Crypto Caselaw Minute #40–6/13/19
Sanctions, trademarks and general crypto disputation — all this and more in this week’s GLORIOUS 40th CCM. [As always, Rosario summaries are “NMR” and Palley summaries are “SDP.”]
Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario [twitter: @nelsonmrosario] and Stephen Palley [twitter: @stephendpalley]. These summaries are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes. (Picture credit: https://www.sec.gov/litigation/complaints/2019/comp-pr2019-87.pdf)
Ownum, LLC v. Ownum, Inc., Case 1:19-cv-01043-UNA (D. Del. filed June 5, 2019)[NMR]
This is a case of a blockchain company enforcing its trademark rights against a non-blockchain company. As you might recall, not that long ago the Crypto Caselaw Minute covered the inverse scenario where an established firm was suing a blockchain startup. The times they are a changing. Okay, what are the particulars here, and is Ownum suing itself? No.
Ownum, LLC is an Ohio-based blockchain company that is developing products and services for managing titles to vehicles, birth and death records, as well as other vital and/or governmental records. Ownum, LLC has four different operating units: CHAMPtitles, Vital Chain, DigiCredits, and Tech Tags. Apparently, Ownum, LLC started out as CHAMPtitles, for which they own a trademark, and then on May 11, 2018 they officially changed their company name to Ownum. May 28, 2018, they file for a trademark on the word Ownum, and on January 15, 2019, the USPTO issued a Notice of Allowance for the Ownum mark directed to software solutions for managing the aforementioned types of documents. The complaint is filled with about six pages of evidence showcasing the Ownum trademark in various press releases, social media postings, and other items to hammer home the association of the name Ownum with the Ownum business lines.
Ownum, Inc. is a Delaware based corporation that sells software that helps people manage their medications. Ownum, Inc. was incorporated March 7, 2019, and is the owner of the domain name ownum.com. That domain name is where all the trouble here began.
Generally speaking, trademark law exists to identify the source of goods and services. It is an ancient body of law tracing back to the practice of craftsman affixing their own personal marks on their wares as a Proof of Origin™. In our current age an owner of a trademark has certain rights in that mark, and is able to bring a cause of action against others when they are engaging in practices that may cause cause confusion amongst consumers, as well as activities that might dilute the mark, or diminish its value.
Returning to the domain name issue, allegedly Ownum, LLC had a business meeting recently where the potential partner thought that Ownum, LLC was in the medication business because they had visisted ownum.com. In April, Ownum, LLC approached Ownum, Inc. to buy the domain name, and put them on notice of Ownum, LLC’s trademark, Ownum. Ownum, Inc. did not respond to that request, but when Ownum, LLC approached them again in May 2019 Ownum, Inc. demanded $1,000,000 for the ownum.com domain. That’s a lot. Negotiations were not fruitful, and now there is a lawsuit.
Ownum, LLC is alleging that Ownum, Inc. registered the domain name in bad faith with the intent to play off the publicity surrounding Ownum, LLC, that the value of their Ownum trademark is diminished/diluted, and that Ownum, Inc. is also violating their rights in a CHAMPtitles trademark, because of a design on the Ownum, Inc. website. Ownum, LLC is asking the court to grant a preliminary and permanent injunction to stop Ownum, Inc. from using the Ownum name, as well as seeking damages and any profits that Ownum, Inc. received as part of using the name.
Now, you may be asking yourself, why didn’t Ownum, LLC already own the ownum.com domain? Great question! They instead own the domain ownum.io. Oops. Gobble up as much of that digital real estate when you start/rebrand your company, so you can avoid the headache of a lawsuit later on.
Kleiman v. Wright, 9:18-cv-80176-BB, S.D.Fl., Order on Motion to Dismiss, 6/11/2019 [SDP]
Hearing transcript: https://www.scribd.com/document/413268354/Kleiman-v-Wright-Hearing-Transcript
Motion to Compel: https://www.scribd.com/document/413268455/Kleiman-v-Wright-Motion-to-Compel
Response to Motion to Compel: https://www.scribd.com/document/413268741/Kleiman-v-Wright-Response-in-Opp
Mediation Order: https://www.courtlistener.com/docket/6309656/208/kleiman-v-wright/
As a litigator you learn a couple of things early. Let the witness talk during deposition. Getting along with your opposing counsel isn’t a sign of weakness. The 1000th page of a spreadsheet at 7 pm after 9 hours of deposition usually isn’t the path to the promised land. Cold coffee is better than no coffee. And most importantly, don’t let your client’s discovery abuse get you sanctioned by a federal judge. This last principle appears to be on display in the Ira Kleiman v. Craig Wright litigation in federal court in Florida.
First a little background. Back on May 6, 2019 the court held a hearing in this case. One of the issues involved discovery requests about Mr. Wright’s Bitcoin holdings and the nature of a blind trust that he claims they were sent to. As the Court put it after some incredulous questioning of Wright’s lawyer, “[y]ou realize it is facially incredible that in 2011 your client transferred potentially billions of dollars in Bitcoin to someone and you can’t tell me who that was. You understand that, right?” I’ve included a link to the transcript above. It’s incredible reading and, well, wasn’t a great day for Wright (and even worse for his lawyers).
At the end of this hearing the Court stated unequivocally that Wright would be required to fully respond to the Plaintiff’s discovery request and provide (among other things) a list of the trustees and the beneficiaries of the trust. Emphasizing the seriousness of the order, the Court ended the hearing with this admonition:
But to be clear, and I think this is clear in my standing order, as you can tell I am not happy when this happens. When someone gets a discovery request, objects to it, forces the Court to rule and adjudicate the objections and then comes back at the end and says oh, by the way, we don’t have anything and we can’t get anything because that’s just a waste of the Court’s time. And your client needs to understand that. Your client needs to understand he is under the jurisdiction of this Court. I will not hesitate to order him to come to the United States and appear in front of me to explain himself. So I don’t know what other priorities he has in his life right now, but this better be one of them.
In other words, get it together buddy or you will lose this case. That is what this means.
So … fast forward to this week. Plaintiff filed a motion to this week in which he say that Wright has continued to fail to comply with the Court’s orders to produce full records of his pre-2014 bitcoin holdings. As a sanction, they asked the Court to enter the Order set forth below:
Wright responded and his lawyers argued that they had done everything required and it’s just all so really hard. They also say that Wright doesn’t know any of the addresses of the bitcoin held by the trusts because cryptography:
The private key needed to access the encrypted file with the data necessary to retrieve information about bitcoin Dr. Wright mined after block 70 has been split into multiple key shares (in lay terms, multiple parts) through a version of “Shamir’s Secret Sharing Algorithm”, an algorithm created by Adi Sharmir to divide a secret, such as a private encryption key, into multiple parts. The key shares were then distributed to multiple individuals through the trusts. The Shamir method enhances security, prevents a single participant from unlocking an encrypted file and prevents a single participant from extracting the information in it. A certain number, but less than all, of the shares is needed to re-construct the private key. Dr. Wright purposely set up a Shamir system — both technologically and through legal trust formation — where he alone does not have ability to access the encrypted file and data contained in it. This Shamir system involves both splitting the private key into multiple parts or “shares” and distributing those key shares through the trusts in a manner where key shares are given to various holders. Thus, Dr. Wright does not know the public addresses of the bitcoin held by the trusts (i.e., the bitcoin mined by Dr. Wright in 2009 after block 70, through 2010).
The Court didn’t go as far as Plaintiff asked but still entered an Order granting the Plaintiff’s motion “to the extent it seeks an order directing Defendant to produce a list of the public addresses of the all the bitcoin Defendant mined before 12/31/13, in accordance with the Court’s prior orders. In the event Defendant fails to produce this list by June 17, 2019, the Court will conduct a Show Cause evidentiary hearing (on one of the four dates offered by the Court) where Defendant will be ordered to testify and explain his non-compliance.”
My read on all of this — including the hearing transcript — is that the Court is on its last nerve and will sanction Wright, up to and including striking his pleadings and entering a default against him if he fails to do as ordered. It’s not clear that this will result in an adjudication on the merits that he is or is not Satoshi, by the way, and that was not raised by the Plaintiff in their motion to compel. This particular case is not squarely about the identity of Satoshi but about the ownership of property. With that said, if and to the extent that has been raised in the by now voluminous pleadings it’s easy to see an argument being made that he can’t relitigate the issue in another court under principles of res judicata and collateral estoppel (also known as issue and claim preclusion).
Big takeaway — do not aggravate a federal judge. It will piss off the judge and it won’t help your case. That is what is happening here. If Wright doesn’t right his discovery ship, it’s not going to go well for him. Given the fact that the case has been ordered into mediation with required attendance by the parties, this may provide an incentive to reach a quick resolution.
Liu v. The Zerocoin Electric Coin Company LLC; and Does 1 Through 50, Inclusive, Superior Court of California, San Francisco County, CGC-19–57–6321 (May 29, 2019) [SDP]
This new state court lawsuit involves a dispute over an alleged equity grant promised by Zerocoin to the Plaintiff. It’s yet another example of how protocols may be decentralized and cryptographic and disputive as all get out but the rubber meets the road in business over what are fundamentally simple contract disputes.
According to the Complaint — which I hasten to add contains unproven allegations and aren’t necessarily true — Plaintiff and Zerocoin entered into a contract back in August 2016 where Plaintiff would be a Senior Software Engineer. In connection with that, he was granted an option to purchase 12,000 “Units” of Stock pursuant to a stock incentive plan. This was later amended to grant him 15,000 units. Plaintiff says that he was also promised a share of a “Founders Reward” in proportion to his option grant. (It is unclear who the 50 John/Jane Does defendants are).
Two years later, on December 31, 2018, plaintiff says the company sent a “status update” to him saying that they hadn’t actually created a stock option plan and that no grants had actually been offered. He send a books and records request several days later asking for access to corporate information to “determine the status and valuation of [promised] units[.]” The company said nope. Things quickly got ugly and Plaintiff says the company basically told him to stop bugging them or they’d fire him. He resigned on May 28, 2019 citing as reasons (1) failure to get the options; (2) “intolerable working conditions” and (3) be threatened with termination unfairly.
The Complaint has seven, count ’em seven counts. First, breach of contract because plaintiff allegedly didn’t give his stock options. Second, “promissory fraud” which kind of repeats the contract claim but frames it as fraud (unclear why, if there’s an express written contract). Third and fourth, misrepresentation (negligent and intentional), also unclear why these are alleged if there’s a … written contract. Fifth, breach of fiduciary duty on the basis that Plaintiff was a “shareholder and/or member of Zerocoin” and had a right to review books and records and shouldn’t have had his equity rights diluted. (This particular allegation has a slightly throw it up on the wall feel to it, in this writer’s opinion but, hey, maybe it works in California). Sixth, “constructive discharge” or … I quit but you really fired me. This sort of claim is more typically seen in the age/gender/race discrimination context but it’s given a try here. And last but not least, count seven alleges deceptive trade practice under a California statute, to round things out.
Anyways, not much in this lawsuit directly germane to crypto, other than the fact it deals with a company in the space and is a reminder that business disputes involving this emerging technology still seem to wind up in old fashioned courts with old fashioned causes of action.
