The case over the stolen Bored Ape NFT will go to arbitration

A case involving a stolen Bored Ape Yacht Club (“BAYC”) NFT must be resolved in arbitration, according to a Texas federal court. In a ruling Wednesday, Judge Alfred Bennett of the US District Court for the Southern District of Texas granted Ozone Networks d/b/a/ OpenSea’s motion to compel arbitration in the lawsuit filed against it last year by a former BAYC NFT owner, who accused the NFT marketplace of failing to address “security vulnerabilities in the platform” that led to a widely reported breach that cost users millions of dollars in stolen NFTs. OpenSea claimed in a motion back in May 2022 that plaintiff Timothy McKimmy “repeatedly and unequivocally agreed to the terms of use,” which include a binding arbitration clause, making arbitration “the proper forum for this dispute.”

In its push for arbitration, OpenSea argued that McKimmy agreed to the terms “through at least three different flows of acceptance: when he purchases his first NFT using OpenSea’s services, when he connects the crypto wallets to OpenSea, and when he uses OpenSea’s mobile application.” Specifically, OpenSea alleged that “before buying or selling NFTs using [its] services, users must first connect third-party crypto wallets, such as MetaMask or Coinbase Wallet, to OpenSea.” To do so, OpenSea says that “users must agree [its] Terms of Use … [which] notify users in advance, in large, bold letters, that the Terms ‘REQUIRE ALL DISPUTES BETWEEN US TO BE RESOLVED THROUGH INDIVIDUAL ARBITRATION RATHER THAN BY A JUDGE OR JURY IN COURT.’

As a “consistent and frequent OpenSea user since at least December 2021,” OpenSea claimed McKimmy agreed to “the terms and arbitration agreements therein when he repeatedly purchased NFTs, connected his crypto wallets to OpenSea and logged into OpenSea’s mobile app.” On that basis, OpenSea argued that McKimmy’s negligence and breach of fiduciary, trust and contractual claims fall within the ambit of the arbitration agreement, which it says is not “so grossly unreasonable or unconscionable in light of the customs and business practices of the time and place as to be unenforceable.”

Judge Bennett set the scene in his March 22 ruling, stating that the parties disagree about whether McKimmy consented to the arbitration agreement, while McKimmy argued that he did not consent because he “did not see a clickable link to [OpenSea’s] Terms … [and] did not review the terms” when registering for or accessing OpenSea’s NFT marketplace site.

The critical inquiry here, according to the court, was whether “the user had reasonable notice of the existence of the terms – i.e. whether the notice was ‘reasonably conspicuous’.” The judge stated that in the “digital context”, courts have held that users of mobile apps entered into valid arbitration agreements when they had such notice. He also noted that there is reasonable notice when a user is “required to click a ‘Continue’ button and a statement is displayed directly above informing users that by clicking ‘Continue’ they agree to the site’s terms.” At the same time, “notice is particularly sufficient,” the judge said, “when the terms of use are hyperlinked and written in bold.”

On that basis, the court found that McKimmy was given reasonable notice of the terms and the arbitration agreement, as OpenSea uses a “Continue” button with corresponding language in bold, contrasting color with a hyperlink. Although McKimmy did not see the link and reviewed the terms, the court held that he was still reasonably notified of OpenSea’s terms when he purchased NFTs on the site, as OpenSea modifies users of the terms and requires users to accept them before completing a purchase transaction. And with this in mind, the court held that a valid arbitration agreement exists between the parties.

Regarding the arbitrability of the case, the court argued that OpenSea took the position that its terms “clearly include delegation clauses by giving the arbitrator exclusive authority to determine the scope and enforceability of the arbitration agreement, and adopt the JAMS Rules.” McKimmy pushed back, arguing that “even if the arbitration agreement is valid, the limited exception in it that allows users to seek equitable relief in court for infringement or misuse of intellectual property rights applies to this case.”

Alongside OpenSea, Judge Bennett stated that as a preliminary matter, “the exception in the arbitration agreement that allows users to seek equitable relief in court does not apply.” While McKimmy is seeking an injunction to have OpenSea “pause and/or stop any listing or sale of Bored Ape [NFT] in the question,” he did not claim [in his complaint] that he has any intellectual property rights arising from the purchase of Bored Ape NFT, nor does he claim that his rights have been infringed or misused to trigger the exception in the June Terms.” Instead, the court found that McKimmy argued for the first time in his answer [to OpenSea’s motion to compel] that his intellectual property rights were infringed. As a result, his argument “is not properly before the Court.”

(In his May 2022 response, McKimmy claimed—referring to the BAYC terms—that the purchase and possession of a Bored Ape NFT “gives the owner an unrestricted, worldwide license to use, copy, and display the purchased art for the purpose of creating derivative work based on the art.'” By failing to “reverse” the fraudulent sale of his NFT and refusing to freeze the OpenSea account that currently holds the stolen NFT, McKimmy claims that OpenSea has “effectively” taken the ” intellectual property rights” [that come with a BAYC NFT] away from him.”)

Moreover, the court stated that OpenSea’s terms “express acceptance” of the JAMS rules “present clear and unmistakable evidence that the parties agreed to arbitration,” and as a result, held that all of McKimmy’s claims must be submitted to arbitration. The judge similarly refused to grant McKimmy’s request for pre-arbitration discovery, stating that “it is unclear how the discovery [he] applicant is relevant to his claims”, and thus these questions are better suited for the arbitrator to decide.

Now that the arbitration issue has been settled, McKimmy’s case “may consider how much you can get away with waiving contract law in New York,” which is the state that OpenSea lists in the choice-of-law provisions of its terms of service, according to the attorney and intellectual property researcher Mike Dunford.

McKimmy filed a lawsuit against OpenSea in February 2022, claiming that his Bored Ape NFT (#3475) — which is “undoubtedly valuable” but “undoubtedly” worth something in the “millions of dollars” — was stolen from him due to a phishing attack. OpenSea users, and then sold by an unknown third party. McKimmy says he paid 55 ETH ($232,000 at the time) for the NFT in December 2021, and it quickly sold after being stolen in February 2022 for 98.9 ETH (then $300,000). McKimmy is asking for an injunction, as well as damages in excess of $1 million.

The case is Timothy McKimmy v. OpenSea, 4:22-cv-00545 (SD Tex.).