United States: California Federal Court Denies Preliminary Injunction In "Blockchain" Dispute

How different is a celebrity-focused "cryptocollectible" from a celebrity-focused "cryptocurrency," and how similar does it have to be to constitute a trade secret? That was the question facing the Southern California federal district court in deciding a motion for a preliminary injunction in Founder Starcoin v. Launch Labs, Inc., No. 18-CV-972 JLS (MDD) (S.D. Cal. July 9, 2018). Defendant Launch Labs, d/b/a Axiom Zen, is the developer of "CryptoKitties," a game that uses the Ethereum blockchain technology to "allow[] users to securely buy, sell, trade, and breed genetically unique virtual cats." Plaintiff Starcoin has a business plan to create a "regulated exchange" for secure "tokens" representing celebrities that can be bought and sold, not just by typical investors, but by a celebrity's fans as well.

In February 2018, Starcoin's CEO reached out to Axiom to discuss Starcoin's business plan, emailing (after requesting a nondisclosure agreement) a presentation detailing the broad strokes of the plan and decorated with photos of various celebrities, including athlete Steph Curry. Axiom did not respond, but in May its affiliate company, Dapper Labs, released special CryptoKitties bearing the likeness of Steph Curry. Starcoin filed suit and moved for a preliminary injunction, arguing that Axiom had revealed its trade secrets.

The court applied the traditional test for preliminary injunctive relief—asking whether Starcoin was likely to succeed on the merits, whether Starcoin would suffer irreparable harm in the absence of preliminary relief, whether the balance of equities favored relief, and whether such relief was in the public interest—and concluded that a preliminary injunction was not warranted.

Critically, the court found that Starcoin was unlikely to succeed on the merits, for at least four reasons: 1) Starcoin's trade secret was not particular enough to warrant protection; 2) Starcoin's alleged trade secret was essentially a matter of public knowledge, albeit applied in a new field of endeavor; 3) to the extent that the "CurryKitty" shared anything in common with Starcoin's nebulous ideas, it was developed independently and before Starcoin revealed any supposed trade secrets to Axiom; and (4) Starcoin had sued the wrong entity.

Perhaps most fatal to Starcoin's claim was the fact that the idea of celebrities selling blockchain tokens was already out in the marketplace before the alleged transfer of trade secrets even took place. In particular, the court cited a November 2017 Business Insider article discussing "how artists can raise money through token launches." That article arguably laid out the essential elements of the business plans of both Starcoin and Axiom, discussing the ability of an artist to "turn[] their intellectual property (IP) into a financial asset, so an artist's token reflects the value of their creative output." Even apart from that article, the court concluded that "[m]arrying the concept of celebrity licensing with blockchain appears, on its face, to be unremarkable, obvious, and general knowledge." Because Starcoin's alleged business model was already publicly known, it could not constitute a trade secret.

Almost equally deadly to Starcoin's claim, Axiom put on evidence to show that it had already begun negotiations to release the CurryKitty and other celebrity-licensed CryptoKitties by October 2017, several months before Starcoin sent its presentation to Axiom. Axiom had therefore developed the idea independently. Indeed, this is what one would expect to happen with an "unremarkable" and "obvious" application of a venerable idea (like celebrity endorsements) to a new technology—several parties hatch the same plan independently, and there is a race to the market.

Given these very strong reasons to find Starcoin was unlikely to succeed on its claim, the court perhaps did not actually need to delve deeply into the nature of Starcoin's business plan. But delve it did, and it ran into some conceptual trouble as a result. Notably, the court found that while Starcoin did indeed come up with an idea for pairing celebrity licensing with blockchain technology, that idea was not the same as Axiom's plan: "A plain reading of Plaintiff's slide deck is that it intended to create a platform for token offerings in celebrities, not licensing digital collectibles." How did the court distinguish token offerings from collectibles? "Plaintiff's trade secret is that it hoped to use a fungible asset, cryptocurrency, to commoditize unique celebrities. Defendant's product is a unique collectible (each CryptoKitty is unique) and [the] celebrity's likeness would help sell the unique asset. These two ideas are not equivalent."

This is only half right, though. It's true that the two ideas are slightly different—as the court suggests, CryptoKittys can exist without celebrity endorsements, and the involvement of the celebrity is primarily useful as advertising to sell the Kitty. Starcoin's idea as expressed in its presentation was to allow celebrities to essentially sell securities in themselves.

But the two models are not that far apart. For one thing, Starcoin explicitly envisions selling its tokens directly to fans, as a form of fandom. So to some extent it's still the charisma and image of the celebrity that would be selling the tokens, making them more like collectibles than the court seemed ready to admit.

More importantly, while it's true that CryptoKitties derive their value from uniqueness, the court assumes that the tokens Starcoin would issue would not also be unique and non-fungible. But the very nature of blockchain assets suggests otherwise, as does the current market for direct-to-fans celebrity contact.

First, because any blockchain is primarily a ledger system that keeps track of transactions, it is not even clear that ordinary "cryptocurrency" tokens are completely fungible. Some Bitcoin exchanges, for example, attempt to block "dirty" coins that are either associated with illegal activities (and thus potentially subject to law enforcement investigation and/or forfeiture) or believed to be stolen. Thus, "dirty" coins are worth less than "clean" coins, because of their history—a history that is stored in the DNA of the currency itself. Finn Brunton, a scholar who studies trends in blockchain, even suggests that by "coloring" the coin with its history, blockchain could enable divestment campaigns against particular uses or users by devaluation of tainted coins. Tokens of a blockchain inherently carry a history, and that history can affect their value.

Second, many blockchain tokens are non-fungible by design, and as blockchain moves toward more complex uses around contracts, ownership, identity, and securitization, non-fungibility actually becomes a critical part of the use of such tokens. As an initial matter, of course, the value of celebrity-based tokens would be precisely that they could verifiably be identified as originating with a particular celebrity. A Steph Curry token would not be fungible with a Kendrick Lamarr token; the difference in source is precisely what defines their value. (This makes the blockchain a kind of ultra-trademark, as an identifier of source that cannot be counterfeited.)

Moreover, even different Steph Curry tokens could, and likely would, be non-fungible. To see why, consider one present means for celebrities to solicit investments directly from fans: Kickstarter. In 2013, for example, the creator of the cult TV show Veronica Mars solicited over $5 million from fans to make a low-budget theatrical film version of the show. The Veronica Mars Kickstarter drive, like most, featured different tiers of investment, with different possible "rewards": $1 would get you "our eternal gratitude"; $10 would get you a PDF copy of the script; $25 netted a commemorative T-shirt, and so on, all the way up to a $10,000 tier that guaranteed the fan-investor a (very small) speaking role in the film. The $10,000-level reward was unique: only one backer could claim it, after which that tier was closed out.

Now consider the same project funded through blockchain. Each fan-investor could buy in at a different tier—necessitating different tokens to track the rewards that would come with higher levels of investment (akin to different classes of shares in traditional stock offerings). But one could easily take this one step further: rather than sending investors T-shirts or scripts, the token itself could be the collectible that is the fan's reward. More substantial investments could be tied to better, more complex, or simply rarer types of collectible tokens. To amp up fan involvement in the project, unique tokens could also be awarded for fan art, essays, musical remixes, creative selfies, scavenger hunts, and so on. (The excitement generated by such interaction would in turn boost the value of the celebrity's brand and therefore the value of his or her tokens across the board.)

In short, the tokenization of celebrities very likely would imply the issuance of unique, non-fungible, and/or collectible tokens, if past forms of direct-to-fan marketing are any indication. To not create unique tokens would be to ignore one of the most salient features of blockchain tech—and to leave money on the table.

This does not mean the court was wrong to deny the injunction. Even setting aside the problems of public knowledge and independent development, Starcoin's presentation as described in the order does not appear to have developed these ideas in sufficient detail to constitute a particular method or business plan that could be protected (or divulged) as a trade secret.

But the order's conceptual confusion around blockchain technologies—the attempt to draw a clear distinction between commodity/coin tokens and unique collectibles, where no such distinction really exists—is indicative of the danger cutting-edge companies may run into in trying to enforce (or even defend against) trade secret claims. Particularly where, as here, the trade secret at issue is inherently time-limited (even if the celebrity-collectible model had not been public knowledge before the release of the CurryKitty, it surely was afterward), there may only be one shot to protect an idea long enough to be first to market. Where the court does not understand the implications of the technology involved, it will be incumbent on the parties to explain it sufficiently, or to risk losing both the case and the market based on a misunderstanding.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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