At a recent technology conference, Bill Gates claimed that the value of non-fungible tokens (“NFTs”) is “100% based on greater fool theory” – the idea that money can be made from overvalued assets as long as people are willing to bid them higher .
There is no doubt that Gates was on to something. The massive rise in values of NFTs in 2021, and subsequent crash in 2022, suggests that there was irrational optimism about the investment potential of these assets. But one of the things that is often overlooked about NFTs is their utility beyond being a new asset class. NFTs have many useful features.
For example, in a case involving the theft of virtual assets worth nearly $8 million, lawyers served a defendant with a temporary restraining order in the form of an NFT, following approval of the “service token” by the New York Supreme Court. This approach allows legal process to be brought to an individual who controls a blockchain address and who could otherwise 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 stored securely, and can deteriorate or be damaged when transferred from 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 multiple times without ever having to be moved from secure storage, and there is never any confusion as to ownership or fraud because each transaction is recorded in the blockchain ledger.
Such applications are becoming more widespread. However, they are not without risk. One such risk, as demonstrated by a lawsuit filed by Nike against sneaker resale marketplace StockX, is a claim for trademark infringement.
Background to the lawsuit
In February 2021, Nike filed a lawsuit against the online resale platform StockX, a company that, among other things, sells sneakers. The complaint states: “Without Nike’s authorization or approval, StockX ‘triggers’ NFTs that prominently use Nike’s trademarks, markets those NFTs using Nike’s goodwill, and sells those NFTs at grossly inflated prices to unsuspecting consumers who believe or are likely to believe that the “investable digital assets” (as StockX calls them) are actually authorized by Nike when they are not.”
StockX claims that each of its Vault NFTs is tied to a specific product, such as a pair of Nike sneakers it bought used from its rightful owner, which is sold on the 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 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. NFTs can simply be sold over the blockchain.
StockX contends that the use of the Nike branding and imagery as part of the display and sale of Vault NFTs is proper under the first sale doctrine. Under the first sale doctrine, an entity may resell goods bearing a trademark, such as a logo or brand name, after the trademark owner has sold those goods. In other words, the trademark owner’s right to control product distribution according to the first sale doctrine does not extend beyond the first sale of the product. However, there are limitations to the first sale doctrine, including situations where resale is likely to confuse or deceive consumers.
With regard to its Vault NFTs, StockX claims its actions are “no different than major e-commerce retailers and marketplaces that use images and descriptions of products to sell physical sneakers.”
In short, StockX says Vault NFTs are a means of authenticating physical products it has the right to sell under the first sale doctrine. Nike claims 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, but rather by openly free-riding, almost exclusively , on the back side. of Nike’s well-known trademarks and associated goodwill.”
The problem of price differences
The Nike v. StockX The 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 differ from those the physical assets they correspond to.
One of the issues that could weigh heavily on the court’s decision is that, according to Nike’s claims, a number of Vault NFTs have sold for significantly more than the physical shoes they are ostensibly attached 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 claims that the 2022 version of the Nike Dunk Low sneaker will retail for $100 on the Nike website, and the average resale price for the 2021 physical version on the StockX website was $282 as of February 2, 2022. However, the average price of the Vault NFT associated with the 2021 Dunk Low shoes from the same date was $809, with the highest trade at $3,500.
In other words, there is a large link (almost 1000 percent) between the price of the physical shoe and the price of the digital option that can be redeemed for the physical shoe (ie Vault NFT).
This price difference suggests that, at least in the minds of some consumers during the heady days of 2021, there was confusion as to whether Vault NFTs were merely a means of authenticating and demonstrating ownership of physical sneakers or were a unique asset with a value different from its physical assets. If the Vault NFTs are determined to be separate assets, then StockX’s argument that it is protected against Nike’s trademark infringement claims by the first sale doctrine becomes more tenuous.
NFTs and IP unanswered questions
The issue of price differences 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 disputes related to NFTs, such as Hermès’ lawsuit against artist Mason Rothschild . These cases will help to lay the foundation for how IP rights – especially trademark rights – will be treated in connection with the creation, purchase and sale of NFTs in the future.
But it is not only the judiciary that must decide on these questions. In response to a request from US Senators Patrick Leahy and Thom Tillis, the US Copyright Office and the US Patent and Trademark Office recently announced that they will jointly investigate issues related to NFTs amid an increase in questions and disputes such as those raised in Nike and Hermès bags.
A selection of the issues the senators asked the USPTO and the Copyright Office to address include:
“For current and potential future applications of NFTs:
- How does the transfer of rights apply? How does the transfer of an NFT affect the IP rights in the associated asset?
- How do license 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 linked to an asset covered by third party IP? Or where the underlying asset associated with an NFT is owned by the NFT creator and violated by another?
- What intellectual property protection can be granted? What IP protection can the NFT creator provide? What if the NFT creator is a different person or entity than the creator of the associated resource?”
All good questions. No obvious answers yet. What is clear is that a combination of judicial, regulatory and legislative actions will help shape the IP and NFT landscape for years to come. As the senators note in their letter, “[I]It is critical that we understand how NFTs fit into the world of intellectual property – as the rights are 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.
