Source: https://blogs.orrick.com/blockchain/category/litigation/
Timestamp: 2019-04-20 12:20:04+00:00

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Following a recent opinion by a Florida appellate court, virtual currency dealers who do business in, from, or into Florida – even individuals in the business of selling their own virtual currency for cash – may be required to obtain a “money services business” license from Florida’s Office of Financial Regulation and maintain costly anti-money laundering programs in accordance with Florida and federal law or face criminal penalties.
The charges against Espinoza stem from a sting operation in 2013, in which undercover detectives contacted Espinoza through a Bitcoin exchange site, LocalBitcoins.com. Espinoza posted on that site that he would sell Bitcoins for cash through in-person transactions. Espinoza was not licensed or registered as a “money services business” with Florida or federal regulators. An undercover detective met Espinoza several times and paid him a total of $1500 cash for Bitcoin, earning Espinoza a profit. During those transactions, the undercover detective allegedly made clear his desire to remain anonymous and said he was involved in illicit activity. For example, the undercover detective allegedly told Espinoza that he needed the Bitcoin to buy stolen credit card numbers from Russians.
The Florida appellate court’s determination that Bitcoins are “monetary value” and “payment instruments” under Florida law fits within a line of cases finding that Bitcoin qualifies as “money” for the purposes of money laundering and anti-money laundering laws. For example, in 2014 Judge Rakoff, a United States District Judge for the Southern District of New York, found that Bitcoin clearly qualifies as “money” or “funds” for the purposes of the federal money transmitter statute because “Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value and is used to conduct financial transactions.” United States v. Faiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014) (citing SEC v. Shavers, 2013 WL 4028182, at *2 (E.D. Tex. Aug. 6, 2013)). Some states have also codified virtual currency into their anti-money laundering regulations. For example, after the trial court determined that Bitcoin was not a “monetary instrument” that could be laundered under Florida’s money laundering statute, the Florida legislature amended the statutory definition of “monetary instruments” to explicitly include the term “virtual currency.” Fla. Stat. § 896.101(2)(f) (2017). Other states, however, have taken a different approach. Pennsylvania’s Department of Banking and Securities (“DoBS”), for example, recently published guidance that virtual currency, including Bitcoin, is not considered money under Pennsylvania law. “Money Transmitter Act Guidance for Virtual Currency Businesses,” Pennsylvania Department of Banking and Securities (Jan. 23, 2019).
The Florida appellate court found that Espinoza was operating as a “money transmitter” and therefore was a “money services business,” simply by engaging in the business of selling his own Bitcoin for cash and not otherwise acting as a middleman between parties. The trial court had applied the more common and narrow understanding that a “money transmitter” operates “like a middleman in a financial transaction, much like how Western Union accepts money from person A, and at the direction of person A, transmits it to person or entity B,” as explained by the appellate court.
The appellate court’s interpretation of the text of Florida’s statute is disputable. From a statutory interpretation perspective, the middleman requirement is arguably inherent in the plain meaning of the word “transmit,” which is defined by Merriam-Webster as “to send or convey from one person or place to another.” (Notably, Pennsylvania’s DoBS recently issued guidance interpreting the word “transmitting” in a comparable state statute to include a third-party requirement. See “Money Transmitter Act Guidance for Virtual Currency Businesses,” Pennsylvania DoBS (Jan. 23, 2019) (interpreting statute that “[n]o person shall engage in the business of transmitting money by means of a transmittal instrument for a fee or other consideration with or on behalf of an individual without first having obtained a license from the [DoBS]” to impose a third-party requirement).) It would, therefore, be reasonable to interpret Florida’s statute as consistent with federal regulations. Moreover, the Florida appellate court’s interpretation of the statute could have broad and troubling consequences. Although dicta in the Florida appellate court’s decision make it seem like the court is making a distinction between “merely selling [one’s] own personal bitcoins” and “marketing a business,” the court’s statutory interpretation leaves open the possibility that the mere act of selling one’s own property – without registering as a “money services business” – could be a crime.
While we watch to see whether Espinoza will appeal this decision to the Florida Supreme Court, virtual currency dealers should be aware that selling virtual currency in, from or into Florida may require a money services business license and the maintenance of an anti-money laundering program.
We have said it in both part 1 and part 2 of this series: for a U.S. court to exercise its powers over a foreign defendant, it must have personal jurisdiction. But even if the court finds that it has jurisdiction, the defendant can request the court to transfer the case to an alternative forum, even to a different country, under the common law doctrine forum non conveniens. In In re Tezos Securities Litigation, the Swiss defendant Tezos Foundation failed in its attempt to transfer the action to Switzerland because of the operation of its forum-selection clause. In this final part of our series discussing jurisdictional questions for blockchain and cryptocurrency companies, we address two crucial factors that non-U.S. companies should consider when crafting a forum-selection clause.
In the Tezos case, the Swiss defendant argued that there were no exceptional circumstances preventing the court from giving controlling weight to its forum-selection clause, which stated that “[t]he applicable law is Swiss law [and] any dispute . . . shall be exclusively and finally settled in the courts of Zug, Switzerland.” This forum non conveniens motion, however, failed because the court found that the plaintiff had not been put on notice of the forum-selection clause and thus could not have consented to it.
Choose clickwrap over browsewrap: A clickwrap or clickthrough agreement requires the user to engage with the website, usually by checking an “I agree” or “I accept” box. A browsewrap agreement attempts to bind users of the website by inferring assent to the terms and conditions. Generally, it is easier to prove notice and consent where a clickwrap agreement has been used, since the user is required to take affirmative action to show agreement to the terms and conditions. A browsewrap agreement may also bind the user, but this requires either (i) a showing that the plaintiff had actual knowledge of the agreement, or (ii) the website putting a reasonably prudent user on “inquiry notice” of the terms. The Contribution Terms of the Tezos ICO did not include a clickwrap agreement for the forum-selection clause. And, as discussed next, the browsewrap agreement itself was poorly executed.
A fundamental problem with the Tezos ICO Contribution agreement was that it did not actually include the forum-selection clause but instead had a single sentence, on page ten of the twenty-page agreement, directing users to “refer to the legal document that will be issued by the Foundation for more details.” Adding to the problems, the court noted that the relevant website did not even hyperlink to this legal contract with the forum-selection clause. Finally, Judge Seeborg added that even if Tezos Foundation had added hyperlinks and some language indicating a user’s “purported agreement,” the browsewrap agreement might still be held unenforceable, particularly against individual consumers.
After finding that the terms of the ICO did not provide sufficient notice that the plaintiff had agreed to Switzerland as the forum, the court applied the traditional forum non conveniens analysis and dismissed the transfer motion. Judge Seeborg added, however, that if discovery later shows that the plaintiff was, in fact, aware of the forum-selection clause, then he may consider dismissal or transfer of the case to the courts of Switzerland.
Without personal jurisdiction over a defendant, a court cannot exercise its powers. And when it comes to non-U.S. companies who want to avoid being dragged to court in the U.S., Alibaba Group Holdings Limited v. Alibabacoin Foundation, No. 18-CV-2897 (S.D.N.Y.) and In re Tezos Securities Litigation, No. 17-CV-06779-RS (N.D. Cal.) show that the traditional jurisdictional analysis applies to blockchain technologies as much as to traditional companies. To further minimize the risks of U.S. litigation, blockchain-related companies should also heed the lessons derived from case law related to online businesses – other creatures of the modern age. This is the second part of our series discussing jurisdictional questions for blockchain and cryptocurrency companies. The first part, which can be read here, focused on how the location of the blockchain nodes may affect the court’s analysis.
U.S. courts can exercise personal jurisdiction over a foreign defendant who has either a continuous and systematic presence in the state (general jurisdiction) or “minimum contacts” with the state such that the exercise of jurisdiction “does not offend traditional notions of fair play and substantial justice” (specific jurisdiction). “General” or “all purpose” jurisdiction permits a court to hear all claims against the defendant, while “specific” or “case-linked” jurisdiction permits only those claims which stem from the defendant’s forum-related contacts (see Walden v. Fiore, 571 U.S. 277 (2014)). While some states have adopted additional long-arm statutes, the federal due process requirements must always be satisfied.
Most courts analyze the “minimum contacts” for specific jurisdiction in a three-part inquiry: (1) Does the claim arise out of the defendants’ forum-related contacts? (2) Did the defendant purposefully avail itself of the forum’s laws? and (3) Is exercising jurisdiction reasonable? We will now look at the second prong of the test and the steps that non-U.S. companies setting up operations can take to avoid purposeful availment.
An interactive website accessible in the U.S.: The courts in both Alibabacoin and Tezos agreed that an interactive website available in the U.S., alone, is not sufficient for personal jurisdiction. But the more functional the website, the more likely a court is to find personal jurisdiction (with additional factors present). For example, in Alibabacoin, the court found it relevant that the defendants’ website allowed a user to (1) register a cryptocurrency wallet, (2) access and download content about the Alibabacoin cryptocurrency and white paper, and (3) interact and contact sales representatives with questions.
Blocking IP address or providing notice to U.S. viewers: A very recent U.S. appellate court case noted that to avoid purposeful availment of U.S. laws, online businesses should consider blocking U.S. IP addresses (Plixer International, Inc. v Scrutinizer GmbH, 2018 WL 4357137 (1st Cir. 2018)). Even if the technical solution does not keep out all U.S. visitors, the Plixer court stated that the blocking attempt shows intent to avoid U.S. customers and is thus relevant to the jurisdictional analysis. If blocking is too aggressive a business strategy, foreign companies can try to avoid jurisdiction by adding notices on the website that their services or products are not available and intended to be used in the U.S.
Marketing and advertising in the U.S.: Avoiding U.S.-specific media and U.S.-specific discussions can further improve a company’s chances in the jurisdictional analysis. In the Tezos case, the court found that the Swiss defendant using a “de facto U.S. marketing arm” and mostly marketing the ICO in the U.S. showed purposeful availment. The same was illustrated in the Alibabacoin case by the finding that over one thousand New Yorkers visited the defendants’ website and at least one New York resident purchased the tokens.
Employees or agents working in the U.S.: If possible, non-U.S. companies should avoid moving their employees to the U.S., hiring in the U.S., or using U.S. agents. This was an important issue in the Tezos case: the court noted that the defendant “kept at least one employee or agent in the United States,” and this was “responsive” to the purposeful availment test.
Working with U.S. service providers: Although for any contacts in question to create jurisdiction, they must give rise to the claims at issue (step 1 in the “minimum contacts” test), limiting reliance on contacts with U.S. service providers outright can lower the jurisdictional risk. In In re Tezos, the Swiss defendant’s use of a “de facto marketing arm in the U.S.” was an important factor in the court’s analysis. In Alibabacoin, the non-U.S. defendant had dealings with a U.S. company (Digital Ocean), which hosted the Alibabacoin website. But, in contrast to Tezos, because the plaintiff had not showed that Digital Ocean had an “active role” in administering the website or that Digital Ocean’s servers were hosted in New York, the court did not rely on this relationship as a basis for finding jurisdiction. Moreover, contacts with U.S. businesses can overlap with the previous point on marketing. For example, if a company used Google Ad Words to target areas of the U.S., it might increase the chances of the courts finding jurisdiction.
Voluntary sales to the U.S.: Depending on the facts, claims and the state’s long-arm statute, even a few intentional sales into the U.S. may prove purposeful availment. For example, in Alibabacoin, the court highlighted that the plaintiff “presented evidence that at least one New York resident ha[d] purchased Alibabacoin on three occasions.” And in In Re Tezos, the court stated that a “significant portion” of the 30,000 ICO contributors were in the U.S. Similarly, after analyzing the federal case law on this issue, the Plixer court held that a German cloud computing company which “voluntarily service[d] the U.S. market” and made around $200,000 should have “reasonably anticipated being haled into U.S. court.” That court also noted that the Oregon Supreme Court had found jurisdiction over an out-of-state defendant that had sold over 1000 battery chargers totalling about $30,000 (Willemsen v. Invacare Corp., 352 Or. 191 (2012) (en banc)), while a district court in New Jersey did not exercise specific jurisdiction over a defendant who had made fewer than 10 in-state sales totalling $3,383 (Oticon, Inc. v. Sebotek Hearing Sys., LLC, 865 F.Supp.2d 501 (D. N.J. 2011)). Accordingly, voluntary and intentional sales to the U.S. should not be made and, if sales occur, blocking U.S. website visitors, or at least providing clear notice, becomes crucial.
When analyzing specific personal jurisdiction, the courts generally examine these factors together, and it is difficult to rank them in order of importance. The U.S. Supreme Court is expected in the coming years to decide on when online contacts are sufficient to create specific personal jurisdiction. Until then, In Re Tezos, Alibabacoin, and case law on online businesses serve as good guidance for non-U.S. blockchain companies.
Following the 2017 ICO boom and the more recent declines in cryptocurrency prices, blockchain-related litigation has substantially increased. U.S. courts have seen most of that action: American regulatory agencies have been more aggressive than their foreign counterparts (the SEC alone has over 200 open investigations), and private parties regularly bring individual suits and class actions. Altogether, close to 100 cases have been filed.
The physical location of the verifying nodes can affect the court’s jurisdictional analysis.
On personal jurisdiction, existing case law related to foreign online businesses serves as useful guidance for blockchain companies seeking to avoid U.S. litigation.
Strategic dispute resolution and forum selection clauses can save the day.
Considering the importance of these issues for avoiding U.S. litigation and the space required to provide enough legal background to meaningfully discuss them, each issue will be addressed in a separate On the Chain post. Today we will address the first point: location of the nodes (the individual devices part of the larger data structure maintaining a copy of the blockchain and, in some cases, processing transactions).
When a foreign defendant is sued in a U.S. court, the court must determine that the U.S. laws in question can be fairly applied and the court has personal jurisdiction over the foreign party. While well-developed legal principles continue to govern the analysis, when a party is a company that uses blockchain and distributed ledger technologies, its reliance on multiple nodes that are physically located across the world raises unique jurisdictional questions. The following two cases tackle this issue.
In asserting U.S. jurisdiction, Judge Oetken did not buy this argument. The Court held that the place where the transaction is put on the ledger is not relevant, comparing this situation to an everyday online purchase: “it would constrain common usage to say that the transaction occurs at the potentially remote location of the servers that process the buyer’s banking activities and not at location where the buyer clicks the button that commits her to the terms of sale.” The Court concluded that the plaintiff had demonstrated with reasonable probability that personal jurisdiction over Alibabacoin existed, based on other factors, which will be addressed in the next post.
In Re Tezos appears to be the first time the courts have considered the location of the nodes to be relevant for jurisdictional analysis. But the cases also show that the courts are only beginning to wrestle with this issue. Jurisdictional analysis will always depend on individual facts and the claims asserted. For example, when focusing only on the fourth factor of Judge Seeborg’s analysis (the location of the nodes), all projects using ERC-20 tokens, which depend on the same cluster of Ethereum nodes, could be considered to operate to some extent in the U.S. Furthermore, the importance of the nodes in jurisdictional analyses is likely to rise because the cases currently in courts are mostly ICO-related. That is, most of the ongoing litigation does not stem from the operation of the blockchain technology but is related to fraud, trademark disputes, and failures to register with various regulatory agencies.
Soon when more blockchain projects become operational and disputes arise in relation to such issues as on-chain transactions, hacking, security failures, and disputes over the governing of the networks, the importance of the data structure of these networks will increase. As a result, the influence of nodes as a factor in the courts’ analyses is also expected to increase, and many foreign blockchain companies that are avoiding the U.S. may, nevertheless, be dragged to U.S. courts.
As will be discussed in the upcoming posts, there are steps a company can take to avoid litigating in U.S. courts, including the set-up of its operations, drafting of its contracts with customers and partners, and litigation strategies pursued in court.

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