Service of Process in the Digital Age: Twitter, Blockchain and Chatbox Valid methods or modern nails and mail? | ArentFox Schiff
Courts 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 things, the courts investigate whether alternative forms of service satisfy traditional requirements that service is reasonably designed to notify interested parties of pending claims and give them the opportunity to respond.
Recent decisions by 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 court case will likely guide future litigation seeking remedies in the Web3 space. These courts authorized the use of non-fungible tokens, online chat boxes and discussion forums to perform the service. These cases represent an evolution of jurisprudence to address new technologies. Legal parties 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 illegal commodity trading transactions under the Commodity Exchange Act (CEA).
Shortly after the filing, the CFTC sought authorization to serve Ooki DAO through a “Help Chat Box” and online discussion forum on the DAO’s public website, arguing that alternative service was appropriate because Ooki DAO had no physical address or registered agents, and in CFTC’s view, had been “purposely structured to attempt to make its activities ‘enforcement-proof,’ including by ‘creating[ing] significant obstacles to traditional process management.'”
The court initially granted the CFTC’s alternative service proposal, but industry groups pushed back by filing amicus briefs asking the court to reconsider. 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 not subject to enforcement under the CEA; and although it was subject to enforcement under the CEA, it was not properly served.
The court rejected amici’s arguments that DAO is just a technology that is incapable of standing in court. 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 the Help Chat Box website 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 DAO’s co-founders and token holders, but the court ultimately concluded that such service was not required under California state law because Ooki DAO was an unincorporated association without a mailing address.
Other DAOs may anticipate similar issues in their whitepaper prior to 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 for receiving, discussing, and responding to legal claims.
Blockchain as process server – LCX serves hackers via NFT
When presented with the problem of servicing an anonymous hacker group that had made off with millions of dollars in cryptocurrency assets, Liechtenstein-based cryptocurrency exchange LCX decided to turn the tables on the hackers, convincing a New York state court to agree.
In early 2022, LCX was the victim of a cyber attack where outsiders stole around $8 million 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 legal proceedings.[1]
After issuing the TRO, the court ordered the defendants to show cause why a preliminary injunction should not issue, and LCX was ordered to serve a copy of the show cause order on the hackers. LCX’s counsel, in 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” defendants appeared after that hearing and argued that the service was improper, and that the alternative service was improperly authorized because LCX did not demonstrate that regular service was impractical. Ultimately, the court agreed with LCX and concluded that LCX’s “Service Token” was effective because it was delivered to the wallet containing the stolen assets, the wallet contained significant amounts of stolen cryptocurrency (meaning the hacker(s) would likely return to the wallet), and the token contained a link to all the papers that would have been served in all traditional ways.
Quote-Tweeted Subpoena – 3AC Bankruptcy Court Authorizes Digital Service
Bankruptcy courts are also confronted with the reality that debtor directors and officers, in possession of critical information, may be impossible to find and yet active on social media. In order to affect these persons, the courts consider whether Federal Rule of Civil Procedure 45’s requirements can be satisfied by the use of digital services when persons 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 applied for permission to use alternatives. means serving the debtor’s co-founders who were otherwise unresponsive to formal or informal overtures.[2] Accordingly, the foreign representatives requested the opportunity to serve the co-founders (Su Zhu and Kyle Livingston Davies), certain investment managers and Troy Trade (a principal broker for the Debtor) with subpoenas using email and social media – particularly Twitter.
The court first eliminated the ability to serve non-U.S. citizens under Rule 45 because the rule did not provide for service outside the United States on non-U.S. citizens or residents and specified the scope of permitted service. Subsequently, despite an acknowledged lack of precedence, the court allowed the issuance of a subpoena on Kyle Livingston Davies because (1) he is presumed to be a US citizen (by virtue of being born in the US), (2) he was determined to be “necessary” due to his “integral role” in Three Arrows Capital Ltd., where he ran all facets of the business with Su Zhu (making him one of the only ones with accurate knowledge of the nature, scope and access to the debtor’s assets ), and (3) the information is only available from Davies (as Zhu could not be reached).
The court then considered whether the request for alternative service complies with the duty “to ensure receipt, so that notice will be given 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 considerable effort, the foreign representatives could not serve Davies by traditional means, and that service by email and Twitter would suffice. 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 the recent use “can apparently provide evidence of actual receipt of the subpoenas[,]“service in these ways would be effective.[3]
This decision may be relevant where important sources of information about the debtor’s assets are unresponsive US citizens outside the US, as future courts have precedent for digital service to subpoena individuals to testify or deliver documents. This court’s reasoning also followed the other courts’ thinking about whether digital service provides sufficient notice of the act and the duty to respond, suggesting to some extent converging legal opinions.
Takeaways
As courts receive and review new lawsuits and determine how existing federal, state, and local rules apply to new situations, they will look to past decisions to help guide them in outcome and 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, contracting with, or otherwise dealing with Web3 entities, determining how to enforce one’s rights in the event of a conflict should be an important consideration in advance. For now, the Metaverse, Blockchain and Digital Assets team at ArentFox Schiff are ready to advise clients on understanding these new developments, legal obligations of DAOs and token holders, and the digital asset economy.
[1] LCX AG v. John Doe Nos. 1–25Order to Show Cause and Temporary Restraining Order (Index No. 154644/2022, Supreme Court of the State of New York, June 2, 2022).
[2] About: 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, blatantly ignore court directives and enjoys media attention while continuing to obstruct the foreign representatives’ efforts to gain access to documents and information.”
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