2022 In Review: Crypto Litigation, Compliance, Cybersecurity And Enforcement

• Jurisdiction: United States,Federal
• Law Firm: Arnold & Porter
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Technology, Insolvency/Bankruptcy, Trials & Appeals & Compensation, Security, Fin Tech
• Author: Mr Allon Kedem, Christian D. H. Schultz, Brian Lohan, Ronald Lee, Jane Norberg, Kevin Toomey, Maja Zerjal Fink, Mark Epley, Sasha Zheng and Steven Wickman
• Published date: 12 January 2023

2022 was a defining year for cryptocurrencies and other crypto assets. As valuations plummeted, litigation proliferated, and the "crypto winter" caused several high-profile crypto bankruptcies. Meanwhile, government regulators moved from watch-and-wait to a more active enforcement role. Amid these trends, crypto assets continued to raise novel legal questions and challenges for those involved in their development, sale and use, while also presenting new fact situations involving far less novel legal questions and challenges.

This Advisory continues Arnold & Porter's ongoing series on cryptocurrencies and digital assets by summarizing key litigation and enforcement actions and examining themes and trends in general commercial litigation, intellectual property, securities, bankruptcy, cybersecurity and compliance.

General Commercial Litigation

As crypto assets gain wider use and acceptance, they have increasingly made appearances in general commercial disputes. In most cases, the claims being brought do not hinge on the status of the crypto assets themselves; instead, they center on other issues such as the terms of a contract or a party's fiduciary duties. In at least one case this past year, however, the digital nature of the subject assets has been determinative.

One example where the digital nature of the crypto assets played only an ancillary role was Fattaruso v. Roche Freedman LLP.¹ There, Paul Fattaruso sued his former law firm, the litigation boutique Roche Freedman LLP, alleging that the firm withheld nearly $1 million in compensation and retroactively removed Fattaruso from the partnership, depriving him of a two percent share in a cryptocurrency fee estimated to be worth $250 million. Although the dispute concerned Fattaruso's share in what his complaint described as "cryptocurrency tokens," his claims were familiar: breach of contract, breach of fiduciary duty, conversion and other standard commercial claims.

On the other hand, the outcome in Rosenberg v. Homesite Insurance Agency, Inc.² is dependent on the treatment of the subject crypto assets. In this case, the Rosenbergs sued their homeowners insurance issuer and underwriter after it limited coverage for the theft of $750,000 worth of crypto tokens, including $600,000 worth of SafeMoon tokens, that had been stolen by hackers. The Rosenbergs' insurance policy covered theft of "personal property owned or used by an 'insured' while it is anywhere in the world," but capped coverage to $200 for "money, bank notes, bullion," and the like. In limiting coverage for the theft of the crypto tokens, Homesite cited this special limit of liability. However, the Rosenbergs have argued that there is a difference between crypto coins, which "may resemble currencies used to transact on a blockchain," and crypto tokens, which "more closely resemble alternative assets like art, collectibles or commodities." The Rosenbergs argue that since the stolen SafeMoon tokens do not function as currency used for transactions on any block chain, they do not fit any reasonable definition of "money," and their claim should not have been subject to the special limit.

As crypto assets continue to grow in popularity and cryptocurrency replaces fiat currency as a medium for conducting some transactions, it comes as no surprise that crypto assets have themselves become the thing of value being argued over. Moreover, as we continue to grapple with questions about what crypto assets are and how they should be treated within our existing frameworks, disputes like the one in Rosenberg are likely to become more common.

Intellectual Property

The rise of non-fungible tokens (NFTs) has raised numerous intellectual property issues. One animating theme has been the application of the likelihood-of-confusion doctrine, a central concept in trademark law. Likelihood of confusion exists when the allegedly infringing mark is likely to mislead the public into incorrectly believing that the mark originated from or was endorsed by the trademark holder.³ In 2022, litigation involving likelihood-of-confusion arguments played out in various shades in intellectual property disputes involving NFTs.

Yuga Labs v. Ryder Ripps⁴ provides a straightforward example. Yuga Labs created the popular Bored Ape Yacht Club (BAYC), a set of NFTs that are associated with digital pictures of particular cartoon apes. Ownership of the NFT comes along with certain rights and benefits, including a license to display the associated image and to create derivative works using the BAYC characters and brands; it also grants the owner entry into an exclusive virtual clubhouse, Discord channel, and festival called ApeFest. In its suit, Yuga Labs alleges that the defendant Ryder Ripps created his own NFTs using BAYC images, with the only difference being his use of the title "RR/BAYC" instead of "BAYC." If these allegations are true, BAYC would have a strong case for likelihood of confusion and trademark infringement; the goods and marks at issue are essentially identical. In fact, Yuga Labs pleaded that Ryder Ripps actually intended to confuse consumers about what they are buying.

Another likelihood-of-confusion case, Hermès v. Rothschild,⁵ shows how the doctrine intersects in an artistic context with issues of freedom of expression under the First Amendment. When allegedly infringing trademarks are used artistically, the Second Circuit has held that courts must balance the "public interest in avoiding consumer confusion" against the "public interest in free expression."⁶ In the Hermès case, Mason Rothschild created 100 original digital images depicting blurry versions of luxury Birkin handbags, selling them as "MetaBirkin" NFTs. Hermès, the owner of the Birkin...