ICO securities class-action against Unikrn is kept out of arbitration, but is that bad for them?

If you spend a lot of time reading, writing and litigating contracts and terms of service for software projects – blockchain and otherwise – you see many arbitration clauses. 

This train of thought brings me to a particular case: Hastings v. Unikrn, Inc., 2020 Wash.App. LEXIS 808. At issue is a putative class action involving the Unikrn token sale, which the plaintiff says "violated federal securities law when selling him and other investors digital tokens called UnikoinGold Token."  

(It also violated spelling laws, but your 4th-grade English teacher can’t impose money damages on you at this late date).

Defendants moved to compel arbitration and thus "stay" the judicial proceeding. According to the Court’s recitation of the facts, participation in the ICO required using a website:

"This website contained several web pages requiring potential users to establish a personal account, enter personal information, and verify their contact information. One of the web pages (the "address verification web page") required users to type in a physical street address. The address verification web page displayed a checkbox located next to an affirmation statement underneath the fields requiring users to type in their address. The affirmation statement read "I have read and understood Unikrn Token sale Terms of Service and the Privacy Policy, and hereby agree to them." The phrase "Terms of Service" contained an embedded hyperlink to a document entitled "UNIKRN BERMUDA LTD TERMS OF TOKEN SALE." The first section of this document explicitly stated the following: "PLEASE READ THESE TERMS OF TOKEN SALE CAREFULLY. NOTE THAT SECTION 15 CONTAINS A BINDING ARBITRATION CLAUSE AND CLASS ACTION WAIVER, WHICH, IF APPLICABLE TO YOU,AFFECT YOUR LEGAL RIGHTS. IF YOU DO NOT AGREE TO THESE TERMS OF SALE, DO NOT PURCHASE TOKENS.""

In order to proceed, you had to check a box next to an "affirmation statement" and acknowledge that you’d agreed to the terms of service (including this arbitration clause). If you didn’t do this, you couldn’t proceed and get your tokens.

The motion to compel arbitration was denied and the defendants appealed. The primary argument on appeal was that the trial court was wrong when it ruled that clicking the box wasn't enough to be deemed an agreement to the terms of service and, thus, the arbitration clause. Plaintiff argued that, among other things, "a reasonable Internet user would not have understood that the phrase 'Terms of Service' was hyperlinked to a contract requiring review and assent", that it wasn’t clear he had to actually read the terms of service, and that the link to the terms didn't work on the day he bought his tokens.

In order to be bound to the terms of a contract, you have to agree to its terms. It may surprise the reader to learn that that court of appeals agreed with the trial court and found that there was a lack of "reasonable notice" as to the existence of a link to the token sale terms. Other grounds for appeal were also denied.

So, the lesson here is one we've certainly seen in the past. 

If you want to build terms of service on a website, you need to make sure that you build a workflow that provides ironclad evidence that the terms of service were agreed to, including the arbitration clause.  Somewhat damning for the defendant in this case: there was actually a chat log that showed that the terms of service link was broken.  

As the saying goes, that dog won't hunt. As a consequence, this case stays in Court, and out of arbitration.

But...is this a bad thing? 

I am sure that the Defendants aren’t happy. But whether or not arbitration is a good or bad thing is a matter of widely differing opinion. It's true that litigation and trials can be very expensive. There is no doubt about it, and this state of affairs is one the reasons why most disputes, at least in the U.S, settle before trial. Indeterminate results, uncertain cost and time all combine to form a strong incentive to resolve things on your own. 

In arbitration, private arbitrators decide disputes between parties out of the eyes of the public and providing their own rulings. It has some appeal, to be sure but it comes with its own layers of complexity. And as I explain below, it's not always as inexpensive as advertised.

 (Arbitration should not be confused with mediation, which is, as a general rule – though there are some exceptions – non-binding).

I have mixed feelings about arbitration clauses. While arbitration clauses can, in some cases, streamline dispute resolution, they have some fundamental limitations. An arbitration clause does not immunize a developer from things like criminal laws, consumer protection statutes or securities regulations (both of which can have a criminal and civil component). Also, an arbitrator can also sometimes "split the baby" in a way that a judge or jury can't. If you have a very strong case on the law but the other side has sympathetic facts, you might be better off in court. 

And the "cost-savings" argument does not always bear fruit – sometimes.  There are instances in which arbitration can cost the same as or even more than a lawsuit filed at the courthouse. That is certainly true at the outset – compare the filing fees at your local courthouse with those of AAA, which can be thousands of dollars, and more. Another difference is that judges don't bill you for their time (at least not in the U.S.) They're public employees. Arbitrators may not only bill by the hour but also charge you for travel and lodging expense. So, if you choose arbitration in addition to paying for your lawyers, now you're paying your dispute resolution panel as well.

In some cases the tradeoff is worth it because the arbitration process itself can be streamlined, faster, and have limited discovery. This isn't always the case, however.

Because traditional evidence rules don't apply, it's actually possible for arbitration to lead to more expansive discovery than in court-controlled discovery. It depends on the parties, the forum, and the arbitrator(s). There's also no reason why parties in plain old going to court style litigation can't agree to limit the scope of discovery or to exchange evidence privately. In short, efficiency has as much to do with the parties as the process itself.

As for some of the other stated advantages, each has a potential downside. Take the limited appeal rights that are available under the Federal Arbitration Act. You may think they are an advantage, but wait until you've lost an arbitration and realize that you can't appeal plain legal error or a decision based on evidence that would have never been admissible in a court room because your appeal doesn't fit within the four grounds for appeal set forth in 9 U.S.C. Sec. 10(a).

Arbitration can have an advantage that is difficult to find in litigation: it's private. While it is possible to request that documents in publicly filed lawsuits be sealed, there is no guarantee that a court will agree to the request. Once filed, there is no guarantee that a document will remain under seal. It's also worth that some of the privacy that arbitration affords can also be lost if an arbitration judgment is registered with a court and enforcement pursued. And you may not want privacy – it depends.

Another stated advantage is that arbitrators with specific technical expertise can be selected, as opposed to judges who may lack subject matter expertise. Judges are experts in dispute resolution and – with some exceptions – aren't expected to have technical subject matter expertise. Subject matter expertise isn't usually necessary, and one can argue  is a potential an impediment to decision-making. Experts can bring their own biases to adjudication. In U.S. litigation, where expert testimony is required, the parties retain experts who provide their opinions. The fact-finder determines which opinion is more credible. 

I don't mean to suggest that arbitration clauses are a bad idea (for software projects or otherwise). They are just not a perfect solution. Their appropriateness really depends on particular use cases.

So, it may come as cold comfort to the defense lawyers or defendants in the Unikrn case, but maybe they will get a fairer shake in court than in arbitration. I can think of more than one case I've been involved in where arbitration didn't end up being such a great thing for the defendant. 

Maybe the same will be true here.