-1

Please help me evaluate the fictitious fact pattern below and understand whether there is a viable legal strategy for the prosecution. Note that this is somewhat futuristic and does not contemplate a current project. That said, let's please assume the technical claims are correct and only evaluate the legal issues involved. If there is a valid legal theory, who will be sued and how? Note that I am not at all a lawyer, so please excuse my poor attempts to use legal language as I would greatly appreciate your input.

Suppose IncumbentCo is effectively monopoly in its industry and enjoys large profit margins due to the patent protection that exists on a piece of software it created years ago. Suppose these patents have allowed for IncumbentCo to repeatedly prevents smaller competitors from entering the industry as competition and that the patents are valid.

Mr. Founder is a middle manager in the same industry as IncumbentCo and wants to compete with them. For this reason, Mr. Founder creates SoftDAO, a decentralized autonomous organization (DAO), which has a "SAAC"-model ("software-as-a-coin"). Access instances to the software for a user are apportioned by the SoftDAO with a token called "SoftCoin." This works in a similar way to how cloud-SaaS providers like Adobe offer software licenses today, but it is a bit different. Instead of a LLC corporation issuing access for 1 month periods to software, access is granted for small time slices in exchange for SoftCoin tokens. No LLC or corporate entity exists around or in relation to SoftDAO. The software is maintained open-source and contributors are incentivized to contribute to the SoftDAO ecosystem because the are issued SoftCoin tokens by SoftDAO in exchange for their participation. In this way, the tokens act like equity.

Because IncumbentCo priced like a monopoly with large margins, it was easy for SoftDAO to grow quickly and take market share. This is 2025, so blockchain and Ethereum is a mature piece of technology that no longer suffers bubbles; at this time in history, the SoftCoin tokens apportions access rights to the SoftDAO software at a price near marginal cost, which was 80% below IncumbentCo's price.

The lower pricing meant that though SoftDAO clearly initially offered an inferior product, it was quickly able to gain market share from IncumbentCo. IncumbentCo originally dismissed this as a fad (due to the originally inferior product), but once they reported weak earnings and the SoftDAO product got better, they decided it was the right time to sue SoftDAO.

The case makes its way up to the Supreme Court and various legal theories are considered for suing SoftDAO. It was clear that the patents were violated. That said, the main question was: who exactly committed the crime and why are they actually responsible for the harm suffered by IncumbentCo?

At first, the CEO of IncumbentCo says to sue SoftDAO. However, the SoftDAO owns no assets, has no employees and, moreover, cannot be compelled to do anything other than what is written in the code base. For this reason, IncumbentCo decides this is not the best legal strategy.

Next, the Court considers Mr. Founder as the right defendant. After all, the initiative to make SoftDAO was his idea. Moreover, Mr. Founder has numerous public appearances promoting the SoftDAO on YouTube. He has also been put on lists for "Who's Who in Blockchain" for his contributions to the project, so the public often associates him with SoftDAO. That said, Mr. Founder's lawyers argue the following as defense:

  1. Mr. Founder has made many public statements along the lines of "I am but one bee in a hive" and "there is no leader to the project - we are a colony." Though these statements are quixotic, they appear to be made honestly and in good faith.
  2. The code for the SoftDAO is open source, with the majority of contributions being made by people other than Mr. Founder. Mr. Founder has never met the vast majority of contributors.
  3. There was no hierarchy on top of which Mr. Founder was the leader. After all, the contributors to the product were all compensated in SoftCoins (which acted like equity) and the SoftDAO issued the tokens, not Mr. Founder.
  4. None of SoftDAO is the property of Mr. Founder. The SoftDAO source code and project is maintained by a system of smart contracts on the Ethereum blockchain.
  5. Mr. Founder is not a majority or even largest owner of the SoftCoin tokens. Some anonymous identity that cannot be identified is the largest owner. He owns less than 2% of the tokens.

Simultaneously, IncumbentCo is given legal authorizations to identify the largest owner of SoftCoins because, given their war chest, shareholders have encouraged them to sue as many people as possible to stop SoftDAO. Unfortunately, ownership of SoftCoins is anonymously recorded on the blockchain, were issued by a decentralized exchange, and therefore public keys on the SoftCoin blockchain cannot be readily de-anonymized even through court order. Though the largest owner of SoftCoin could not be successfully identified, the 30th largest owner, Mr. Large, identified himself as such per a Fortune Magazine article ("How Mr. Large is Livin' it Large"). On this evidence, Mr. Large is then sued by IncumbentCo. Mr. Large's defense offers the following arguments:

  1. Mr. Large did not commit a crime himself and generally is a good citizen.
  2. Suing Mr. Large is like suing an Enron shareholder for owning Enron shares. Typically we do not sue shareholders.
  3. Mr. Large is being unfairly targeted simply because he is a public figure with association with the project due to the Fortune Magazine article.
  4. It is nearly impossible to prove that Mr. Large is the 30th largest owner of SoftCoin. Court warrant allowed the Court to find some of Mr. Large's public keys on the SoftCoin blockchain, but the blockchain says he is actually only the 100th largest owner now. The Court suspects Mr. Large has failed to produce all of the private keys associated with his ownership of SoftCoin, but cannot prove this.

Finally, the Court considers suing a few of the major contributors to the SoftDAO open source code base that have made themselves known to the public (note that at least half of the contributors are still anonymous). They request two forms of relief: (i) stop working on the code base and (ii) force a shutdown of the code base. With some intervening events in between, the lawyers defending the developers argue the following:

  1. The developers agree to stop working on the codebase, but their lawyers argue that shutting down the DAO is outside of their control. This is because the developers that are still anonymous can keep working on the project in silence. These other developers have strong incentives to do this given their equity ownership via tokens.
  2. Changes to the DAO codebase require votes by SoftCoin holders and any attempt they make to push code to end the project will not be approved by the majority of owners.
  3. The developers were not even the major contributors and are not software geniuses. It is not within their skill set to even do what is necessary to shut down the project -- it is something larger than themselves.

At last, IncumbentCo realizes that its attempts to achieve legal retribution are in vain -- there is nothing they can do. They take on enough debt to purchase a majority stake in SoftCoin, then they use their governance rights to implode the project. This ends the story.

Please help me evaluate the fact pattern above and understand whether there is a viable legal strategy for the prosecution. What rights do they have to protect their interests? If there is a valid legal theory, who will be sued and how? How compelling do you find the arguments above and where are the arguments right or wrong? Even if no legal action can prevent the demise of IncumbentCo, it is still helpful to know who in the SoftDAO ecosystem can be sued and why.

  • "The case makes its way up to the Supreme Court and various legal theories are considered for suing SoftDAO." - Um, you're in trouble if you aren't considering your legal theories well before the case makes it to the Supreme Court. They ordinarily won't even consider any theories you haven't already argued at a lower level. – D M Feb 24 '18 at 4:14
  • cool thanks. just so its clear, the intention was to better understand the legal properties of DAOs not to critique the plot holes in the narrative, but point taken. my hypothesis is that the answer is "no legal action can be taken to successfully defend the patent" but I want to hear from someone that knows about law, since i don't know much. (unfortunately, my meta-hypothesis is that nobody will answer this thread since the intersection of people understand both fields and are on this forum is a null set). – griggah Feb 24 '18 at 4:51
3

No LLC or corporate entity exists around or in relation to SoftDAO.

That's a bad thing, not a good thing, to those involved.

Mr. Founder is obviously liable. When he wrote the DAO, he intended that it compete with IncumbentCo, and thus almost certainly intended that the software would violate the patent. And it doesn't matter that he's not the majority owner - he's still a part owner, meaning he's profiting from the infringement. Furthermore, he promoted the scheme, and according to 35 U.S. Code § 271(b), "Whoever actively induces infringement of a patent shall be liable as an infringer."

Mr. Large, and any other identifiable part owner, is liable.

Mr. Large did not commit a crime himself and generally is a good citizen.

Good for him. But lots of people get sued that never committed a crime.

Suing Mr. Large is like suing an Enron shareholder for owning Enron shares. Typically we do not sue shareholders.

But he isn't a shareholder, and that's critical. If you want the benefits of a publicly traded company, you need to actually make a publicly traded company.

Mr. Large is being unfairly targeted simply because he is a public figure with association with the project due to the Fortune Magazine article.

Yes, he's being sued because of the article, but so what? It's like saying the police unfairly targeted you for an underage drinking citation because you were dumb enough to post yourself on Facebook. That argument won't fly in court. IncumbentCo can pick who they want to sue.

It is nearly impossible to prove that Mr. Large is the 30th largest owner of SoftCoin. Court warrant allowed the Court to find some of Mr. Large's public keys on the SoftCoin blockchain, but the blockchain says he is actually only the 100th largest owner now.

It doesn't matter. He's a part owner, by his own admission and by the blockchain evidence.

The developers are also liable, also potentially for the whole amount. They created software that infringed a valid patent, and profited from it. If they can't shut it down, they can't shut it down, but they're going to be paying.

I'm thinking this is a case where joint and several liability applies; IncumbentCo can go after any particular one of the owners and developers for the entire amount if they feel like it, and then it would be up to that person to then sue anyone else he thinks is partially liable. If Mr. Large is a billionaire and could pay the entire judgement himself, they might just do that. They'd probably go after Mr. Founder for as much as they thought they could get out of him, though.

The users are also liable, since the law provides that using a patented invention without authority is infringing. But they're only liable for their one copy, and IncumbentCo may not bother with them, at least initially.

However, the SoftDAO owns no assets

No, but IncumbentCo is going to seek injunctions against selling SoftCoins or running the software.

Could some people slip through the cracks? Sure. People infringe copyright all the time online, and only some get caught. You could easily imagine someone selling pirated software in exchange for cryptocurrency. This would be little different.

  • How would a court determine the damage owned by the owners here? Suppose (i) the court says that there is $10 billion of damage to IncumbentCo, (ii) SoftCoins are worth $10 billion in total, (iii) the largest owners (including the founders) own approximately 1% of the coins and these are the effective entirety of their personal assets, (iv) most of the developers only own 0.01% of the coins. How much is owned by the developers, the owners of the tokens and the founder do you think? I am not sure if I understand what joint and severally liable means in $s. – griggah Feb 24 '18 at 18:29
  • By the way, this was a great answer and I think I generally understand how to think about this now. Thanks for helping me understand. – griggah Feb 24 '18 at 18:30
  • The company could go after any of them for any amount until they've recovered their $10 billion. But if someone was forced to pay a disproportional amount, they could themselves go after the other people involved. 0.01% of $10 billion is still $1 million; that's worth suing over. There are also going to be people who "cashed out" to some degree (otherwise where is the money that people are paying for the coins going?) and that will impact the analysis. It's likely going to be a mess. – D M Feb 24 '18 at 19:05
  • So even if a person has less than $10bn in coins, they can still pay an amount greater than the coins they own? That sounds draconian. I know Sean Parker was in debt after Napster but before Facebook, so it’s not out of the question that this could really suck, but still just curious. – griggah Feb 24 '18 at 19:59
  • @griggah IANAL, but it's easily possible for someone to cause more damages than the amount of assets they own. – user253751 Feb 15 at 0:02

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.