate commerce for the sale, distribution, promotion, and advertising. The company asserts that these marks extend to virtual products and that Nike intends to expand that use with current trademark applications by transferring them into the virtual market with its own NFTs.
Ultimately, Nike argues that the first sale doctrine does not apply in this case, allowing it to retain its IP rights because they do not transfer with the sale of its shoes. Once the shoes are sold from their stores, Nike has no say as to how they are distributed or resold. However, Nike does have a say as to how its image is used and who can profit from it.
Meanwhile, StockX contends that each of its VaultNFTs is tied to a specific product sold on its marketplace—a product StockX bought second-hand from a rightful owner/consumer. StockX says its right to use Nike branding and imagery falls within the first sale doctrine, so no copyright issues are pertinent. Further, Nike’s IP rights do not entitle Nike to control transactions in the shoes after the first sale. So, StockX can buy the shoes from a retailer or an individual and resell them as it wishes, while using Nike’s branding and imagery of the shoes in a limited way as part of the resale and marketing process. StockX argues that its NFTs are tied to the resale of Nike shoes on its marketplace and they are not original NFTs creating digital versions of Nike’s shoes. Rather, the NFTs offer proof of ownership of these goods that is recorded on the blockchain.
Copyrights can be divisible by contract from an asset or good. This aspect can be recorded on the blockchain so it will be traceable. However, NFTs are considered indivisible assets, meaning they cannot be sliced into fractional shares like cryptocurrency. Perhaps NFTs will evolve similarly to software, where NFT creators will need to obtain licensing rights from IP holders to showcase a copyrighted product. NFT and blockchain-related law is still evolving to deal with these new technologies. As the story unfolds, the Nike v. StockX case is likely to provide new legal insight as to how intellectual property rights will evolve to include NFTs and blockchain-related issues.
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