Virtual shoes and vault NFTs: first sale, fair use or first impression?

6 May 2022 , 4:45pm

Loeb & Loeb’s Melanie Howard and Lisa Wiznitzer break down the Nike v. StockX case, in their continuing commentary on IP rights in the metaverse

As previously discussed in Branding the metaverse: first US lawsuits define scope of IRL trademarks, recently filed US federal court lawsuits are challenging the intellectual property rights of creators in the metaverse and the business models underlying certain NFT platforms.

One such lawsuit pits iconic athletic brand Nike against StockX, a global online resale marketplace. In its March 31, 2022 answer, defendant and reseller StockX called Nike’s lawsuit “a baseless and misleading attempt to interfere with the application of a new technology to the increasingly popular and lawful secondary market for the sale of its sneakers and other goods.” StockX’s answer relies upon long-standing doctrines of first sale and nominative fair use to justify its business model in the face of allegations of trademark infringement and dilution, unfair competition and other rights violations.

StockX refutes Nike’s description of their NFT offering and associated service as “ ‘virtual products’ or digital sneakers,” by explaining at length how this technology is used for authenticating, tracking and trading authentic physical or “IRL” products on the lawful secondary market. StockX uses NFTs – digital images created for the platform and tied to a physical good – to track sales of physical products. Upon purchasing an NFT from StockX, consumers can redeem the physical good (thereby removing the NFT from the customer’s digital portfolio) or leave it stored in the company’s warehouses and instead retain the key (i.e., the NFT). According to StockX, the benefit of leaving the product in the vault while trading the NFT is that the owner can sell or trade the product without incurring transaction costs (e.g., delivery fees, product damage or wait times.

StockX admits to using images of Nike products in their NFT “receipts”, but maintains that this constitutes nominative fair use, and not trademark infringement – “no different than major e-commerce retailers and marketplaces who use images and descriptions of products to sell physical sneakers and other goods.” Because StockX NFTs include the Nike logo – traditionally “out of bounds” for nominative fair use – Nike’s lawsuit alleged that “they are likely to confuse consumers, create a false association between those products and Nike, and dilute Nike’s trademarks.” To minimize the likelihood of consumer confusion, the generally accepted rule for nominative fair use is to use as little of the trademark owner’s mark as is necessary to identify the original, authentic product. While Nike objects to the inclusion of its logo in the StockX NFT, the 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. However, StockX does not address in its response the key fact that the images in the NFTs are not merely camera photos of the IRL product in storage, but generated images acting as art, in addition to receipts of purchase.

StockX is not the only business using NFTs (and the associated benefits of blockchain technology) as means to document chain of title for an IRL product. Instead of issuing physical certificates, Breitling now issues a ‘digital passport’ which utilizes NFT technology to certify the authenticity of its luxury watches. Using a code (referencing the watch’s serial number and activation date of the digital warranty), purchasers can add the watch to their digital Arianee wallet. Those digital certificates can be helpful when trying to re-sell the watch – the NFT helps prove the watch’s authenticity. According to Arianee’s website, Panerai is also exploring the use of NFTs as digital passports to unlock unique benefits and services for the owner of the watch and corresponding NFT.

A key difference in these models is that Breitling and Panerai consumers have both the watch and the NFT in their possession, whereas StockX consumers cannot possess both the NFT and the IRL product. If a StockX customer wants to take possession of their physical good from the vault, the NFT is “removed from the customer’s digital portfolio and permanently removed from circulation”. This indicates that the NFT is associated with the use of the StockX’s service (including exclusive access to StockX releases, promotions, and events), rather than as a portable receipt or certificate of authenticity of the IRL product; otherwise, the certificate of authenticity should remain in the possession of the consumer as long as they own the corresponding product (and serve as a measure of verification for subsequent purchasers of those physical products).

These distinctions will be key in the court’s evaluation of the StockX and Nike dispute and will lay the groundwork for the intersection of intellectual property laws in the virtual and physical worlds.

Melanie Howard is a partner at Loeb & Loeb in Los Angeles where she chairs the Luxury Brands Group and Intellectual Property Protection practice.  She can be reached at mhoward@loeb.com.  Lisa Wiznitzer is a Loeb & Loeb associate in Chicago with a transactional practice focused on advertising, media, entertainment, sports and technology.  She can be reached at lwiznitzer@loeb.com