Brand protection in the virtual world

The emergence of new crypto-currencies, murmurs of a metaverse and the increase in popularity of non-fungible tokens (NFTs) have helped the NICE Class 9 to become the second highest trade mark class filed for globally. However, as these sectors are largely unregulated, they present a significant challenge to how intellectual property is created, managed and protected in the virtual world.

Nike vs StockX

StockX launched its Vault NFTs in January 2022 as an alternative way to buy and sell products on their platform. In February 2022, Nike filed a lawsuit against StockX at a US District Court in the Southern District of New York over the Vault NFTs, accusing StockX of trade mark infringement and causing reputational damage. Nike has also asked the court to let it add a counterfeiting claim to its revised lawsuit alleging that the platform has falsely advertised its authentication process. They are seeking damages and an end to StockX selling the digital tokens.

Who are StockX?

StockX is an online global marketplace that allows its users to buy and sell items, mainly catering to shoes. They also have the option to store products on behalf of their clients who can buy and sell them for purely investment purposes without the goods leaving the storage facility. Items stored in this manner are referred to as ‘Vault’ items which have an NFT attributed to them which acts as a ‘key’ or ‘token’ certifying ownership of the goods. When a person buys a Vault NFT, they are also buying the physical item depicted on them. The NFTs can be used to redeem the goods attributed to them from the StockX Vault or sold but cannot be decoupled from the underlying item. The company also purports to use a multi-step authentication process to verify the authenticity of products sold on their platform.

Overview of Nike’s initial claim

The issue that has arisen is that some of the vault NFTs feature images of Nike trainers which Nike claims could confuse consumers and creates a false association between the two companies. This could lead consumers believing that these tokens are authorised by Nike, when in fact, they are not.  Also, as Nike has recently entered the NFT market, they have claimed that StockX’s NFTs have led to confusion and have been impeding their success in the market.

The case so far

Nike sued StockX LLC, an online resale marketplace, for allegedly minting and selling unauthorised non-fungible tokens (NFTs) of their trainers, infringing their intellectual property rights. Nike, which began offering NFTs last month, argued that the digital assets were likely to cause customers confusion with their own products. StockX countered by claiming that they were using the NFTs to authenticate and certify ownership of its physical shoes and not as a standalone product. Consequently, they claimed that their actions were a lawful exercise of the ‘first-sale’ doctrine which is equivalent to the ‘exhaustion of rights’ in UK intellectual property law.

The two companies have been locked in a legal battle that has now escalated with Nike informing the court that StockX has allegedly been selling counterfeit versions of their shoes, adding on to the existing lawsuit they filed accusing StockX of violating its trade marks by selling digital images of Nike shoes in the form of NFTs. In their amended complaint Nike claimed that they had acquired four counterfeit shoes which were ‘verified authentic’ on the reseller’s site, one of which had an NFT attributed to it attesting to its authenticity. Nike argued that as the trainers tied to the NFTs are in a vault, it’s concerned that StockX has linked the infringing Nike branded NFTs to counterfeit goods and sold them for heavily inflated prices, thus damaging their goodwill and reputation.

StockX responded by saying that the lawsuit is misleading and that their NFTs do not infringe on Nike’s trade marks. In relation to the counterfeit goods, they have asserted that they take customer protection extremely seriously and that Nike’s own brand protection team had previously communicated confidence in the authentication process.

The importance of this case

The outcome of the case is yet to be decided by the court, but, the trial highlights some key areas in relation to brand protection and NFTs within the digital world. It could set a legal precedent regarding NFTs, which currently have few restrictions, and could clarify the nature of an NFT that may be created and the extent of ‘fair use’ within the virtual space.

Nike’s legal action is the latest dispute in a growing number of brand protection actions taken regarding the virtual NFT space. This trend clearly reflects the value and possibilities that companies anticipate could arise from NFTs. The outcomes of these cases and the precedents they set should be closely followed by content creators and owners so that they can protect their intellectual property rights in the developing virtual world.

If you have any questions about NFTs or how to protect your brand, please get in touch to speak to one of our attorneys