Crypto Caselaw Minute #57–10/11/19
This week’s Crypto Caselaw Minute has two, count ’em two updates on the ongoing Centra Tech case, including a NEVER BEFORE SEEN MOTION TO RETURN ETHER, and we also get into a trademark dispute that Facebook and Calibra appear to be facing in New York federal court.(see what we did there?). Also, those are some nice looking figs, aren’t they?
Disclaimer: Crypto Caselaw Minute is provided for educational purposes only by Nelson Rosario and Stephen Palley. These summaries are not legal advice. They 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”. Our Image credit: image link here https://pixabay.com/photos/fig-sliced-dessert-fruit-healthy-4466454/(Pixabay license).
Rensel et al. v. CentraTech, Inc., Case №1:17–cv-24500[RNS](S.D. Fla. entered September 17, 2019)[NMR]
This order from the Court is on a motion for class certification in the saga that has been the Centra Tech case. Don’t remember the Centra Tech case? You know, the one with the crypto backed debit cards with the backing of Visa and Mastercard? Okay, okay, this is the ICO that had DJ Khaled, and Floyd Mayweather as celebrity promoters. Yeah, now you remember. There has been a lot that has happened in the case, so let’s do a little recap before we get to the judge’s reasoning in this particular matter.
Centra Tech ran an ICO in 2017 that would eventually raise $32 million, and that was not exactly on the level. We previously wrote about the class action lawsuit at issue in this case in CCM #36, and the co-pending criminal investigation underway in the S.D.N.Y. in CCM #41. For good measure this is an SEC enforcement action underway that is stayed pending the result of the criminal case. Suffice to say, Centra Tech was a bit of a mess. Given that thigns were not what they seem why did the judge dismiss this motion for class certification?
There are very particular requirements that you need to meet to get a proposed class certified for your would be class action lawsuit to move forward. As an initial step, the plaintiff needs to show:
(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.
If that hurdle is cleared then the plaintiff has to fit into one of three buckets for why class action is in everybody’s best interest. Two key points the Court considers when determining if a class is proper are if the class is ascertainable, as in can they even figure out who the members of the class are based on the plaintiffs assertions, and the timeliness of the filing for class certification. Here, the Court determined that the plaintiff failed on both counts.
Courts often have their own particular rules known as local rules. The S.D. Fla. does not have a local rule pertaining to the timeliness of the filing of a class certification, but the Court noted that the M.D. Fla., and N.D. Fla., as well as many other courts around the country DO have rules related to timeliness of certification filings. Here, the certification was filed 18 months after the initial lawsuit was filed, and six months after the first amended complaint. Additionally, the Court inserted commentary that the delay appears to be deliberately done after all individual defendants had been dismissed, and Centra Tech had a default judgment entered against them. The Court was not impressed.
That was a sufficient reason to deny the motion for class certification, but then the Court took the extra step to lay out why even if the motion was timely it was woefully deficient. In particular, upon reviewing the facts of the case at the time and the plaintiffs three proposed classes the Court found that there was essentially no way that they would be able to identify members of the class. The plaintiff made reference to a supposed spreadsheet that the Federal government has of Centra Token purchasers in the criminal case, but there was no guarantee they could even get the spreadsheet. Another argument they asserted that you could definitely ascertain their proposed classes was a hand-wavy “you can look at the crypto exchanges, they know,” which the Court in essence said “Dude. Come on.”
It should really come as no surprise that you don’t want a federal judge to be in a position where they feel compelled to go beyond what is required to tell you why you are wrong.
Finco Services, Inc. v. Facebook, Inc. et al., Case №1:19-cv-09410, S.D.N.Y, 10/10/2019 [SDP]
Adding to their legal issues, Facebook and Calibra were sued yesterday in New York federal court for alleged trademark infringement, unfair competition and “false designation of origin” under the U.S. Lanham Act, all arising out of the distinctive Calibra swirly tilde logo. In addition to damages, Plaintiffs seek preliminary and permanent injunctive relief (that is an Order from the Court ordering them to stop using the mark).
Plaintiff Finco Services says that it’s a Delaware corporation that provides online and mobile banking services in a mobile app. It does business under the name “Current”. According to its lawsuit, in 2016 Finco paid a company called Character SF (which is also a defendant) to “create a branding strategy for the company.” As part of this strategy, Character created the logo that appears below.
Finco says that it registered its logo with the U.S. Patent and Trademark Office (USPTO) for a bunch of purposes, including “in connection with a mobile computer software application used for enabling cryptocurrency-based transactions in Class 9 and SaaS services used for enabling cryptocurrency-based transactions.” It also says that it uses its current marks in an app available in the Google Play Store and Apple App Store, on a debit card, and on its website.
The problem, Finco says, is that Character created a logo design for Calibra that infringes on the design it created for Finco. That alleged infringing logo is below and Finco says it’s “nearly identical.” Finco says that it complained to the general counsels of Calibra and Facebook and, whelp, they didn’t do anything.
Here’s how they look, lined up, each to each:
The lawsuit includes a variety of direct claims for trademark violation against Calibra, Facebook and a company called JLV, LLC, which allegedly owns the intellectual property (including trademark and service marks) related to Calibra. It also makes claims against Facebook and Character for contributing to these alleged trademark violations.
There’s also a strangely pleaded claim against Character for breaching something called the “covenant of good faith and fair dealing”, which is an implied term in every contract — the idea here is that if we enter into a contract for you to design a mark for me, you’re not going to design and sell the same mark to someone else. Oddly, there’s no actual breach of contract claim here and, in fact, the complaint alleges the existence of a contract “on information and belief” (which means something like, we think there was a contract but don’t know for sure). It may be that someone other than the plaintiff paid for Character to do the design work, so Finco can’t claim a direct breach of contract — only that it’s a third party beneficiary of someone else’s. But the introduction to the lawsuit (at paragraph 11) says that Current paid Character to create a design strategy for it, so it’s hard to know what this weird pleading strategy is all about. Anyway, this piece of the lawsuit is messy and seems likely to be subject to a motion to dismiss.
Anyhoo. Oversimplifying a lot, the issue in a case like this is often the visual similarity of the design marks and the likelihood of confusion between the two. While these two designs look kinda similar to me, it’s difficult to predict the exact outcome without seeing the full briefing on the issue by all of the parties. These cases have a lot of procedural and substantive nooks and crannies and not every similarity is necessarily infringement. That said, it would be a real pain in the patootie for Calibra if it gets hit with a TRO or preliminary injunction preventing its use of the mark while the dispute were resolved. It’s a lot easier to rebrand before you’ve truly launched globally, so if there is a risk that that the defendants will ultimately lose, one imagines they will be weighing that risk against the cost of a quick rebranding exercise now.
United States v. Sharma et al., 18 Cr. 340(LGS), S.D.N.Y. 10/4/2019 (“Motion to Return Ether”) [SDP]
Link to case: https://www.scribd.com/document/429814853/Motion-to-Return-Ether
Whether or not you agree with Ecclesiastes 1:9 that there is nothing new under the sun, this is absolutely the first time ever in any court anywhere ever that anyone has ever filed a motion called “Motion to Return Ether.” I’m just saying. This has never happened before. And, I was going to write about something other than the Centra case, because Nelson covered the class action denial but the siren song of a never before filed motion caught my eye, so here we are.
For those of you who have been sleeping through Crypto Caselaw Minute for the last year, the Centra Tech case involved a, well, let’s call it a scheme (but not in a judgmental way) to raise a lot of money for something called the Centra Card, which would let you spend yer cryptos with the card just like you were spending cash from a debit card linked to a bank account.
The whole thing came crashing to a halt when the SEC sued the co-founders for orchestrating a fraudulent ICO [https://www.sec.gov/litigation/complaints/2018/comp-pr2018-53.pdf] and they were picked up by criminal authorities and charged with, yes, crimes.
This motion is filed in the criminal case against Sam Sharma and Robert Farkas. It says that the government has in its possession 100,000 Ether taken from the defendants by the government and asks that the Court order the government to “anyone who purchased Centra Tokens from Centra Tech during its token sale and suffered a loss as a result of its purchase (‘Purchasers’).”
The government has refused to return the Ether, the Motion says, if there is a pro rata return but will maybe agree to do so if there is no pro rata return and purchasers agree to receive ether in return.
The Motion claims that “Centra Tech’s business model focused on creating a technological system that would allow persons having all types of cryptocurrency to spend it in a more familiar way by using a functional platform like a traditional debit card.” You can see the defense argument developing here, as the brief explains that “During the summer of 2017, Centra Tech began Beta testing its card program and system. By the end of December of 2017, Centra Tech began shipping its full-scale product operating on the Mastercard network.” Presumably the SEC will argue that the business model was a fiction and the real goal was to fleece money from investors.
Defendants say that they have been trying to return the Ether they got in the sale since late 2017, and the government has consistently refused — and meanwhile the value of Ether has dropped considerably, damaging investors. But the SEC says that the return that the defendants propose would be an illegal rescission. They ask in this motion for the court to order the government to return the Ether to “the same people and entities the government views as alleged victims in this case.”
Defendants recognize a difference between people who suffered a loss and those who made a profit on their sale of Centra tokens, and propose that the government address the issue thus:
this Court should order the government to identify the Purchasers it contends have suffered a loss and promptly return the proper amount of Ether to them through a claims process. Again, the Defendants have no objection to the Ether being used to refund the Purchasers who sold their Centra Tokens purchased during the token sale period from Centra Tech for a loss or have owned and held their Centra Tokens the entire time since there purchase from Centra Tech. Those who purchased from Centra Tech but sold for a gain and those who purchased from third parties are ineligible. Thus, the Purchasers will all receive what they purportedly lost before trial begin.
While there are some admittedly complicated issues relating to the return of this substantial amount of crypto, there are some pretty compelling arguments here. I mean, why sit on a 100,000 ether — given its inherent volatility — if you can refund it to people who are the alleged victims. Surely there’s a way to sort this out.
