blockchain – Attorney Evan Brown

March 21, 2024 Blockchain, Contracts, Cryptocurrency

Bitcoin miner denied injunction against colocation service provider accused of removing rigs

Plaintiff Bitcoin miner sued defendant colocation hosting provider for breach of contract, conversion, and trespass to chattels under Washington law. After filing suit, plaintiff filed a motion for temporary restraining order against defendant, seeking to require defendant to restore plaintiff’s access to the more than 1,000 mining rigs that defendant allegedly removed from its hosting facility. The court denied the motion, finding that plaintiff had established only possible economic injury, not the kind of irreparable harm required for the issuance of a temporary restraining order.

The underlying agreement

In July 2021, the parties entered into an agreement whereby plaintiff would collocate 1,610 cryptocurrency mining rigs at defendant’s facility. Plaintiff had obtained a loan to purchase the rigs for over $6 million. Defendant was to operate the rigs at a high hash rate to efficiently mine Bitcoin, with defendant earning a portion of the mined BTC.

After plaintiff defaulted on its loan, however, in early 2023, defendant allegedly reduced the available power to the rigs, despite plaintiff having cured the delinquency. Plaintiff claimed this reduced power likewise reduced the amount of Bitcoin that imined, and claims that defendant reallocated resources to other miners in its facility from whom it could earn more money.

The discord between the parties continued through late 2023 and early 2024, with 402 rigs being removed, and then defendant’s eventual termination of the agreement. The parties then began disputing over the removal of the remaining rigs and alleged unpaid fees by plaintiff. In early March 2024, plaintiff attempted to retake possession of its rigs, only to allegedly find defendant’s facility empty and abandoned. This lawsuit followed.

No irreparable harm

The court observed that under applicable law, a party seeking injunctive relief must proffer evidence sufficient to establish a likelihood of irreparable harm and mere speculation of irreparable harm does not suffice. Moreover, the court noted, irreparable harm is traditionally defined as harm for which there is no adequate legal remedy, such as an award of damages. Further, the court stated that it is well established that economic injury alone does not support a finding of irreparable harm, because such injury can be remedied by a damage award.

In this situation, the court found there to be no problem of irreparable harm to plaintiff. The court distinguished this case from the case of EZ Blockchain LLC v. Blaise Energy Power, Inc., 589 F. Supp. 3d 1102 (D.N.D. 2022), in which a court granted a temporary restraining order against a datacenter provider who had threatened to sell its customer’s rigs. In that case, the court found irreparable harm based on the fact that the miners were sophisticated technology and could not be easily replaced.

The court in this case found there was no evidence defendant was going to sell off plaintiff’s equipment. It was similarly unpersuaded that the upcoming Bitcoin halving (anticipated in April 2024) created extra urgency for plaintiffs to have access to their rigs prior to such time, after which mining Bitcoin will be less profitable. Instead, the court found that any losses could be compensated via money damages. And since plaintiff had not provided any evidence to support the idea it would be forced out of business in these circumstances, the court found it appropriate to deny plaintiff’s motion for a temporary restraining order.

Block Mining, Inc. v. Hosting Source, LLC, 2024 WL 1156479 (W.D. Washington, March 18, 2024)

See also:

March 18, 2024 Blockchain, Trademarks

MetaBirkins defendant denied of opportunity to exhibit NFT artwork in Swedish museum

metabirkins museum
In February 2023, Sonny Estival, known by his pseudonym “Mason Rothschild,” was found liable by a jury on a number of claims, including intentional trademark infringement, trademark dilution, and cybersquatting against luxury brand Hermès. The court ordered Estival to pay $133,000 in damages to Hermès and issued a comprehensive permanent injunction against him and his associates. This injunction specifically prohibited the production, distribution, and promotion of “MetaBirkins” non-fungible tokens (NFTs) and related merchandise, aiming to prevent any association or confusion with Hermès’s “Birkin” trademark.

In January 2024, Estival sought clarification from the court regarding the scope of the permanent injunction, particularly whether it would prevent him from allowing a Swedish museum to exhibit his MetaBirkins artworks as part of an exhibition on Andy Warhol and Business Art. Despite his claims that the museum’s display would not imply any association with Hermès and would even include mention of the lawsuit and its outcome, Hermès opposed this motion. The court held an evidentiary hearing, and after considering submissions from both parties and testimony from museum representatives, denied Estival’s motion. The court could not conclude that the proposed exhibition would comply with the injunction’s terms, given the lack of detailed information about the nature of the permission Estival would be granting to the museum, especially concerning the promotion of the exhibit and potential merchandising.

The court’s decision was heavily influenced by the context of Estival’s previous actions and the jury’s findings, which characterized him as intentionally misleading the public to associate his NFTs with Hermès’s Birkin brand. Despite the museum’s assurance that the exhibit would not suggest any affiliation with Hermès, the court remained unconvinced, especially given discrepancies in the museum representatives’ testimonies regarding how the lawsuit and Estival’s infringement would be presented to the public.

Hermès Int’l v. Rothschild, 2024 WL 1089427 (S.D.N.Y. March 13, 2024)

See also:

March 12, 2024 Blockchain

Key takeaways from the USPTO and Copyright Office joint report to Congress on NFTs

On March 12, 2024, the United States Patent and Trademark Office and the Copyright Office released a joint report from a study they did exploring the impact of NFTs on Intellectual Property law. The study aimed to assess how innovations in digital art ownership and authenticity verification align with existing intellectual property frameworks.

The report emphasized that NFTs present novel opportunities for intellectual property owners, possibly enhancing licensing avenues and offering creators greater control over their works and a larger share of the resulting revenues. On the other hand, the immutable and decentralized nature of blockchain and the underlying technology of NFTs, introduce big challenges in enforcing intellectual property rights, amplifying concerns around online piracy and counterfeiting.

A significant issue that the report highlighted is the widespread confusion around the scope of rights obtained in an NFT transaction, often leading to misconceptions about owning intellectual property rights in the associated digital assets. Despite these challenges, the study found that current intellectual property laws are generally adequate to address the complexities introduced by NFTs, with both the Copyright Office and the USPTO favoring educational initiatives over legislative changes to clarify the nature of rights involved in NFT transactions. So it is not likely we will see new NFT legislation – at least the Copyright Office and the USPTO are not pushing for it.

To conclude the report, the USPTO and the Copyright Office committed to further exploring the use of emerging technologies to improve agency operations and to ongoing engagement with stakeholders to enhance understanding of NFT-related intellectual property issues.

All in all, there is nothing too surprising or revealing in the report, but it does provide a great summary of the various issues. Below is the full text of the report.

Joint-USPTO-USCO-Report-on-NFTs-and-Intellectual-Property

January 9, 2024 Blockchain, Litigation, Service of Process

Court says lawsuit can be served via blockchain

Plaintiff sued multiple defendants, including parties located in foreign countries, for claims related to trade secrets misappropriation, unfair competition and other business torts. Plaintiff sought court permission to serve the summons and complaint on these overseas defendants through alternative means, marking a significant adaptation of legal procedures to modern communication technologies.

The court, considering the Federal Rules of Civil Procedure and international agreements, allowed plaintiff to use unconventional methods for serving legal documents. These methods included email, social media direct messaging, messaging via Telegram and Signal, text messaging, online publication, delivery to the foreign defendants’ attorneys, and a particularly innovative approach — service via NFT.

The court’s decision was based on several key considerations:

International Agreements and Due Process: Defendants were located in the United Arab Emirates, Singapore, and Cyprus. The UAE and Singapore, not being signatories to the Hague Convention, had no international agreement prohibiting such alternative service methods. Cyprus, a signatory, had not objected to alternative service forms like email under Article 10 of the treaty. The court also ensured that these methods complied with constitutional notions of due process.

Efficiency and Practicality of Modern Communication: The court acknowledged the practicality and growing acceptance of digital communication methods in legal proceedings. It found email to be a viable option, especially given that defendants were associated with a website that discussed the litigation. Signal, Telegram, and text messaging were also considered effective, given the defendants’ active presence and communication on these platforms.

Service Through U.S.-Based Counsel and Online Publication: The court also approved service to defendants’ U.S.-based legal counsel and publication in online media outlets in Singapore, Cyprus, and the UAE. It saw these methods as traditionally acceptable and likely to inform the defendants of the legal action.

Innovative Use of Blockchain Technology: Notably, the court permitted service via blockchain technology, where a non-fungible token (NFT) containing a link to the legal documents would be dropped to the defendants’ digital wallets. This method was considered particularly appropriate due to defendants’ involvement in blockchain technology and their familiarity with its use.

This decision illustrates the legal system’s evolving approach to international service of process, adapting to the realities of global communication and digital technology. It highlights the judiciary’s willingness to embrace new methods that align with both legal standards and the practicalities of communicating across borders in the digital age.

CipherBlade, LLC v. CipherBlade, LLC, 2024 WL 69164 (D. Alaska, January 5, 2024)

Hackers stole cryptocurrency but the insurance company did not have to pay

hackers cryptocurrency insurance

Insurance and loss

Plaintiffs had a homeowners insurance policy with defendant insurance company. The policy covered personal property owned or used by the plaintiffs with a maximum limit of $359,500 for direct physical loss due to certain perils, including theft. In June 2021, hackers accessed plaintiffs’ computer and stole crypto tokens from their crypto wallets on two blockchain networks, amounting to approximately $750,000. Plaintiffs reported the incident and filed an insurance claim with defendant. Defendant only paid $200 on the claim because of a special limit of liability found in the policy.

Thinking that to be a pretty insufficient payment for such a dramatic loss, plaintiffs sued, alleging breach of contract and unreasonable denial of coverage under a Minnesota statute. Defendant moved for judgment on the pleadings. (“Judgment on the pleadings” in US federal court refers to a ruling made by the court based solely on the parties’ written pleadings and documents, without the need for a trial, when there are no genuine issues of material fact in dispute.) The court granted the motion.

Not direct and physical

Defendant had argued that the theft of digital assets (crypto tokens) did not constitute a “direct physical loss” under the policy, and thus, the claim was not covered. The court analyzed the language of the insurance policy, stating that “direct physical loss” required a distinct, demonstrable, and physical alteration to the covered property. Since crypto tokens are purely digital and lack physicality, according to the court, they do not meet the requirements for “direct physical loss” under Minnesota law.

Plaintiffs claimed that the policy’s language was ambiguous, but the court rejected this argument, applying the ordinary meaning of “direct physical loss” as required by Minnesota law.

The court also addressed plaintiffs’ statutory claim for bad-faith denial of coverage under Minnesota Statute § 604.18. To succeed in this claim, plaintiffs needed to prove that defendant lacked a reasonable basis for denying coverage and acted in reckless disregard of this fact. But since defendant did not breach the policy, the court found that the bad-faith claim failed as well.

Rosenberg v. Homesite Insurance Agency, Inc., 2023 WL 4686412 (D. Minn., July 21, 2023)

From the archives:

Exploiting blockchain software defect supports unjust enrichment claim

February 14, 2022 Anonymity, Blockchain

Court protects the privacy of bitcoin address and transaction information

Defendant asked the court to redact his bitcoin address and transaction information from exhibits used at trial, which ordinarily would become part of the public record. He argued that for each transaction recorded on the blockchain, one could reverse engineer the entire transaction if he or she knows the individual associated with one of a number of pieces of information, including transaction ID and public bitcoin address. “[O]nce a particular individual is associated [with] any of this information, it is essentially akin to providing that individual’s financial account number.”

The court allowed the redaction of the bitcoin address and bitcoin transactions. It found that defendant had demonstrated good cause to support the redactions. The court balanced the public’s right of access to court information against defendant’s interest in keeping the information confidential. It agreed with defendant’s assertion that the bitcoin information he sought to redact is akin to a financial account number or personally identifiable information.

Kleiman v. Wright, 2022 WL 390702 (S.D. Fla., February 9, 2022)

January 4, 2022 Contracts, Cryptocurrency, Fraud/Misrepresentation

Exploiting blockchain software defect supports unjust enrichment claim

blockchain unjust enrichment
Most court cases involving blockchain have to do with securities regulation or some other business aspect of what the parties are doing. The case of Shin v. ICON Foundation, however, deals with the technology side of blockchain. The U.S. District Court for the Northern District of California recently issued an opinion having to do with how the law should handle a person who exploits a software flaw to quickly (and, as other members of the community claim, unfairly) generate tokens.

Exploiting software flaw to generate tokens

Mark Shin was a member of the ICON Community – a group that includes users who create and transact in the ICX cryptocurrency. The ICON Network hosts the delegated proof of stake blockchain protocol. The process by which delegates are selected for the environment’s governance involves ICX users “staking” tokens. As an incentive to participate in the process, ICX holders receive rewards that can be redeemed for more ICX. The system does not give rewards, however, when a user “unstakes” his or her tokens.

When a new version of the ICON Network software was released, Shin discovered that he was immediately awarded one ICX token each time he would unstake a token. Exploiting this software defect, he staked and unstaked tokens until he generated new ICX valued at the time at approximately $9 million.

Bring in the lawyers

Other members of the community did not take kindly to Shin’s conduct, and took steps to mitigate the effect. Shin filed suit for conversion and trespass to chattel. And the members of the cryptocurrency community filed a counterclaim, asserting a number of theories against Shin, including a claim for unjust enrichment. Shin moved to dismiss the unjust enrichment claim, arguing that the community’s claim failed to state a claim upon which relief could be granted. In general, unjust enrichment occurs when a person has been unjustly conferred a benefit, including through fraud or mistake. Under California law (which applied in this case), the elements of unjust enrichment are (1) receipt of a benefit, and (2) unjust retention of the benefit at the expense of another.

Moving toward trial

In this case, the court disagreed with Shin’s arguments. It held that the members of the community had sufficiently pled a claim for unjust enrichment. It’s important to note that this opinion does not mean that Shin is liable for unjust enrichment – it only means that the facts as alleged, if they are proven true, support a viable legal claim. In other words, the opinion confirms that the law recognizes that Shin’s alleged conduct would be unjust enrichment. We will have to see whether Shin is actually found liable for unjust enrichment, either at the summary judgment stage or at trial.

Examining the elements of unjust enrichment, the court found that the alleged benefit to Shin was clear, and that the community members had adequately pled that Shin unjustly retained this benefit. The allegations supported the theory that Shin materially diluted the value of the tokens held by other members of the community, and that he “arrogated value to himself from the other members.” According to the members of the community, if Shin had not engaged in the alleged conduct, the present-day value of ICX would be even higher. (It will be interesting to see how that will be proven – perhaps one more knowledgeable than this author in crypto can weigh in.)

Shin v. ICON Foundation, 2021 WL 6117508 (N.D. Cal., December 27, 2021)

October 6, 2021 Blockchain

How do we attribute value to an NFT?

How do we attribute value to an NFT? We can analyze this question from a number of perspectives. To start, we could draw a line of demarcation between categories of possessions that exist physically and those that exist intangibly. One intuitively understands how tangible things get value. This is often tied to the item’s usefulness. For example, a car has value because it transports. A knife is useful for cutting. A pen enables writing. We move out one level of abstraction and see that pieces of physical money (coins and bills) have value in how they are used to transact in goods and services.

Empty intangibility?

The value of intangible possessions requires more abstract thinking, but the reasonable person has no difficulty in grasping how that valuation works. One may possess a right or privilege even though he can’t hold it in his hands. Another may possess a digital good – think about premium skins in video games – but she cannot physically touch it. Understanding the value in these kinds of intangible things is not too challenging. So we can reject the notion that an NFT’s intangible nature means it has no value. But where do we go from here in exploring where an NFT’s value is derived?

Ain’t she a beauty?

Consider a digital work of art (as a .jpg, for example) that is transacted as an NFT. The underlying work of art – whether seen as bits on a screen or printed out as ink-on-paper – can hold the viewer in aesthetic arrest. But the NFT itself – data within the blockchain – does not so stimulate the human soul. It seems, therefore, that we have eliminated the notion that beauty or some similar concept gives value to an NFT.

There’s something about Mona Lisa

But let’s not yet move away from thinking about characteristics of works of art in seeking to answer our question about attributing value. The ability to hold its viewer in aesthetic arrest is only one way a physical piece of art can have value. Consider the Mona Lisa – the actual physical painting hanging on a wall this very moment at the Louvre in Paris. I could fly to Paris, take the Metro to the Louvre, buy a ticket and make my way to the hall where the Mona Lisa is displayed. I could look at it there and behold its beauty. But I could also behold that beauty by doing a Google Image search on my computer in the basement. Or I could go to Target and buy a Mona Lisa print to hang on my own wall. The fact that I could enjoy the Mona Lisa without going to Paris shows that the ability to induce aesthetic arrest does not come only from the original. One can get the same thrill from seeing a copy. Yet there remains a thrill one can get only by beholding the actual physical painting in Paris. There’s a “something more” arising from seeing the actual materials assembled as they were by da Vinci’s own hand. There is a value in being in the presence of and perceiving the actual corporeal stuff that da Vinci saw and manipulated.

There is only one original Mona Lisa. It is irreplaceable. That is, it is non-fungible. The original Mona Lisa in Paris connects us to da Vinci in time and space. When we are in the presence of the original Mona Lisa, we are in the presence of the actual stuff (wood, pigment) that da Vinci handled. That ability to give the viewer an experience of presence – one more than mere aesthetic arrest – contributes substantially to the painting’s value. So it must be, then, that these particular molecules comprising the original Mona Lisa, and one’s being in proximity to them, are what gives the original painting a special value? Well, no.

Love at the molecular level

The actual molecules comprising the Mona Lisa – the carbon in the poplar board, the material in the pigment, etc. – compared in terms of chemical structure and behavior – differ none from all the other like category molecules in the universe. The Mona Lisa’s molecules are not special in themselves, but instead are valuable because they were worked in accordance with da Vinci’s intention.

Being intentional

Here we may have reached a good place from which to jump back over to NFTs. We know that intangibleness does not disqualify NFTs from having value. And we know that NFTs do not induce an aesthetic experience. But they do carry some specialness due to their uniqueness. In a certain respect, Jack Dorsey’s NFT of the Very First Tweet carries the same flavor of specialness as the Mona Lisa in the Louvre, even though – unlike the Mona Lisa – the Very First Tweet NFT does not portray beauty. And, unlike the original Mona Lisa, the Very First Tweet NFT, being intangible, does not contain any particular molecules that Dorsey put there (because of course the bits stored that embody the tweet or the NFT are not tied to a particular memory substrate that he dealt with back in March 2006). But what does remain is the fact that the content of the Very First Tweet has now become inextricably (even if only symbolically) linked to the NFT because of Dorsey’s intention.

We have now arrived at a point where we can at least preliminarily posit some statements articulating how an NFT gets value: Value attaches to an NFT because of the uniqueness of its digital structure having come into existence as the particular effect of an act of its author’s intention. More simply: One may want an NFT because there is something abstractly intriguing about its creation and existence, even though there is nothing one can touch that corresponds with that intrigue.

Evan Brown is a technology and intellectual property attorney in Chicago. Follow him on Twitter at @internetcases. This content originally appeared at evan.law.

November 11, 2019 Governance, Litigation

Ninth Circuit won’t stop electricity cost increase for blockchain companies

Plaintiffs provide “verification and security services for blockchain-based cryptocurrencies.” Grant County, Washington decided to charge plaintiffs and others in “evolving industries” more for electricity. Plaintiffs sued and tried to get an injunction against the rate increase.

The lower court denied the preliminary injunction. Plaintiffs sought review with the Ninth Circuit. On appeal, the court affirmed the denial of the preliminary injunction.

It held that simple monetary harm would not constitute an immediate threat of irreparable harm that would be appropriately remedied by an injunction. Although a legitimate threat that a company might face bankruptcy or be driven out of business may constitute irreparable harm, in this case, plaintiffs failed to introduce competent evidence that they would be driven out of business because of the increased rates.

Blocktree Propterties, LLC. v. Pub. Utility Dist. No. 2 of Grant County, 2019 WL 5704281 (9th Cir. November 5, 2019)

March 7, 2019 Anonymity

Court allows blockchain platform to send subpoena seeking info about hacker

Plaintiff provides a blockchain asset trading platform and claimed that a hacker broke in and transferred 330,000 Tether and 100 Ether to a Bittrex account. Though Bittrex told plaintiff it had identified the relevant Bittrex account holder, it would not disclose the identity to plaintiff without a court order.

So plaintiff filed suit against the John Doe hacker for conversion, violation of the federal Computer Fraud and Abuse Act, and under Washington state law. Since it could not serve the complaint on the Doe defendant without knowing his identity, plaintiff sought permission from the court to take early discovery from Bittrex. The court granted the motion.

The court permitted plaintiff to send a subpoena to Bittrex requesting the name of the Doe defendant. Federal Rule of Civil Procedure 26(d) bars parties from seeking “discovery from any source before the parties have conferred as required by Rule 26(f), except in a proceeding exempted from initial disclosure under Rule 26(a)(1)(B), or when authorized by these rules, by stipulation, or by court order.” Fed. R. Civ. P. 26(d)(1). In determining whether to permit expedited discovery, the court required plaintiff to demonstrate that “good cause” existed to deviate from the standard pretrial schedule.

In the Ninth Circuit, a court evaluating whether a plaintiff establishes good cause to learn the identity of Doe defendants through early discovery examines whether the plaintiff (1) identifies the Doe defendant with sufficient specificity that the Court can determine that the defendant is a real person who can be sued in federal court, (2) recounts the steps taken to locate and identify the defendant, (3) demonstrates that the action can withstand a motion to dismiss, and (4) proves that the discovery is likely to lead to identifying information that will permit service of process. This test is often associated with the case of Columbia Ins. Co. v. seescandy.com, 185 F.R.D. 573, 578–80 (N.D. Cal. 1999).

In this case, the court found that good cause supported plaintiff’s request for leave to take expedited discovery to ascertain sufficient identifying information about the Doe defendant. Plaintiff had provided evidence that appeared to trace the allegedly stolen funds to an account on Bittrex, and plaintiff’s conversation with Bittrex indicated that Doe’s identity as the account holder was likely already known or ascertainable. The court also found that plaintiff’s request seeking identifying information related to Doe was reasonably likely to lead to the production of information that would permit plaintiff to serve process.

ZG TOP Technology Co., Ltd. v. John Doe, 2019 WL 917418 (W.D. Wash., February 25, 2019)