iCourts across the United States are grappling with the application of traditional legal principles to "Web3” technologies and tools, such as blockchain, NFTs, and decentralized autonomous organizations (DAOs).
Among other issues, courts are examining whether alternative forms of service of process satisfy traditional requirements that service be reasonably calculated to place interested parties on notice of pending claims and afford them an opportunity to respond.
Recent decisions from the US District Court for the Northern District of California, the US Bankruptcy Court for the Southern District of New York, and a New York State trial court are likely to guide future litigants pursuing remedies in the Web3 space. These courts authorized the utilization of non-fungible tokens, website chat boxes, and discussion forums to effectuate service of process. These cases represent an evolution of jurisprudence to address new technologies. Litigants and investors in Web3 technologies have significant interests at stake.
Serving a DAO - The Ooki DAO Suit
On September 22, 2022, the Commodity Futures Trading Commission (CFTC) sued Ooki DAO in the US District Court for the Northern District of California for allegedly engaging in unlawful retail commodities transactions under the Commodity Exchange Act (CEA).
Shortly after filing, the CFTC moved for authorization to serve Ooki DAO through a “Help Chat Box” and online discussion forum located on the DAO’s public website, asserting that alternative service was appropriate because Ooki DAO had no physical address or registered agents and, in the CFTC’s view, had been “intentionally structured to attempt to render its activities ‘enforcement-proof’ including by ‘erect[ing] significant obstacles to traditional service of process.’”
The court initially granted the CFTC’s motion for alternative service, but industry groups pushed back by filing amicus briefs asking the court to reconsider. The amici argued, among other things, that Ooki DAO can neither be served nor stand as a defendant because it is a technology, not an entity, and therefore is not subject to enforcement under the CEA; and even if it were subject to enforcement under the CEA, it was not properly served.
The court rejected the amici’s arguments that the DAO is merely a technology incapable of standing trial. Rather, the court concluded that the DAO is an unincorporated association under California law. The court also ultimately rejected the amici’s arguments that the DAO was improperly served or without capacity to be sued. The court noted that when the CFTC served the DAO via its website Help Chat Box and a discussion board, it led to a “flurry” of activity on Ooki DAO’s communication channels, including a post on the Telegram App that was viewed over 100 times. The court also required the CFTC to serve two of Ooki DAOs co-founders and token holders, but the court ultimately concluded that such service was not required under California state law because the Ooki DAO was an unincorporated association without a mailing address.
Other DAOs may want to anticipate similar issues in their whitepaper before a token issuance. If the court’s reasoning holds, DAOs cannot escape service simply by operating as unincorporated associations without designated agents and should develop procedures to receive, discuss, and respond to legal demands.
Blockchain as Process Server - LCX Serves Hackers Via NFT
When presented with the problem of serving an anonymous hacker group who had made off with millions of dollars of cryptocurrency assets, Liechtenstein-based cryptocurrency exchange LCX decided to turn the tables on its hackers and convinced a New York State court to agree.
In early 2022, LCX was the victim of a cyberattack where outsiders stole about $8 million worth of the LCX token. After tracing the stolen funds to a specific blockchain wallet, LCX obtained a temporary restraining order (TRO) freezing the hacker group’s assets pending further litigation.[1]
After issuing the TRO, the court ordered the defendants to show cause for why a preliminary injunction should not be issued and LCX was ordered to serve a copy of the show cause order on the hackers. LCX’s counsel, at a hearing on the preliminary injunction, requested and was granted authorization to create and issue (via an airdrop) a service token containing a link to a website hosting the relevant papers for the injunction.
Interestingly, counsel for the ‘Doe’ defendant(s) appeared after that hearing and asserted that service was improper, and the alternative service was wrongly authorized because LCX did not demonstrate that regular service was impracticable. Ultimately, the court agreed with LCX and concluded that LCX’s “Service Token” was effective because it was delivered to the wallet holding the stolen assets, the wallet contained significant amounts of stolen cryptocurrency (meaning that the hacker(s) were likely to return to the wallet), and the token contained a link to all of the papers which would have been served in any traditional means.
Quote-Tweeted Subpoenas - 3AC Bankruptcy Court Authorizes Digital Service
Bankruptcy courts are also being confronted with the reality that debtor directors and officers, in possession of critical information, may be impossible to locate and yet active on social media. To effect service on these individuals, courts are considering whether Federal Rule of Civil Procedure 45’s requirements can be satisfied using digital methods of service when individuals otherwise subject to it cannot be served by conventional means.
The foreign representatives of Three Arrows Capital, Ltd., an investment company that focused on cryptocurrency and digital assets and collapsed in early 2022, brought this issue to the US Bankruptcy Court for the Southern District of New York when they moved for permission to use alternative means to serve the debtor’s co-founders who were not otherwise responsive to formal or informal overtures.[2] Accordingly, the foreign representatives requested the ability to serve the co-founders (Su Zhu and Kyle Livingston Davies), certain investment managers, and Troy Trade (a prime broker of the debtor’s) with subpoenas using email and social media – Twitter specifically.
The court first eliminated the possibility of serving the non-US citizens under Rule 45 because the Rule did not provide for service outside the United States for non-U.S. nationals or residents and specified the scope of allowable service. Then, despite an acknowledged lack of precedence, the court allowed the issuance of a subpoena on Kyle Livingston Davies because (1) he was presumptively a US national (due to being born in the US), (2) he was determined to be “necessary” due to his “integral role” at Three Arrows Capital Ltd., where he ran all facets of the business with Su Zhu (making him one of the only people with accurate knowledge regarding the nature, extent, and access to the debtor’s assets), and (3) the information is only available from Davies (as Zhu could not be reached).
The court next considered whether the request for alternative service comports with the obligation “to ensure receipt, so that notice will be provided to the recipient, and enforcement of the subpoena will be consistent with the requirements of due process.” The court found that alternative service is acceptable because, despite significant efforts, the foreign representatives could not serve Davies by traditional means and that service via email and Twitter would be sufficient. The court reasoned (1) Davies himself provided the email address the foreign representatives intended to serve, (2) both the email address and the Twitter account were recently used, and (3) Twitter’s public nature and evidence of its recent use “could ostensibly provide probative evidence of actual receipt of the subpoenas[,]”service through those means would be effective.[3]
This decision may be relevant where crucial sources of information on debtor assets are non-responsive US nationals outside the United States, as future courts have precedent to digital service to haul individuals into court to testify or provide documents. This court’s reasoning also followed the other courts’ thoughts on whether digital service provides adequate notice of the action and the obligation to respond, and suggests, to some degree, coalescing judicial opinion.
Takeaways
As courts receive and consider new suits and determine how existing federal, state, and local rules apply to novel situations, they will look to previous decisions to help guide them in result and in reasoning. Accordingly, these recent decisions represent a major development for investors in digital businesses and their rights in the event of a dispute. When investing in Web3 entities, contracting with them, or otherwise transacting with them, determining how to enforce one’s rights in the event a conflict arises should be a prime consideration in advance.
FOOTNOTES
[1] LCX AG v John Doe Nos 1–25, Order to Show Cause and Temporary Restraining Order (Index No 154644/2022, Supreme Court of the State of New York, 2 June 2022).
[2] In re: Three Arrows Capital, Ltd., Case No. 22-10920 (MG)
[3] Subsequently, the foreign representatives filed a motion to compel Davies to respond, given that “Davies has continued to post on his Twitter account, openly ignoring the court’s directives and enjoying media attention while he continues to thwart efforts by the Foreign Representatives to gain access to documents and information.”
