Question of whether mining equipment preorders qualify as securities moved to arbitration

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".

[related id=1]Roberts v. Obelisk, Inc., 2019 U.S. Dist. LEXIS 72065 (D.Cal., 18-cv-2898-LAB, April 29, 2019) [SDP]

Is the marketing or sale of cryptocurrency miners that ultimately fail to meet promised specifications a violation of state securities and unfair marketing laws? We may never know what this Court thinks of the subject, because it just granted a motion to compel arbitration. A discussion of the arbitration decision follows, but this ruling makes it sufficiently less likely (though not impossible) that this Court will issue a substantive ruling on the merits of plaintiff’s claims, which will be resolved in the first instance by an arbitrator, whose ruling if challenged will be accorded significant deference. While this makes it less likely that we will see a published opinion on the creative securities law issue pleaded by Plaintiffs, this case does give us some further useful precedent on what makes an arbitration clause in a website’s terms of service enforceable.

[related id=2]We covered this case in prior editions of CCM, but as a reminder, the Court explains that “Obelisk offered pre-orders for two types of miner, the SC1 and the DCR1. Because the miners boasted high ‘hash rates,’ individuals involved in the cryptocurrency mining industry (including the Plaintiffs) believed these units would be more profitable than existing miners.” The miners were allegedly shipped late, failed to meet advertised specifications, and when the plaintiffs demanded a refund the defendant refused. They filed a lawsuit (a putative class action) in state court in California and it was moved to federal court. Now it is going to be moved to arbitration.

Making a pre-order on the website required the purchaser "to check a box indicating that he or she agree[s] to the Terms and Conditions and acknowledge[s] the Privacy Policy." The phrases "Terms and Conditions" and "Privacy Policy" are in red hyperlinked letters, which contrasts with the gray lettering elsewhere on the page. When clicked, the Terms and Conditions hyperlink redirects the purchaser to a document entitled "Pre-Order Terms & Conditions,’’ which contains the various terms of the sale and notes that "BY CLICKING ‘I AGREE’ YOU REPRESENT THAT YOU AGREE TO BE BOUND BY THE TERMS OF THIS AGREEMENT AND THAT YOU HAVE THE AUTHORITY TO ACT ON BEHALF OF THE BUYER." The terms of service contained an arbitration agreement and a class action waiver.

Defendant moved to dismiss the case for lack of personal jurisdiction and in the alternative to compel arbitration. The court denied the motion to dismiss but granted them motion to compel arbitration. As to personal jurisdiction, the court found sufficient contacts to satisfy the well-established rubric for assertion of a court’s jurisdiction over out of state defendants: “Considering the various connections between the Individual Defendants and the California market at large — the speeches given in California, the direct email contacts with California purchasers, and the 'size and commercial value of the California market’ — the Court concludes that there is enough ‘other conduct directly targeting the forum’ that the Individual Defendants’ internet posts constitute purposeful direction.”

As to the motion to compel arbitration, Plaintiffs made three arguments why the agreement should not be enforced, each of which the Court rejected.

First, the terms were sufficiently conspicuous to give the Plaintiffs notice of what they were agreeing to. The fact that they hyperlink was “in pink rather than the customary blue” did not matter. There’s no black letter law requirement that a link be a specific color and “by clicking a box indicating that they agreed to the terms, a reasonable user be on notice that a hyperlink was likely somewhere in the adjacent text.”

Second, Plaintiffs said that because they never got an “executed” copy of the Terms defendants could not prove that Plaintiffs assented to it. The Court disagreed and said that were it to accept this argument “it would unravel nearly every clickwrap agreement on the Internet.” Plaintiff provided enough evidence to show that agreeing to the terms was a condition of pre-ordering the miners; for this Court, that evidence was enough.

Third, the fact that the terms gave the company the ability to change them at any time was immaterial because the arbitration agreement was never changed. Also, an implied covenant of good faith and fair dealing would have prevented the company from unilaterally changing the arbitration agreement. Finally, whether or not the arbitration agreement was “unconscionable” was for the arbitrator to decide in the first instance.

An interesting final wrinkle in this case is that the Plaintiffs sued both the company and a number of other defendants who were not parties to the terms of service. Plaintiffs argued that these non-signatories were not entitled to enforce the arbitration agreement. The court ruled against Plaintiffs here as well. Because the claims against the individual were inherently bound up with the signatory — here Obelisk, on whose website the terms of service were presented — the Court said that in order to avoid duplicative litigation, under applicable precedent, the arbitration clause would be applied to all parties.

The Block is pleased to bring you expert cryptocurrency legal analysis courtesy of Stephen Palley (@stephendpalley) and Nelson M. Rosario (@nelsonmrosario). They summarize three cryptocurrency-related cases on a weekly basis and have given The Block permission to republish their commentary and analysis in full. Part I of this week's analysis, Crypto Caselaw Minute, is above.