Vivek Jayaram
Founder, Jayaram Law

As the metaverse continues to expand its offerings of digital goods to the masses—from real estate to yachts to wearables (clothing)—everyone, from individual creators to global corporations, are aware of and trying to futureproof their online-only items.

Take, for instance, the news of Nike’s lawsuit against IRL reseller giant StockX, which immediately attracted widespread media coverage throughout the NFT, sneaker, and IP communities. Creators, sneakerheads, and lawyers are paying close attention to the dispute because it will undoubtedly provide an early roadmap of how courts will handle creators’ decisions to mint NFTs that are representations of physical goods—especially those that are exceedingly similar (see NFT Economies and Counterfeiting Risks and A New Frontier: Brand Protection and Elevation in the Metaverse).

The facts by now are familiar to sneakerheads and NFT collectors alike: StockX is a reseller for streetwear, bags, and sneakers. To address the rampant counterfeiting that takes place with these kinds of products, StockX has built its reputation by also acting as an intermediary that verifies the authenticity of the goods that it sells. Their industry-recognized verification process is in large part why they are the leading reseller of sneakers. This self-regulatory practice has earned the trust of a community which prides itself on the verifiably rare. StockX built upon that existing system in January 2022 by launching NFTs linked with physical goods. These “Vault NFTs” further add value as their blockchain contracts can be utilized to redeem physical items, and they can be traded instantly, just like other NFTs, as digital goods.

The challenge arising is that as Nike shoes are extremely popular on StockX—and its Vault tokens are linked with the same name and picture of their corresponding products—Nike alleges that the resulting newly-minted NFTs constitute trademark infringement, false designation of origin, and trademark dilution. The case now hinges on whether StockX’s NFTs are merely an extension of its normal reselling process (like a digital receipt of ownership or authenticity) or whether they are separate and distinct products that would require a license from Nike before using Nike marks in connection with the products. The question seems to be morphing from simply who owns the trademark rights to, rather, who owns the added utility?

In the lawsuit, Nike alleges that StockX’s decision to mint and sell the NFT is likely to cause confusion among consumers because the StockX NFT prominently bears the famous Nike trademarks. How is it possible StockX could lawfully mint and sell NFTs bearing the famous Nike trademarks? 

On April 22, StockX offered a few theories in its Answer filed in federal court and in response to Nike’s Complaint. According to StockX, minting and selling NFTs is “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 other words, StockX has taken the position that because its NFTs do nothing more than verify or “authenticate” a product that it is actually selling (the Nike sneaker), its conduct is fair use and not in violation of US trademark laws.  

Then, in early May, Nike doubled down on its accusations, alleging that StockX was actually selling counterfeit Nikes on its marketplace. This is a serious allegation that, if true, could damage StockX’s reputation as the place to buy verified and authenticated sneakers. In most cases, a brand like Nike would not sue the marketplace itself for selling fakes – places like eBay or Amazon enjoy substantial immunity unless a brand can show that the marketplace knew that a specific fake was being sold and subsequently did nothing to remove the listing. StockX is different because it makes an affirmative representation – unlike Amazon or eBay – that the sneakers it offers for sale are verified as “real” sneakers. If it turns out that StockX is selling counterfeit Nikes, then its argument that NFTs simply act as a digital certificate of authenticity for the physical sneaker will likely fail. 

While it may be too early to tell how this case will turn out, here are a few actions that owners can take to ensure that their NFT drops linked to physical goods do not violate federal trademark laws.  

Make sure that the acquisition of the NFT also includes the acquisition of the physical good.  

Nike alleges that an acquisition of a StockX NFT, at least at the time it filed its lawsuit, did not also include any corresponding physical sneaker. This would certainly be a problem.  

For brands to validly assert a fair use right to mint and display NFT that are alleged representations of physical goods, the actual goods must be linked to the NFT and must be sold along with the NFT. If a brand simply mints and sells an NFT that does not also include the sale of a physical product, then it is doing nothing more than selling NFTs that contain trademarks that the brand does not own. While NFT creators are often entitled to a fair use of trademarks while creating digital artworks, that fair use analysis would likely not work.

Retailers should primarily promote the physical good, not the NFT.  

If retailers want to avail themselves to the kind of argument StockX is making in the Nike case, they need to make sure that they are not promoting the NFT more than they are promoting the physical good. Trademark and copyright infringement suits are highly fact intensive; judges are observant and if a brand is primarily promoting the NFT (versus promotion of the physical good), then such action calls into question the idea that the NFT is analogous to a website listing for a product. In other words, “over-promoting” the NFT might result in a conclusion that the NFT—not the physical good—is the primary product offered for sale, with the sale of the physical good ancillary to the digital sale.  

Once the physical good is no longer available, the NFT should be delisted.  

If retailers are truly creating NFTs to act as digital receipts or authentication tools for physical goods, then this should never be an issue. However, we have seen some instances where physical goods are sold without the NFT (perhaps the buyer does not have a wallet to hold the NFT). In such cases, the NFT must be immediately delisted. If the NFT remains for sale, the brand opens itself up to claims for infringement since the NFT is no longer linked to any physical good.  

NFTs and blockchain technology are powerful tools that allow brand owners to substantially reduce or even eliminate counterfeiting and infringement on their products. Because consumer behavior is still developing in Web3 environments, however, retailers should follow these best practices (and go further in some cases) to ensure that using new technologies does not expose them to lawsuits for infringement. It is far better to mitigate risks by considering self-regulatory, internal policies to better futureproof interests than to wait and see if it’s a necessity—it is. The metaverse and its digital accoutrements are here to stay.