Darts, DAOs and Defending Trademarks
Will DAOs be able to protect their trademarks?
It is difficult to follow crypto recently without running into a project that describes itself as a DAO. Some DAOs are organized as companies that spin off a subsidiary DAO. Some DAOs have venture capital money supporting them. Some DAOs have really centralized leadership. Some DAOs are formed in a discord server. Some DAOs are a mixture of some or all of these elements. In other words, while everyone agrees that DAO stands for “decentralized autonomous organization”, what that exactly means in practice is still being worked out. For purposes of this article, I will use DAO to mean an organization of people operating in a common endeavor that is not organized in a traditional corporate structure. In other words, there is no related company holding assets for the DAO. The DAO is unincorporated in any jurisdiction.
While discussing DAOs it is common to hear a refrain of not knowing whether a DAO can protect its intellectual property similar to how a corporation does. For example, can a DAO own the code that makes up its smart contract? It is not uncommon to hear that DAOs, because they lack a corporate structure, lack any authority to own any intellectual property on its own. However, I believe that there is authority for the proposition that DAOs do have the capacity to assert trademark rights in federal court. In order to demonstrate that I must discuss in depth a case about darts. Yes, the same darts you might see played in a local bar.
We start our story in Santa Monica, California. Anecdotally, darts arose in popularity in Southern California after WWII when a number of British soldiers made Santa Monica, California their home (evidenced by the surprising presence of British focused bars in the area). Since the 1960s an organization called the Southern California Darts Association (“SoCal”) promoted the competitive play of the game of darts and coordinated league play of the game.
In the 1960s, members of SoCal formed and ran a corporation named “Southern California Darts Association, Inc.” The corporation was later suspended by the State of California in 1977 for nonpayment of the corporate franchise tax. Nevertheless, SoCal continued to operate and used the following unregistered trademarks, “Southern California Darts Association”, “SCDA”, “SoCal Darts” and a logo featuring the organization’s full name and a dart board.
And things continued along fine until a member of SoCal in the 2010s had a falling out with the organization apparently over the use of the member’s middle initial (if you can believe that). Noticing that the corporate structure had lapsed for SoCal, the now former member of SoCal decided to incorporate as SoCal Inc. The former member went and informed hundreds of darts-related businesses of the new SoCal Inc.’s existence, including the bars which SoCal had traditionally hosted dart-related events. Then the former member began suing any bar that hosted dart events while using SoCal’s name or marks.
SoCal, even though it was a defunct corporate entity, did not want to just give up on the culture and community it had built over the course of decades. Anyone intimately involved in the creation of a DAO is familiar with the fact that cultures are not easy to create, they are hard to build and even harder to maintain for any meaningful length of time. So, SoCal did what any red-blooded American, yet defunct corporation would do: it sued the former member and his new corporation in federal court alleging violations of the federal Lanham Act and the California Business and Professions Code, common law trademark infringement and unfair compensation. SoCal also moved for a preliminary injunction.
Cut to another year of litigation, interlocutory appeals, lawyers withdrawing, and SoCal moved for summary judgment against the former member on its Lanham Act claim. While the former member failed to file an opposition, the district court considered the motion on its merits (in other words, it did not grant the motion just because no opposition was filed).
The matter ended up in front of the Ninth Circuit. I would like to pause to point out how awesome and simultaneously ridiculous this is. The Ninth Circuit, one level below the US Supreme Court was tasked with settling a dispute over a former member’s fight with a group of dart enthusiasts because of an apparent fight over a middle initial.
The former member made a number of arguments on appeal, but I want to focus on just those that I think impact DAOs and their ability to protect their trademarks.
The former member argued that the federal courts did not have jurisdiction because there were no common law trademark rights and SoCal never registered any marks so had no statutory right to the trademarks. Wrong said the Ninth Circuit. The Lanham Act protects against infringement of unregistered marks and trade dress. Registration of the mark is not necessary.
The former member then argued that SoCal couldn’t’ sue because it lacked capacity as a defunct corporation. And while it is true that in California state courts a delinquent corporation who is suspended may not bring suit and may not defend a legal action, in federal court it is not that simple. Federal Rule of Civil Procedure 17 states that a corporation’s capacity to sue is determined by the law under which it was organized and the capacity to sue is determined by the law of the state where it located. FRCP 17(b)(1)-(3). So that does not look good for SoCal. Except, there’s an exception. A partnership or other unincorporated association that lacks the capacity to sue under the law of the state may sue to enforce a substantive right under federal law. FRCP 17(b)(3)(A). An unincorporated association is a voluntary group of persons, without a charter, formed by mutual consent for the purpose of promoting a common objective. Idaho’s High Desert v. Yost, 92 F. 3d 814, 820 (9th Cir. 1996).
Turning to the merits of SoCal’s Lanham Act case, the Ninth Circuit noted that in order to prevail, a party has a valid trademark and the defendant’s use of the mark is likely to cause confusion. Applied Info. Sciences Corp. v. eBay, Inc., 511 F. 3d 966, 969 (9th Cir. 2007).
The Ninth Circuit noted that a trademark is protectable depending on its distinctiveness. Zobmondo Entm’t, LLC v. Falls Media, LLC, 602 F. 3d 1108, 1113 (9th Cir. 2010). A mark can’t be distinctive if its generic. A mark can be descriptive, suggestive, arbitrary or fanciful. Two Pesos 505 U.S. 768. A descriptive mark can become protectable if it acquires a secondary meaning by becoming distinctive as used or in connection with the applicant’s goods in commerce. Id. at 769. Since the former member made it abundantly clear he trademarked SoCal’s traditional marks because of its acclaim in the darts community, it was clear that the mark was distinctive enough to be protectable.
The Ninth circuit then noted that it was evident that the former member’s attempts to copy the marks used by SoCal were identical in appearance, sound and meaning, the parties offered similar services, there were overlapping channels for marketing and advertising, the former member chose similar marks to take advantage of SoCal’s reputation, and at least one party had been confused.
The Ninth Circuit noted that there was no dispute that SoCal was the first to use the marks.
The Ninth circuit held that an unincorporated association can own a mark. The court noted that its previous decisions had at the very least implicitly suggested that much. Further, other circuits, including the Sixth and Seventh Circuit, reached a similar conclusion.
Next the Ninth Circuit noted that the fact that SoCal was a delinquent corporation was immaterial and collateral to its use of its marks.
So, what’s the takeaway? I believe that if unincorporated associations can own a trademark, then, DAOs can also hold marks and enforce them if the need arises. That means should a company wish to come and steal a mark used by a DAO and hold itself out as the original DAO, the original DAO should be able to enforce its right to use the mark in federal court.
Whether such protection extends to other forms of intellectual property such as copyrights, patents, or trade secrets is beyond the scope of this article.
Further, this is not meant to suggest that an unincorporated association is an ideal state for DAOs. It almost certainly is not. Whether its Medium articles, Crypto Twitter, certain law firms that have devoted departments to blockchain technology, the refrain from all corners is rife with warnings about DAOs being treated as unincorporated associations. But, while states like Wyoming develop their own laws about DAOs, it is self-evident that DAOs will continue to be built all over the world. In the event a DAO uses a mark that is subsequently stolen by another entity, the DAO will be able to defend its right to the mark in federal court in the United States.
