In 2019, the global sneaker resale market equalled $6 billion. By 2030, some analysts predict it will top $30 billion. At the cutting edge of that growth are companies such as StockX, a Detroit-based company that, along with others, has turned the previously underground market of sneaker resale into a sophisticated online experience. Since its founding in 2016, StockX has expanded from sneakers to electronics, clothing, handbags and, most recently, non-fungible tokens (NFTs).
StockX's expansion into NFTs is not surprising, as many entities are getting in on the action. The global market for NFTs ballooned to $41 billion in 2021 and will continue to evolve as brands and content creators innovate on blockchain platforms. But, of course, success brings more scrutiny, particularly from companies whose products StockX has had so much success reselling.
On 4 February 2022, Nike, the owner of three of five of StockX's most popular sneaker brands (Air Jordan, Nike and Converse), sued StockX in the United States District Court for the Southern District of New York. Interestingly, the issue was not the vast reselling at scale of Nike shoes and clothing, but StockX's creation of NFTs featuring Nike's products and branding.
According to the complaint:
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 that those . . . [NFTs] are . . . authorized by Nike when they are not.
Nike went on to accuse StockX of misrepresenting the NFTs as digital receipts tracking physical Nike products, and asserted that the NFTs are actually new virtual products using Nike's trademarks, and images of its products, without Nike's consent. Nike also argued that in addition to the rights to the physical shoe, the NFT could potentially grant users other privileges on the StockX website. Furthermore, the NFTs had been sold by StockX at many times the prices of the physical shoes available for purchase on StockX. Based on these allegations, Nike brought claims of federal and common law trademark infringement, federal false designation of origin, federal trademark dilution, and New York State law injury to business reputation claims.
Unfortunately, the StockX opposing arguments are yet to be issued in full, but StockX gave a preview of its position in its 31 March 2022 answer to Nike's complaint. From StockX's perspective, the creation of NFTs featuring Nike products is simply a way to "innovate and expedite the process of trading physical products". StockX described a primary part of its business as catering to customers who are interested "in acquiring and trading current culture products, without any interest in immediately or ever wearing (or 'consuming') those products or taking physical possession of those products". Therefore, NFTs are a way to cut down on transaction costs and shipping times for such customers.
StockX further argued that its NFTs are not a "virtual product" or digital sneaker, but a "claim ticket" or "key" to access a StockX authenticated product stored in the "StockX vault". StockX went on to point out that it had created NFTs of its most popular items – not just Nike's products – including Puma, Adidas and even basketball trading cards. Furthermore, all of the NFTs prominently feature StockX trademarks, as do the pages where they are sold, and disclaimers concerning ownership and affiliations with other brands. StockX believes such facts entitle it to affirmative defences against Nike's claims, including fair use and the first sale doctrine.
Growth in the NFT market has brought litigation concerning the unauthorised use of NFTs. Over the past few years, cases delving into NFTs have been filed by well-known brands such as Hermès, production companies such as Miramax and artists such as Jay-Z.
This case, as do the others, raises interesting questions concerning IP rights and potential defences against infringement claims. For example, are the StockX NFTs digital goods or digital receipts? Would StockX's use of Nike's trademark constitute fair use, and to what extent? Does that analysis change if the owner of StockX's NFT only had rights to the physical shoe, without any ancillary benefits? If the price of the NFTs and the physical product were the same, would that matter from a trademark perspective?
It remains to be seen whether the courts will begin to answer some of the tough questions in this emerging area of the law.
For further information on this topic please contact Justin E Pierce, Calvin R Nelson or William Lawrence at Venable LLP by telephone (+202 344 4000) or email ([email protected], [email protected] or [email protected]). The Venable LLP website can be accessed at www.venable.com.