Crypto litigation and wall-throwing

That saying “if you throw stuff at the wall sometimes something will stick” may be true, but nobody ever thinks about what happens to the wall. Hopefully you have a nice high-quality washable paint. I think about this often when I look at lawsuits, particularly long and sloppy ones with dozens of pages of novelistic stylings and a dozen or more counts. (See the messy FTX Trading lawsuit, which I covered in last week's column).

The idea here, I suppose, is that if you draft a 20-count lawsuit maybe one or two of them will make it past a motion to dismiss. Call me old-fashioned, but I tend to believe that (as a general rule) if you pick your claims well — maybe even do a little research up front — you don’t have guess at what the Court is or is not going to allow to go forward. In other words, instead of throwing stuff at the wall, find some glue or a picture hanger and attach things carefully.

The throw stuff on the wall theme has really been on my mind a lot lately as I’ve read new crypto lawsuits and filings. We seem to have reached a steady state where there are at least a couple of new crypto filings each week and many of them seem to involve a veritable thicket of claims whacked up against a wall, with some poor judge left to make heads or tails of what’s, you know, a real claim.

Temurian v. Piccolo, 2019 U.S. Dist. LEXIS 196561, is yet another case in point. This is a new opinion out of a federal court in Florida and it is a true wall-thrower of a case. The nubbin of the thing seems to be a break down in a business relationship. The plaintiffs are Armen Temurian and Vista Technologies. The defendants are named P. Piccolo, K. Johnson and P. Morris (the court calls them “PJM”), Joseph Reid, and Travelada LLC. Lots of moving parts even before we get into what broke down and why.

Vista sells mining rigs called the Vista Mini Miner. Reid introduced the PJM defendants to Vista. Vista entered into a deal with the PJM defendants to develop software for Vista “to manage its sales and shipping, handle its records, and give Vista and its customers a platform to monitor Mini Miner usage, which it calls the Back Office.”

Apparently, the whole thing went very south very quickly, and the Court’s order explains that (if one is to believe the lawsuit):

Throughout the course of their business dealings, Plaintiffs allege that Defendants committed a series of fraudulent acts and schemes, including: (1) creating false customer profiles using access to the Back Office; (2) perpetrating a scheme to convert Vista’s cryptocurrency; (3) fraudulently ordering and shipping Mini Miners; (4) laundering fraudulent gains procured through various Vista accounts; (5) disabling Vista’s access to the Back Office; (6) using Vista’s customer list to send out emails to customers whilst impersonating Vista; and (7) extorting Vista by offering to lease the Back Office back to Plaintiffs for a fee or threatening to shut off the software and delete Plaintiffs’ data unless Defendants were paid large sums of money.

Sounds bad, right? The Plaintiffs first filed suit over a year ago and were given the right to file an amended complaint, which they did in January. That was dismissed in April. And so the plaintiffs filed ANOTHER complaint, which includes 20 counts, including a lot of wall-throwing. This time, the Court dismissed 19 of the 20 counts, allowing the Plaintiff to move forward on a federal Lanham Act claim, dismissing the other claims, most of which the Court says can be refiled in state court. The Lanham Act claims allege trademark violations when the defendants allegedly sent out emails using the Vista trade name and Mini Miner trademark.

The artful pleading does give us at least one interesting tidbit of crypto precedent on someone else’s satoshi. One of the claims that the plaintiffs make is that the defendants violated the Computer Fraud and Abuse Act by using the “Back Office Software without authorization to transfer ‘application programming interface (API) information’ (which the parties do not dispute constitutes ‘password or similar information’ under the CFAA) from Vista to Vista’s Alfacoins account.”

By using the API this way, Defendants were able to access a significant amount on bitcoin and other cryptocurrency. In order to plead a violation of the CFAA (which is a really, really broad statute) “the plaintiff must adequately allege that the defendant knowingly and with the intent to defraud, trafficked a password or similar information through which a computer could be accessed without authorization. The CFAA defines ‘traffic’ as to ‘transfer, or otherwise dispose of, to another, or obtain control of with the intent to transfer of dispose of.’” The Court says that plaintiffs didn’t plead a violation of the CFAA because there’s no allegation that they trafficked password or similar information to anyone else, but that they used the API to “disburse cryptocurrency to themselves.”

So … the lawsuit is now more than a year old. I have no idea if the plaintiffs are paying their lawyer to prosecute this case or doing it on a contingent fee basis. But at this point they are not a heck of a lot closer to a resolution than they were a year ago. In other words, at this point, they’ve got a live lawsuit and a dirty wall. Making this even more messy is the fact that the Defendants themselves filed a counterclaim (basically, their own lawsuit against the Plaintiffs) in September of this year, saying that in fact that they are the aggrieved parties here. The counterclaim includes this eye-popper:

So the defendants, who are also now counter-plaintiffs, say that they were promised a whole lot of money if they helped the defendant with this project. (Double your money in 80 days? I mean. No red flags here at all. But I digress). 

A plaintiff’s lawyer might respond to my larger point about throw-it-up-against-the-wall lawsuits by saying “Well, Steve, this is new and emerging technology and we still don’t know how a Court is going to rule on some of these things, so we have to engage in some wall throwing.” In fact, there are even odds I will get at least one message like this. Here's the thing, though -- While some indeterminacy is always present in litigation, little about this particular lawsuit (or most of the others out there) requires creative pleading. It's a business dispute that went bad. Plaintiffs say defendants stole their stuff. Defendants say that they are the wronged party.  

Whether or not stealing bitcoin implicates the CFAA is kinda novel, but that's about it. Slightly better upfront claim selection in this case might have avoided the need for multiple complaints to be filed and a year of motion practice to be avoided. In other words, I wouldn’t blame bitcoin or mining hardware for this legal mess — it’s more a cautionary tale of litigation going off the rails and messing up the walls AND also getting yourself sued right back for your trouble.

What’s a client to do when faced with the draft of a 20-count lawsuit? I mean, I am not suggesting that anyone should second-guess their lawyers here. I guess if I were in the client seat though I might ask whether we can accomplish in seven counts what has been attempted in 20. And if it will cost me less and maybe make the process take slightly less time. I'd also want to know if there's a chance if I will get sued back, which is what happened here. This is all true with respect to crypto litigation and, whelp, any other kind of litigation that you have the necessity or misfortune to find yourself engaged in.