Crypto Caselaw Minute #43–7/04/19
Bitcoin doesn’t take July 4th off and CCM doesn’t either. In this week’s carefully curated and extremely red, white and blue version we’ve got a new case covering civil crypto contempt, bitcoin jpeg embed caselaw, and one of the first patent infringement suits in this space. Give it a read, the get back to your apple pie and the bbq.
Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They 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.
(As always, Rosario summaries are “NMR” and Palley summaries are “SDP”. Image credit: https://commons.wikimedia.org/wiki/Pie#/media/File:FoodApplePie.jpg (public domain, U.S. Federal Government)
Odyssey Reinsurance Co. v. Nagby, №16-cv-3038-BTM-WVG, 2019 U.S. Dist. LEXIS 108871 (S.D. Cal. June 27, 2019) [SDP]
If you have been following the ongoing Kleiman v. Wright case in Florida federal court you know that the court is currently considering whether Craig Wright should be held in civil or criminal contempt of court. What does this mean? Is there anything special about contempt in crypto cases? A June 27, 2019 from federal court in California suggest that the basic rules remain the same: cryptocurrency and lying to a federal judge don’t go together very well, at least not if you’re interesting in staying out of jail, and judges are free to disregard or discount the testimony of witnesses they don’t believe.
This particular case arose out of a dispute involving commission payments in an insurance and reinsurance brokerage arrangement (which itself had nothing to do with cryptocurrency, btw). Plaintiffs said that defendants owed them a bunch of money and ended up getting a judgment against defendants of $3.2 million plus interest. They didn’t pay the judgment, allegedly. Long story short — this lawsuit was filed to collect that judgment under legal theories and a statute that make transferring assets to avoid collection unlawful. (I am simplifying, but that is the gist).
The Court issued a number of orders requiring one of the defendants to pay certain money in her possession into the Court’s registry. She didn’t. Order to Show Cause (“OSC”) proceedings were held to show why she shouldn’t be held in civil contempt. Following those proceedings, the Court held her in contempt.
The Court began (as courts do) by explaining the rules. A U.S. federal court “has the inherent power to enforce its orders through civil contempt. [In this particular federal circuit], a finding of civil contempt is proper when a party disobeys a specific and definite court order by failure to take all reasonable steps within the party’s power to comply.” Inability to comply is a defense but “the party asserting the defense must show categorically and in detail why he is unable to comply.” Furthermore, “[a]t the contempt hearing, the propriety of the underlying order is not at issue; rather, the question for the Court is whether the alleged contemnor has the present ability to obey the Court’s order.”
Applying these rules to the facts at issue, the Court found defendants in contempt.
One of the orders at issue enjoined her from “selling, assigning, transferring, liquidating or withdrawing any funds, shares, equity interests or proceeds in relation to any … bitcoin.” Also, “the Court ordered that [she] must provide discovery, with respect to [a number of accounts] and bitcoin. Also, “[t]he Court warned that ‘[a]ny violation of this Order may be treated as a civil or criminal contempt and may subject the violator to arrest and prosecution for such contempt.’”
The Court said that defendants “failed to produce documents and evidence” regarding cryptocurrency, which violated a Court order. Also, the Court did not believe her claim that she had lost access to a $680,000 investment in Monero from the “Mega Chrome Extension Hack”:
Ms. Dostalik produced no information or documents that she ever had an account at ShapeShift. If Ms. Dostalik’s ShapeShift account was in fact hacked, there is no evidence, other than Ms. Dostalik’s testimony. Ms. Dostalik also failed to produce any evidence that she took steps to recover her $680,000 investment, such as filing a police report or at the very minimum, contacting ShapeShift. Moreover, if Ms. Dostalik did lose account information as a result of a hack that she reported occurred in August 2018, then she must have [*28] managed to create a new or separate account for the purpose of the cryptocurrency investment that she testified occurred in September. She failed to disclose any information about a new or separate account.
The Court said this also violated a Court Order and that willfulness isn’t an element in a contempt proceeding the defendant acted willfully, “deceitfully and with little regard or respect for Court orders.” Among other things, “ after the Court ordered Ms. Dostalik to sign a consent directive instructing Caye International Bank to comply with discovery requests, she sent Caye Bank an altered copy with the majority of the directive crossed out. (Even though the Court denied Ms. Dostalik’s motion to include “under protest” with her signature, Ms. Dostalik hand wrote this language on the altered copy. She also wrote: “Forced to sign under duress, under protest and without A jury trial, as Requested. Do Not Follow this. Court Order. I was forced to sign this against my will without a jury trial. You do not have my authorization to Release any Records or any Funds.”
The Court also largely disregarded her testimony because she demonstrated that she is “an unreliable witness” with gaps and contradictions in her testimony. Thus her self-serving testimony about not being able to comply with the Court’s order — disregarded..
So … what happens when you’re found in civil contempt? In this case, the Court gave her 14 days to pay a chunk of money and to show up in court at the end of that time to do so. If she doesn’t comply — “she shall then and there surrender to the U.S. Marshal to be confined until she purges her contempt.” In other words, jail.
United States v. Stetkiw, 2019 U.S. Dist. LEXIS 111216 (E.D. Mich. decided July 3, 2019)[NMR]
This is a criminal case that has resulted in some new precedent in the Eastern District of Michigan relevant to crypto. This is just further evidence that blockchain and cryptocurrency are slowing edging their way into the mainstream. Alright, great, what’s this case about?
Homeland Security Investigations was investigating Bradley A. Stetkiw for potential violations of 18 USC §1960, ie, the prohibition against running an unlicensed money transmission business, because of Stetkiw’s Bitcoin exchange service. As part of that investigation the government obtained a search warrant to search a computer for image and data files related to his running of the service that may be potential evidence. During that search the special agent for HSI found an image of child pornography, and immediately stopped his search. The agent then procured a second warrant for searching for child pornography. That warrant was granted, and ultimately, Stetkiw was charged with crimes related to running an unlicensed money transmission business, and possessing child pornography. So, what is this particular ruling about?
Well, the Fourth Amendment to the Constitution states “…no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.” (emphasis added) In this case, Stetkiw’s lawyers filed a motion to suppress the evidence of child pornography that was discovered when searching for the bitcoin evidence. His lawyers claimed the search was not particular, was unreasonable, and as such the evidence of child pornography should be thrown out. The judge disagreed.
As the Court explained when discussing the Fourth Amendment and computer searches, in the Sixth Circuit (where the Eastern District of Michigan is located) “a computer search may be as extensive as reasonably required to locate items described in the warrant based on probable cause.” This doesn’t mean that the Government has carte blanche to search whatever and wherever they want. If they did, that would amount to what is known as a “general warrant,” and we have a prohibition on general warrants in this country largely due to the old British practice of bursting into colonists homes and rooting around for any evidence of anything they didn’t like. Incidentally, this practice was one of the reasons the colonists declared their Independence exactly 243 years ago as of today. Where was I?
The judge explained that in this case the warrant was particular for a couple of reasons. The warrant itself identified “all forms of storage… including photographic…” as potential locations of Bitcoin evidence, and the officer testified that he was looking for things like QR codes in image files. Additionally, Stetkiw’s own expert witness conceded that although it was not common for such evidence to be found in image files it was indeed possible. Given these reasons the Court found that the search itself was particular.
As to whether the search was reasonable, Stetkiw’s lawyers tried to argue that it was unreasonable to search the image files, because the agent didn’t use optical character recognition when searching. The Court didn’t buy this argument, because “individuals can ‘hide, mislabel, or manipulate files to conceal criminal activity, a broad expansive search of the hard drive may be required,’” and the use, or lack thereof, of OCR had no bearing on this fact.
Stetkiw’s case was not helped by the fact that the child pornography was deemed to be in plain view during the search, and that the judge felt that the agent was acting in good faith.
What’s this mean for crypto? Well, in this particular instance a judge found that searching image files for evidence related to bitcoin transactions was perfectly fine. It is worth mentioning that the judge was troubled by the fact that the agent during evidentiary testimony said that he effectively had a warrant to search whatever he wanted on the computer. The judge felt that statement sounded a lot like a general warrant. As such, the judge recommended that in the future additional ex ante review of search procedures should be conducted by the judge evaluating the warrant before the granting of the warrant. Maybe crytpo will change the world after all.
Anuwave LLC v. Coinbase, Inc., Case №1:19-cv-01226 (D.C. Del. filed June 38, 2019)[NMR]
We have one of the first patent infringement lawsuits involving a crypto player this week. A company is suing Coinbase for patent infringement in the District Court of Delaware. The patent at issue is not related to blockchain technology, but this is another sign of the blockchain industry maturing for reasons we’ll get into.
Presumably, everyone knows who Coinbase is, but who is Anuwave? Anuwave LLC is a company with it’s principal place of business in Frisco, Texas. For those unfamiliar, Frisco is located in the Eastern District of Texas, which is the location for a large percentage of patent infringement lawsuits. Really, Texas?Time for a little patent law sidebar.
Patents are often reviled in the open source software community for good and bad reasons. How can you get a patent on an idea? How can you sue someone for infringing your patent when it’s so obvious? Why is the world terrible? Like most things in life it’s complicated. For better or worse, patents are a part of the technology landscape at this moment in time, and they are becoming an ever larger part of the blockchain and cryptocurrency landscape. The reality is that companies often file patents to cover their technology for defensive purposes, but other times they attempt to “weaponize” the patent system by filing patents for offensive purposes, ie, suing people. Asserting patents and suing people for patent infringement has been big business in the Eastern District of Texas over the years.
Anuwave was granted a patent in 2012 for a “[m]ethod and system to enable communication through SMS communication channel.” That is just the title of the patent itself, and you can deduce that the patented technology relates to using SMS. What is actually covered by the patent is likely much narrower than what the title states broadly, because what is protected by a patent is chiefly limited to what is listed in the patent claims… and I’ve lost my audience. The point is, when you see someone cry out “that’s outrageous! you can’t patent SMS technology!” know that this patent is very likely much more limited in what it covers, but I digress.
Anuwave is asserting that Coinbase’s text notification solution is infringing on Anuwave’s patented technology. To prove their assertion, Anuwave has about 2–3 pages of argument detailing how they claim Coinbase is infringing Anuwave’s technology. It is worth noting that this is, not a lot. In fact, at nine pages this is a short patent lawsuit. It’s fair to assume that Coinbase’s response will be a bit more substantial.
So, why is this indicative of the industry maturing? Well, the growing number of patent filings in this space shows an increased amount of resources (time and money) being spent by companies operating in this space. Additionally, the fact that a company who monetizes their patent portfolio has deemed Coinbase as worthy of their attention shows that blockchain and crypto companies are on people’s radars. Does this mean we can expect an explosion of patent infringement litigation? Probably not, but they are definitely going to become more common going forward.
