At a recent tech conference, Bill Gates argued that the value of non-fungible tokens (“NFTs”) are “100% based on greater fool theory”—the idea that money can be made on overvalued assets as long as people are willing to bid them higher.
There’s no doubt that Gates was onto something. The massive runup in values of NFTs in 2021, and subsequent crash in 2022, suggests there was irrational optimism about the investment potential of these assets. But one of the things that’s often overlooked about NFTs is their utility beyond being a new asset class. NFTs serve many useful functions.
For example, in a case involving the theft of nearly $8 million worth of virtual assets, lawyers served a defendant with a temporary restraining order in the form of an NFT, following the approval of the “service token” by the New York Supreme Court. This approach allows for the service of legal process to a person who controls a blockchain address and who otherwise could remain anonymous.
Another practical, utilitarian use of NFTs is to use them as proof of ownership of physical assets. There are many assets in the physical world—such as jewelry, artwork, and trading cards—that are valuable, must be securely stored, and can degrade or be damaged when being transferred by sellers to buyers. NFTs for physical assets allow parties to use a digital asset to represent ownership of a physical one. By using an NFT to represent ownership, a painting can be bought and sold several times without it ever having to be moved from secure storage, and there is never any confusion as to ownership or fraud because every transaction is recorded on the blockchain ledger.
Such uses are becoming more prevalent. However, they are not without risk. One such risk, as demonstrated by a lawsuit brought by Nike against sneaker resale marketplace StockX, is a claim for trademark infringement.
Background of the Lawsuit
In February 2021, Nike filed a lawsuit against online reselling platform StockX, a company that resells sneakers, among other goods. The complaint states, “Without Nike’s authorization or approval, StockX is ‘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.”
StockX argues that each of its Vault NFTs is tied to a specific product, such as a pair of Nike sneakers it bought second-hand from its rightful owner, which is being sold on its marketplace. The Vault NFT also allows the owner to resell the NFT, and the right to redeem it for the physical sneaker, without paying any shipping or storage fees. Unlike in a typical transaction for sneakers, or other physical goods, the product does not need to be shipped from one party to another, or re-authenticated, when a transaction occurs. The NFT can simply be sold over the blockchain.
StockX argues that its use of Nike branding and images as part of its display and sale of Vault NFTs is proper under the first sale doctrine. Under the first sale doctrine, an entity can resell goods bearing a trademark, such as a logo or brand name, after the trademark owner has sold those items. In other words, according to the first sale doctrine, the right of the trademark owner to control product distribution does not extend beyond the first sale of the product. There are limitations on the first sale doctrine, however, including situations where resale is likely to confuse or deceive consumers.
With respect to its Vault NFTs, StockX asserts that its actions are “no different than major e-commerce retailers and marketplaces who use images and descriptions of products to sell physical sneakers.”
In short, StockX says that Vault NFTs are a means of authenticating physical products it is entitled to sell under the first sale doctrine. Nike argues that they are distinct digital products with their own value, and that StockX “has chosen to compete in the NFT market not by taking the time to develop its own intellectual property rights, but rather by blatantly freeriding, almost exclusively, on the back of Nike’s famous trademarks and associated goodwill.”
The Problem with Price Disparity
The Nike v. StockX case, should it go to trial, will help lay the groundwork for how IP rights will be treated in connection with the creation, purchase and sale of NFTs, including the extent to which NFTs for physical assets are distinct from the physical assets to which they correspond.
One of the issues that may weigh heavily on the court’s decision is that, according to Nike’s allegations, a number of Vault NFTs have sold for significantly more than the physical shoes they are ostensibly linked to. According to Nike, “StockX has sold Nike-branded Vault NFTs at prices many multiples above the price of the physical Nike shoe.”
For example, Nike alleges that the 2022 version of its Nike Dunk Low sneaker will retail for $100 on the Nike website and the average resale price of the 2021 physical version on StockX’s website was $282 as of February 2, 2022. However, the average price of the Vault NFT linked to the 2021 Dunk Low shoes as of the same date was $809, with the highest trade being $3,500.
In other words, there is a major disconnect (nearly 1000 percent) between the price of the physical shoe and the price of the digital option that can be redeemed for the physical shoe (i.e., the Vault NFT).
This price disparity suggests that, at least in the mind of some consumers during the heady days of 2021, there was confusion about whether Vault NFTs were merely a means of authenticating and demonstrating ownership of physical sneakers or were a unique asset with a value distinct from their physical asset counterparts. If Vault NFTs are determined to be separate assets, then StockX’s argument that it is protected against Nike’s claims of trademark infringement by the first sale doctrine becomes more tenuous.
NFTs and IP Unanswered Questions
The issue of price disparity between NFTs and their corresponding physical assets is by no means the only complicated and novel issue raised in this case, as well as other IP litigation related to NFTs, such as Hermès’ lawsuit against artist Mason Rothschild. These cases will help lay the groundwork for how IP rights—trademark rights, in particular—will be treated in connection with the creation, purchase and sale of NFTs moving forward.
But it’s not just the judicial branch that will weigh in on these issues. In response to a request from from U.S. Senators Patrick Leahy and Thom Tillis, the U.S. Copyright Office and the U.S. Patent and Trademark Office recently announced that they will jointly examine issues related to NFTs amid an increase in questions and disputes such as those raised in the Nike and Hermès’ cases.
A sampling of the questions the senators requested the USPTO and the Copyright Office to address include:
“For current and potential future applications of NFTs:
- How do transfers of rights apply? How does the transfer of an NFT impact the IP rights in the associated asset?
- How do licensing rights apply? Can and how can IP rights in the associated asset be licensed in an NFT context?
- In what way does infringement apply? What is the potential infringement analysis where an NFT is associated with an asset covered by third party IP? Or where the underlying asset associated with an NFT is owned by the NFT creator and infringed by another?
- What intellectual property protection can be afforded? What IP protection can be afforded to the NFT creator? What if the NFT creator is a different person or entity from the creator of the associated asset?”
All good questions. No obvious answers yet. What is clear is that a combination of judicial, regulatory and legislative action will help shape the IP and NFT landscape in the years to come. As the senators note in their letter, “[I]t is imperative that we understand how NFTs fit into the world of intellectual property—as said rights stand today and as they may evolve as we move into the future.” Without such clarity, it will become increasingly difficult for companies to innovate and protect their rights in the digital world.
