What is NFT?

Non-fungible token (“NFT”) is a unique digital asset that operates on blockchain technology to record ownership of an asset and evidence authenticity.  NFTs can represent almost anything (artworks, antiques, membership to a club), and provide a means to prove ownership of digital goods and tangible assets. 

Minting an NFT is the process of writing a digital item to a blockchain.  This is achieved through a smart contract that generates a digital token linked to a specified digital asset.  When creating an NFT it is fundamental to determine what rights are attached to the underlying asset – usually this would include copyright, trademark or patent rights. 

Generally speaking, acquiring an NFT does not come with ownership of the intellectual property rights in the underlying asset.  An NFT owner, however, would be granted a licence to the intellectual property rights.  The breadth of the rights is usually set out in the intellectual property right licence stated in the terms and conditions of the NFT. 

Given the intellectual property rights in the underlying asset are intertwined with NFTs, claims of intellectual property infringement is one of the most common routes of protection and enforcement against NFTs.  This is more reflected in the action between Nike, Inc. v. StockX LLC.

Nike v. StockX

On 3 February 2022, Nike failed a complaint in a federal district court in the Southern District of New York, alleging StockX’s unauthorized and infringing use of Nike’s marks in connection with StockX’s entry into NFT market.

StockX, an operator of an online platform for various brands of sneakers, apparel, luxury handbags, electronics, and other collectible goods.  StockX does not sell goods directly to consumers, but its users buy and sell goods from each other on StockX’s platform. 

On 18 January 2022, StockX announced the launch of StockX Vault NFTs, a collection of NFTs that StockX’s users purchase directly from StockX through its website and app.  StockX claimed that Vault NFTs are associated with a unique physical product held in StockX’s custody until the NFT owner ‘redeems’ the NFT in exchange for the associated physical product or some other benefit.     

StockX’s Vault NFTs are virtual products, created and first offered for sale by StockX, and available direct to consumers for purchase and trade on StockX’s website and app.  

Nike alleges without Nike’s authorization or approval, StockX was ‘minting’ NFTs that prominently use Nike’s trademarks, marketing those NFTs using Nike’s goodwill, and selling those NFTs at heavily inflated prices to customers who believe or are likely to believe that those NFTs are, in fact, authorised by Nike when they are not.  Details of the causes of actions as contended by Nike are:

1. Trademark infringement
2. False designation of origin / unfair competition
3. Trademark dilution
4. Injury to business reputation and dilution New York General Business Law
5. Common law trademark infringement and unfair competition

On 25 May 2022, Nike filed an amendment to the complaint filed on 3 February 2022, which contended that StockX knowingly and willingly sold counterfeit products and falsely advertised its authentication services.

On 6 June 2022, StockX submitted its answer to the amended compliant filed by Nike.  In the response, StockX denied all the allegations made by Nike against StockX and contended that, among others:

1. Introduction of NFTs is to track ownership of, and serve as a claim ticket for, frequently traded physical products. The use of NFTs in the manner is lawful and does not violate legitimate right of Nike or any of the manufacturers of the underlying physical goods. 
2. Nike’s trademark infringement and dilution claims lack merit, disregard settled doctrines of trademark law, including the doctrine of first sale and nominative fair use.
3. StockX Vault NFTs are not ‘virtual product’ or digital sneakers. Each Vault NFT is tied to a specific physical good that has been authenticated by StockX.  Consumers purchase the Valut NFTs can either (1) retain digital possession of the Vault NFT and leave the physical good in StockX’s vault; or (2) take possession of the physical good from the vault at any time, in which case, the Vault NFT is removed from the customer’s digital portfolio and permanently removed from circulation. 
4. Vault NFT has no intrinsic value – it is a claim ticket to access the underlying item. Vault NFT cannot be traded separately, or decoupled, from ownership of the underlying item.
5. The benefit of taking possession of Vault NFT rather than the physical good is that the owner can make a future trade without incurring transaction costs, delay or risk of damage or loss associated with shipping physical sneakers to StockX.

Whether NFTs should be considered legal property, or whether certain NFTs will be differentiated based on, among others, their properties and uses, remains to be seen.  With the continuing evolution of NFTs, courts and regulators are catching up to address the novel legal issues.

For more information, please contact: 

Alfred Leung, partner (alfredleung@hkytl.com)