Nike and the “infringing” NFTs

Non-fungible tokens (“NFTs”) haven’t been around that long, yet this is the third time we’ve written about them. But this is probably a measure of how much attention they’ve enjoyed, rather than how significant they’re likely to be in the long term.

SOME BACKGROUND

As we’ve discussed in previous articles, artworks and musical works are popular forms of NFTs. These weird and wonderful new assets are sold on crypto-marketplaces like Opensea and Nifty Gateway, and payment generally takes place through crypto-currency. People buy NFTs for a variety of reasons, with the main one probably being that they’re seen as a good investment – it’s the rarity factor that seemingly makes them valuable.

In a recent article, we wrote about the fact that fashion house Hermès had sued Mason Rothschild in a New York court for trade mark infringement and dilution. This case related to the Hermès trade mark Birkin and, more particularly, the fact that Rothschild was marketing digital assets under the name Metabirkins. In this article, we will discuss an alleged infringement of Nike trade marks.

THE NIKE NFT STORY

Nike has sued a company called StockX, a company that sells NFTs that are based on Nike shoes and display Nike trade marks. This legal action is taking place in the USA. It seems that one of the reasons why Nike has become embroiled in this litigation is the fact that the company recently acquired a virtual sneaker and collectible business called RTFKT, something that is seen as an important step towards Nike entering the NFT market. Nike seemingly believes that the allegedly inferior product offered by StockX is impeding its ability to successfully move into the digital marketplace.

This litigation is at a very early stage. Below, we deal with some of the more interesting features that have emerged so far.

Alleged infringement of Nike trade marks

Nike alleges that StockX has infringed nine of its trade marks (comprising sneaker designs as well as logos and words) through the creation of a line of NFTs that are part of a collection that StockX calls the "Vault". The Vault consists entirely of allegedly unauthorised images of Nike sneakers.

Image source

Consumer confusion and dilution

Nike claims that StockX is selling these NFTs at heavily inflated prices to unsuspecting consumers who mistakenly believe that these “investible digital assets” are authorised by Nike. Nike says this in the lawsuit: “Those unsanctioned products are likely to confuse consumers, create a false association between those products and Nike, and dilute Nike’s famous trademarks.”

Free-riding

Nike claims that StockX is guilty of free-riding. It says this in its papers: “Recognizing first-hand the immense value of Nike’s brands, 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 free-riding, almost exclusively, on the back of Nike’s famous trademarks and associated goodwill.”

NFTs can be exchanged for real shoes

An interesting aspect of this case is that each StockX digital asset is linked to a physical sneaker – seemingly the purchase of a StockX NFT serves to certify ownership of the physical item too. As we understand it, what this means is the NFT can be exchanged for its physical twin at any time, notwithstanding the fact that the NFT often sells for significantly more than the physical item.

There’s serious money at stake

According to Nike’s court papers, StockX has sold some 600 of these Nike-related NFTs, and they are trading for thousands of dollars.

An unusual business model

According to Nike, the StockX purchase agreement purports to allow the company to revoke ownership of the NFT or the corresponding physical asset (the shoe). Nike suggest that this is dodgy, making the point that it is very unusual for the seller of an asset to maintain a right to unilaterally revoke the buyer’s ownership.

The first-sale doctrine (genuine goods)

There is speculation that StockX will, in its defence, raise the first-sale doctrine, in other words the doctrine which says that a marketplace is entitled to sell trade-marked goods. In South Africa, this is referred to this as the right to sell genuine goods.

The thinking is that StockX will raise the argument that it is simply reselling trade-marked goods, and that it is doing no more than creating an NFT to stand in for the actual shoe. Nike, however, is likely to argue that the NFT is a totally separate product from the shoe. In support of this, it is likely point to the fact that an NFT/physical asset (shoe) combination has a far higher value than a shoe without the NFT. It will be very interesting to see how a court deals with this issue.

Unchartered territory

We really are in unchartered territory here. Hopefully, this case will go through to a hearing as it would be very useful to have a judgment dealing with these ground-breaking issues.

Click below for further reading on NFTs:

Reviewed by Gaelyn Scott, head of ENSafrica’s IP department.

Liézal Mostert

IP | Trade Mark Attorney | Senior Associate

lmostert@ENSafrica.com