Meta Swoosh

The Facts:

• Non-fungible tokens (NFTs) are unique items on the blockchain that represent ownership over physical or virtual items
• On December 9th, 2019, Nike Inc. files patent #11,113,754[i] that describes how NFTs on the Ethereum blockchain can be used to authenticate and transact a physical shoe
• On December 27th and 28th, 2021, Nike Inc. files a series of trademarks[ii] to reserve their likeness over “virtual goods, namely, computer programs featuring footwear, clothing, headwear, eyewear, bags, sports bags, backpacks, sports equipment, art, toys, and accessories for use online and in online virtual worlds.”
• On February 3rd, 2022, Nike Inc. files a lawsuit against NFT sneaker company StockX for “trademark infringement or sale of unlicensed non-fungible token sneakers.”

Nike Inc. and StockX are in a fierce legal battle that could set precedence for how trademarks and intellectual property could be protected in the metaverse. StockX, an online resale platform that sells various brands of sneakers and other collectible goods, has profited from the sale of NFTs that display Nike Inc. products. Nike Inc. has claimed this to be a direct infringement and freeloading of Nike Inc.’s trademarks and associated goodwill. StockX has defended this statement by noting that these NFTs are a digital receipt of a purchased item and subsequently redeemable for the physical version shoe (though currently not available). Below is a picture of the redeemable NFTs in StockX’s vault that was sighted in Nike’s lawsuit.

Layer 2

The Heat Increases

One of the most interesting facts about this case is that StockX knew about Nike Inc.’s ventures into the Web 3.0 space. For ease of simplification, Web 3.0 in this sense can refer to the encapsulation of decentralized finance (DeFi), the metaverse, NFTs, and other blockchain technologies.

Most notably, Nike Inc. made the headlines after its acquisition of RTFKT, digital art, and collectible creative studio, on December 13, 2021. Additionally, on January 18, 2022, Nike Inc. announced its formation of Nike Virtual Studies, a division operating purely to bring about the creation of Web 3.0 experiences. These initiatives were clearly an indication of Nike Inc.’s future plans to develop its brand in the form of digital assets. StockX, on the other hand, launched their NFT collection featuring Nike Inc. products on January 18th, 2022.

As many individuals involved in the NFT ecosystem now see the StockX NFT collection as a fraudulent representation of Nike Inc. products, StockX has débuted this sentiment by stating, “Vault NFTs will help unlock new trading opportunities, reimagining what is possible when it comes to investing in the current culture on StockX. By bridging both physical and digital worlds, we’re able to provide a more efficient trading experience anchored by lower costs and storage capabilities – a buyer no longer has to wait several days before they can resell a product, and they don’t have to pay the fees associated with multiple legs of shipping and physical authentication.”

It then begs the question, if a secondary buyer tokenizes an asset that they originally purchased from a brand such as Nike Inc., do they hold the right to use that company’s likeness when digitizing physical items to sell as NFTs? Furthermore, as a brand, what rights do companies hold over their likeness in the ether?

Layer 3

Case Facts & Protecting Digital Likeness

In the case writeup, Nike Inc. noted that from their main website, a pair of Retro White-Black Nike shoes retails for approximately $100. This exact shoe model, one-year-old, had an average sale price of $282 from StockX, and the NFT copy of this shoe has an average sale price of $809 ($3500 highest).

For the remaining items listed in StockX’s vault, the NFT replicas were selling for 286.87% above their already 292% net margins from the base pair. Additionally, the NFTs themselves prominently featured Nike Inc. shoes, and according to StockX’s defense of the NFT acting as a digital receipt, it was an attempt potentially mislead consumers to think that a partnership existed. Under such a circumstance, Nike Inc. found ground to state that StockX was explicitly benefiting from their issued patents and trademarks.

Notable points to Nike Inc.’s arguments include the fact that StockX was not established as an authorized reseller of Nike Inc. products. Additionally, findings from Nike show that it was undetermined as to the exact quantity of physical shoes StockX physically stocked. One of their closing comments came when considering that StockX failed to gain the proper authorization to make, promote, advertise, or sell the physical shoes and violated trademark images.

The legal consul of StockX has disclaimed these allegations by stating Nike Inc. showed a “fundamental misunderstanding” of NFTs. Their reasoning stems from a viewpoint that their NFTs are not virtual sneakers, but an eCommerce listing for physical shoes that can be sold or purchased by users. They conclude by stating:

“Using NFTs in this manner is lawful and violates no legitimate right of Nike or any of the manufacturers of the underlying goods,” StockX said in the filing. “Nike’s claims lack merit, disregard settled doctrines of trademark law, including the doctrines of the first sale and nominative fair use.”

Even as StockX progresses towards a public listing, this case offers companies in the middle market a potential framework to protect their likeness in a world where digital assets are becoming more prevalent.

In this case, they could:

1. File copyright and trademark patents with the United States Patent and Trademark Office to reserve branded logos or slogans.
2. If seeking to use the likeness of others, a formal license or approval can be requested from the other party
3. In the circumstance of redemption for physical assets that are represented as NFTs, the company should expressly state how it will function through the construction of the underlying smart contract.
4. The company can thoroughly document its journey into the Web 3.0 ecosystem so when situations such as this occur, they are able to provide supporting documentation of its intentions.
5. The company could publicize its public key address so buyers can certify its origins and thus create a digital provenance.
   1. The company will need to formalize in a written statement how and where their NFTs can be utilized.
   2. In this sentiment, the company will have the opportunity to restrict how buyers can create alternate narratives that could run in opposition to the company’s brand.
6. Seek formal legal guidance as to how to structure an NFT project’s terms and conditions.
7. Monitor popular social media channels such as Twitter, Discord, Reddit, TikTok, and Instagram for emerging projects that could be attempting to benefit from their likeness.
8. Finally, it is critical to note that the underlying purpose of a blockchain is immutability.
   1. That is, once an item is created and stored on a blockchain unless forked, there will always be a digital history of the transaction.
   2. To remediate the effects of this, companies could have direct lines of contact established for others to use so both parties can reach a formal agreement.

As the Web 3.0 ecosystem is moving at such a rapid pace, cases such as this become extremely important. Not only are new structures being built for how companies are reaching consumers, but they are also laying the ground for subsequent evaluations and prosecution of trademark and intellectual property infringement. Through active awareness along with a touch of intuitiveness, traditional and emerging companies have the opportunity to protect what they create. While the case in this circumstance has yet to reach a settlement, it will definitely be a story to be tracked!