JTIP Blog

Introduction  

In April 2022, someone paid $130,000 for a pair of Nike Dunks. Here’s the kicker – it was for a pair of virtual sneakers. Shelling out five to six figures for a pair of exclusive shoes is not rare in the sneaker world, but paying that much for a pair of virtual kicks is unprecedented.

This sale illustrates Nike’s wider strategy in conquering the next frontier of commerce: the metaverse. In 2021, Nike started making strategic investments to grow and protect its brand in the metaverse. First, Nike submitted several trademark applications with the United States Patent and Trademark Office for virtual goods. Second, Nike announced a partnership with Roblox, an online gaming platform, to create a Nike-branded virtual world where gamers can play virtual games and dress their avatar in digital versions of Nike’s products. Third, Nike acquired RTFKT, an organization that creates unique digital sneakers. John Donahoe, Nike’s President and CEO, described the acquisition as “another step that accelerates Nike’s digital transformation and allows us to serve athletes and creators at the intersection of sport, creativity, gaming and culture.”

Nike is not the only brand exploring the metaverse. Other brands are now offering virtual merchandise through NFTs, including other sportswear brands like Asics and Adidas, luxury fashion brands like Hermès and Gucci, and even fast-food chains like Wendy’s and Taco Bell. Despite these companies’ growing activity in the space, the application of current intellectual property protection to branded NFTs is still unclear. A recent complaint filed by Nike against StockX, a popular sneaker resale platform, illustrates this uncertainty. The outcome of this case could determine the scope of trademark protection in the metaverse and will have serious implications on the commercial viability of brands’ significant investments in the space.

The Nike StockX Lawsuit

In February 2022, Nike sued StockX, a popular sneaker resale platform, after StockX began selling Nike-branded NFTs alongside physical Nike sneakers. The complaint, filed in the United States District Court for the Southern District of New York, laid out several causes of action, including trademark infringement. Nike stated that it “did not approve of or authorize StockX’s Nike-branded Vault NFTs. . . Those unsanctioned products are likely to confuse consumers, create a false association between those products and Nike, and dilute Nike’s famous trademarks.”

In its answer, StockX raises two key defenses. First, it claims that its “use of images of Nike sneakers and descriptions of re-sale Nike products in connection with StockX NFTs is nominative fair use. It 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.” Second, StockX raises a first sale defense, arguing that “Nike’s claims are barred, in whole or in part, by the first sale doctrine permitting purchasers of lawfully trademarked goods to display, offer, and sell those good under their original trademark.” Thus, the outcome of the case turns on how courts will apply traditional intellectual property doctrines to more modern trademark issues.

StockX’s Nominative Fair Use Defense

Nominative fair use is an affirmative defense for defendants who use another’s trademark deliberately to refer to that party, for purposes such as advertising, commentary, and news reporting. To raise a successful nominative fair use defense, the user must meet three requirements: “First, the product or service in question must be one not readily identifiable without use of the trademark; second, only so much of the mark or marks may be used as is reasonably necessary to identify the product or service; and third, the user must do nothing that would, in conjunction with the mark, suggest sponsorship or endorsement by the trademark holder.”

     StockX can likely meet the first and second requirements but will struggle to meet the third. StockX can argue that it would be difficult to sell the virtual NFT Nike sneaker without using Nike’s trademarked logo and that it is only using the Nike logo as much as reasonably necessary for the consumer to identify the product. As StockX’s argues in its answer, “the image and product name on the Vault NFT play a critical role in describing what goods are actually being bought and sold.” As some have pointed out, the Nike logo “does not appear to be used by StockX separate and apart from its appearance in the photo of the shoes corresponding to the NFT.”

At issue is the third requirement regarding an implied sponsorship or endorsement. StockX’s website includes a disclaimer of any affiliation with the Nike brand, but it is unclear if this adequately safeguards against consumer protection. Nike’s complaint characterizes the disclaimer as “comically and intentionally small” and “difficult to read.” As evidence that the disclaimer does not prevent consumer confusion, Nike points to numerous social media users who expressed uncertainty as to whether Nike endorses, approves, or gets a commission from StockX’s NFT sales. This confusion is further compounded by the fact that Nike sells its own NFTs. Thus, StockX will likely have difficulty in succeeding on its nominative fair use defense.

StockX’s First Sale Defense

The success of StockX’s first sale defense requires a more complex, fact-intensive analysis. The first sale defense establishes that “the right of a producer to control distribution of its trademarked product does not extend beyond the first sale of the product.” Whether or not this rule applies to Nike’s case, however, depends on how the court characterizes the NFT. On one hand, StockX will argue that its NFTs are each tied to the resale of a physical Nike shoe – similar to a receipt –  and thus fall under the first sale doctrine. On the other hand, Nike will argue that the NFTs are standalone, separate products and thus are not protected by the first sale doctrine. To succeed on the trademark infringement claim, Nike must establish that the NFT and the physical shoe are two independent products.

On its website, StockX added a disclaimer in an attempt to address this issue directly, “Please note: the purpose of Vault NFT is solely to track the ownership and transactions in connection with the associated product. Vault NFTs do not have any intrinsic value beyond that of the underlying associated product” (emphasis added). However, this disclaimer does not preclude Nike from demonstrating that there is a separate value and that the shoe and the NFT are independent products.

First, Nike can point to the fact that the NFTs being sold on StockX are generally more expensive than the value of the sneaker itself (even if one accounts for the markup of sneakers that is common in the resale market). Nike points to this divergence in monetary value: “Thus far, StockX has sold Nike-branded Vault NFTs at prices many multiples above the price of the physical Nike shoe.” For example, as of October 25, 2022, the Nike Dunk Low Off-White Lot 50 was on sale for $715. The NFT of that very same shoe, however, was on sale for $8,500. This significant divergence in price suggests that there is an independent economic value of the NFT beyond the ownership of the physical shoe.

Second, Nike can argue that the NFTs are an independent product because NFT ownership gives consumers unique perks. When the program initially launched, StockX’s website explicitly stated that NFT “owners may also receive exclusive access to StockX releases, promotions, events, as a result of ownership.” Since the lawsuit, this language has been removed, likely because it could be used as ammunition by Nike to defeat the first sale defense. But NFT owners still get some exclusive perks. For example, the ownership of the NFT means that StockX will store the physical shoe in their “brand new, climate-controlled, high-security vault” and NFT owners will be able to flip/trade the shoe instantaneously, rather than waiting for the shoes to be shipped or paying shipping fees. The storage and the ability to bypass shipping costs associated with flipping sneakers are benefits that are unique to owners of the NFTs but are unavailable to those who only own the physical show.

Conclusion

The Nike-StockX litigation highlights the uncertainty of how traditional intellectual property law applies to more modern trademark issues. The outcome of the case will have serious implications for how companies can protect their brands in the growing world of virtual commerce.

Jeanne Boyd is a second-year JD student at the Northwestern Pritzker School of Law.