Arguing Class Actions is a monthly column by Adam J. Levitt for the National Law Journal.
Reprinted with permission from the July 10, 2023 edition of the National Law Journal. © 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
The emergence of cryptocurrency has introduced new possibilities, both for financial transaction transformation, as well as potential exploitation of the anonymity of cryptocurrency to perpetrate fraud, money laundering, and other criminal activity by bad actors. Over the past several years, countless cryptocurrency consumers have been defrauded by rogue and fraudulent financial technology companies and trading platforms. Many of these injured parties have sought justice in U.S.-based class action lawsuits, where they must show that the court has personal jurisdiction over the defendants.
Plaintiffs have a daunting but doable task to demonstrate personal jurisdiction over “crypto asset service provider” defendants who are incorporated abroad, operate through opaque corporate structures, and often attempt to argue that that they have no “headquarters” anywhere in the physical world. Because cryptocurrency companies are often offshore, plaintiffs are unlikely to be able to show general personal jurisdiction anywhere in the U.S. over these defendants, but plaintiffs can try to establish specific personal jurisdiction on well-pleaded facts that defendants purposefully directed their activities to, or performed some acts that purposefully availed themselves of the privilege of conducting activities in, the forum state.
Although an international cryptocurrency defendant may have done everything it could think of to thwart specific jurisdiction, plaintiffs have shown that it is possible to overcome those efforts to bring (and keep) those defendants in court in the United States. We have seen four successful approaches so far and expect that further innovation on this front will forthcoming.
The first approach involves examining the defendant’s marketing efforts, which a plaintiff must show are specifically (but not exclusively) directed to the forum state (or, in the context of securities and certain other cases with nationwide service of process provision, the United States). Compare Owens v. Elastos Found., 2021 WL 5868171, at *8 (S.D.N.Y. Dec. 9, 2021) (allegations that international defendants “repeatedly and continuously promoted [blockchain company] and the [cryptocurrency] in the United States…in order to increase the value of the [cryptocurrency] and drive further investment in [the cryptocurrency]” sufficient to confer specific jurisdiction), with Holsworth v. BProtocol Found., 2021 WL 706549, at *2 (S.D.N.Y. Feb. 22, 2021) (finding no personal jurisdiction over a Switzerland-based blockchain company based on its rebuttal declaration demonstrating that its appearances, communications, and overall marketing scheme were worldwide, and not just directed to the United States).
The second approach involves examining the defendant’s sales, which a plaintiff must demonstrate come from, or ultimately reach, the requisite forum. See, e.g., Gevorkyan v. Bitmain Techs. Ltd., 2022 WL 3702093, at *3 (N.D. Cal. Aug. 26, 2022) (finding personal jurisdiction over a Chinese company because of the number of physical sales of cryptocurrency mining devices into the subject state).
An additional wrinkle is the fact that the marketing or sales efforts in cryptocurrency cases are often Internet based. “Whether there is personal jurisdiction based on the operation of a website depends on where the website falls on the spectrum of interactivity. Passive websites … are limited to making information available to users and do not establish personal jurisdiction. Interactive websites knowingly transmit goods or services to users and if made available to New York residents, the activities can be sufficient for establishing personal jurisdiction over a defendant.” Enigma Software Group USA, LLC v. Malwarebytes, Inc., 69 F.4th 665, 675 (2d Cir., June 2, 2023). Class action plaintiffs may establish the “purposeful availment” prong of the personal jurisdiction analysis by pleading the requisite interactivity and, if necessary, by combining these allegations with well-pleaded allegations of agency or alter ego directed at affiliates of the website operator. See, e.g., Jeong v. Nexo Fin. LLC, 2022 WL 174236, at *10 (N.D. Cal. Jan. 19, 2022) (finding plaintiffs demonstrated purposeful availment of an international corporation because it operated a cryptocurrency app, which provided users with access to their highly interactive website, at the time the events at the heart of the lawsuit took place).
The third and fourth approaches, discussed below, involve developing evidence of a defendant’s physical presence within the United States, and showing the entanglement of U.S.-domiciled defendants with foreign defendants. For example, the allegations in In re Tezos Securities Litigation, one of the earliest crypto-related class actions, illustrate contacts with the United States that are sufficient to sustain a claim of personal jurisdiction. See 2018 WL 4293341, at *6 (N.D. Cal. Aug. 7, 2018). There, investors who contributed digital currencies to the Tezos blockchain “Initial Coin Offering” (“Tezos ICO”) sued Tezos ICO participants, including U.S.-based and foreign entities, for the sale of unregistered securities. Id. at *1. Those defendants included, among others, a California-based couple, who devised the Tezos ICO, and a foundation based in Switzerland, the Tezos Foundation (the “Foundation”), which the couple established to oversee and hold the consideration raised from investors in the Tezos ICO. Id.
In Tezos, the court concluded that allegations demonstrating that the Foundation maintained at least one employee or agent in the United States, on their own, satisfied the “purposeful direction prong” of the specific jurisdiction analysis. Id. The court separately found that plaintiffs were also entitled to an inference of purposeful direction from allegations that “(a) the California-based [couple] were the de facto U.S. marketing arm of the Foundation; (b) the Foundation engaged in little to no marketing of the ICO anywhere other than in the U.S.; and (c) an accordingly significant portion of the 30,000 contributors to the ICO were in fact U.S. citizens.” Id. These allegations fall within the four general approaches described above; specifically, that (1) the Foundation primarily marketed the ICO in the U.S., (2) the Foundation received the majority of its ICO contributions from U.S. citizens, (3) the Foundation maintained one physical employee in the U.S., and (4) there was an intertwined relationship between the U.S.-based couple and the Swiss-based Foundation. See also United States Sec. & Exch. Comm’n v. Terraform Labs Pte Ltd., 2022 WL 2066414, at *4 (2d Cir. June 8, 2022) (finding specific jurisdiction based on an international defendant’s “purposeful and extensive U.S. contacts, including marketing and promotion to U.S. consumers, retention of U.S.-based employees, contracts with U.S.-based entities, and business trips to the U.S., all of which related to the [blockchain technology] and digital assets at issue in the SEC’s investigation.”).
As a backstop to specific jurisdiction, plaintiffs have also attempted to establish general personal jurisdiction by showing that an international defendant is an alter ego of a resident co-defendant with sufficient minimum contacts to the forum. This backstop must be built from well-pleaded facts—not conclusory allegations—that: (1) there is such unity of interest and ownership that the co-defendants no longer exist as separate personalities; and (2) failure to recognize one co-defendant as an alter ego of the other would result in fraud or injustice. Although this backstop has the potential for success, it has so far eluded plaintiffs in crypto-related class actions. See Kuklinski v. Binance Cap. Mgmt. Co., 2023 WL 2788654, at *6–7 (S.D. Ill. Apr. 4, 2023); Cox v. CoinMarketCap OpCo LLC, 2023 WL 1929551, at *13-15 (D. Ariz. Feb. 10, 2023); Jeong, 2022 WL 174236, at *11-15.
Plaintiffs might be able to build a more effective alter ego backstop with jurisdictional discovery—if the court will allow it. As more courts weigh in on this issue in cryptocurrency class actions, it’s clear that plaintiffs must justify their requests for jurisdictional discovery with more than bare allegations or a mere “hunch.” Jeong, 2022 WL 174236, at *16. Thus, plaintiffs investigating crypto-related companies for wrongdoing should consider investing in extensive research about each defendant to build the case for jurisdictional discovery. That research may also help with other jurisdictional arguments or even bolster other complaint allegations.
In sum, establishing personal jurisdiction over defendants in cryptocurrency class actions in the U.S. requires an embrace of innovative solutions that account for the unique characteristics of this digital landscape. By continually refining jurisdictional doctrines, legal practitioners and courts can effectively address jurisdictional challenges and ensure that the cryptocurrency realm remains accountable to the rule of law.
Thank you to DiCello Levitt associate Michelle Locascio, senior counsel Mark Hamill, and partner Jamie Baskin for contributing to this column.
Adam J. Levitt is a founding partner of DiCello Levitt, where he heads the firm’s class action and public client practice groups. He can be reached at [email protected].