NFTs: Are they legally laced up, or is the shoe on the other foot?
by Danielle Garno, Partner, Reed Smith
2022 got off to a hot start in the world of digital collectibles, with a plethora of businesses, such as American Express, Red Bull and even Chevron rushing to file trademarks in the metaverse. With all of this buzz, innovation, and legal uncertainty, lawsuits have (not surprisingly) begun to follow.
One of the most high-profile disputes of the year so far saw Nike file a complaint for acts in the metaverse against StockX, an online apparel and sneaker reseller, for infringing Nike’s trademarks by selling unauthorised images of Nike’s shoes in the form of non-fungible tokens (NFTs). As one of the earliest legal cases of its kind, it’s outcome could define the ways the courts deal with NFT trademark disputes.
What was the claim about?
In February, Nike filed a complaint in New York federal court stating that without its authorisation or approval, “StockX was ‘minting’ NFTs that prominently use Nike’s trademarks, marketing those NFTs using Nike’s goodwill, and selling those NFTs at heavily inflated prices to unsuspecting consumers who believe or are likely to believe that those ‘investible digital assets’ (as StockX calls them) are, in fact, authorized by Nike when they are not.” The complaint discusses how there has been public criticism of StockX’s inflated prices and ambiguous terms of purchase and ownership in connection with the Nike-branded Vault NFTs, which has garnered a false, negative association with Nike in a way that harms its reputation and goodwill.
This complaint came hot on the heels of a somewhat similar trademark infringement lawsuit filed by Hermès against Mason Rothschild, an individual who created a collection of NFTs called “MetaBirkins,” which depicted fuzzy, colourful versions of the iconic Hermès Birkin bag.
Citing to its famous trademarks throughout the complaint, Nike alleges that StockX’s misappropriation of such marks prevented Nike from entering into the lucrative NFT market, thus depriving Nike of its exclusive right to use its marks in the digital arena. Specifically, Nike points to its December 2021 acquisition of RTFKT, a digital art studio, and its trademark applications seeking registration for “downloadable virtual goods” to demonstrate its recent investments in NFT technology, digital goods, and the metaverse, generally. According to Nike, StockX’s unauthorized use of its marks causes consumer confusion, creates a false association, and harms Nike’s reputation.
Although no formal response has yet been filed in court, StockX has stated that its Vault NFTs are merely proof of ownership of the physical good that can be, according to StockX, redeemed by the owner of the Vault NFT. In other words, it is merely a receipt for a pair of sneakers. Therefore, accordingly to StockX, there is simply no infringement because the Vault NFTs are just a digital version of the physical Nike products StockX has in its “vault.” However, like infringement cases in the physical world, the issue to be decided in the metaverse similarly is whether the consumer believes that Nike is associated with the sales of the Vault NFTs. Given some of the examples of actual consumer confusion and reputational harm included in Nike’s complaint (e.g. “You can cash out the NFT for the actual shoe, but I think it’s just a stupid scam for Nike to make money”), it will be interesting to see StockX’s response to the complaint and if they try to thread that needle.
Overall, Nike alleges that StockX has sold 558 individual Nike-branded Vault NFTs. The brand seeks injunctive relief to prevent further sales and is asking for monetary damages – the same remedies sought by Hermès against Rothschild. Both NFT lawsuits raise questions about adequate remedies when infringing goods are stored on blockchain because transaction records cannot be changed once entered without disassembling the blockchain. This can also affect third parties who purchased these NFTs and whether their access will be denied, including preventing transferability of the NFTs, thus rendering the NFT completely worthless. The practicality of this remedy is still unexplored, as courts may instead prevent future listings rather than “burn” NFTs already sold to innocent third parties.
The future of brand disputes
Given the growth explosion of the NFT market (trading volume in 2021 surpassed $23 billion), we can expect more intellectual property disputes over NFTs in the next couple of months and in the foreseeable future. These first few cases of first impression may define the way courts approach trademark infringement and intellectual property infringement generally, when it comes to digital assets and the metaverse.
While the crux of the arguments (e.g., consumer confusion as it pertains to the source of allegedly infringing goods) and defenses (e.g., fair use) will remain the same as in typical trademark infringement cases, there will likely be new issues arising as they relate to the definition of NFTs, ownership of intellectual property rights in NFTs, and how traditional infringement claims apply virtually. Provided these cases go the distance, these courts have the ability to explore how far intellectual property protection (as it relates to physical products) translates to virtual products; the advantageousness of filing trademark applications for virtual goods and services; and what remedies can be granted.
Finally, what does this mean for consumers? Are they waiting for the proverbial (NFT) shoe to drop? If the courts side with brands and grant injunctive remedies whereby NFTs are incapable of being accessed or transferred by the consumers who purchased them (essentially rendering them valueless), consumers will likely stray from online digital marketplaces. Whatever the outcome, these cases with undoubtedly shape how brands, lawyers, and consumers interact in the metaverse.