Diamond Fortress Technologies, Inc. v. EverID, Inc. ( 2022 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
DIAMOND FORTRESS )
TECHNOLOGIES, INC., and )
CHARLES HATCHER, II, )
)
Plaintiffs, )
)
) C.A. No. N21C-05-048
v. ) PRW CCLD
)
EVERID, INC., )
)
Defendant. )
Submitted: January 18, 2022
Decided: April 14, 2022
OPINION AND ORDER
Upon Plaintiffs Diamond Fortress Technologies, Inc., and
Charles Hatcher, II’s Motion for Default Judgment,
GRANTED.
Kurt M. Heyman, Esquire, HEYMAN ENERIO GATTUSO & HIRZEL, Wilmington,
Delaware; Walter A. Dodgen, Esquire, Zachary P. Mardis, Esquire, MAYNARD,
COOPER & GALE, PC, Huntsville, Alabama. Attorneys for Plaintiffs Diamond
Fortress Technologies, Inc., and Charles Hatcher, II.
United States Corporation Agents, Inc., Middletown, Delaware. Registered Agent
for Defendant EverID, Inc.
WALLACE, J.
This breach-of-contract action arises out of Defendant EverID, Inc.’s failure
to compensate the Plaintiffs, Diamond Fortress Technologies, Inc. and its
CEO Charles Hatcher, II, for their combined assistance in developing EverID’s
cryptocurrency trading platform and mobile application.
For an exclusive license to use Diamond Fortress’s proprietary biometric
software, EverID offered to remunerate the Plaintiffs via cryptocurrency token
distributions. The promised distributions were to occur upon the Initial Coin
Offering (“ICO”) of “ID Tokens,” EverID’s newly created cryptocurrency, and upon
subsequent Token Distribution Events (“TDEs”). The ICO and several TDEs came
and went without Plaintiffs receiving a single token. No surprise, they then sued
EverID.
EverID has never responded, appeared, or otherwise defended itself in any
manner in this lawsuit. So the Plaintiffs filed a default judgment motion that the
Court granted in part—the Court found the breach but paused on the damages.
The Court conducted a subsequent hearing on the Plaintiffs’ purported economic
damages that centered on just what might be the appropriate methodology and value
source for reckoning a damages judgment. The classification and valuation of
cryptocurrency, as well as the calculation of damages resulting from the breach of a
cryptocurrency-paid contract are novel matters to Delaware.
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I. FACTUAL AND PROCEDURAL BACKGROUND1
A. THE PARTIES
Diamond Fortress is a biometric software company.2 Mr. Hatcher is Diamond
Fortress’s CEO—one with extensive experience in the global market of biometric
authentication and identity platform architecture.3
Diamond Fortress developed a patented software named “ONYX.”4 ONYX
is a secure, touchless fingerprint-identification software application that utilizes the
camera on mobile devices, e.g., smartphones, to detect and verify user identities by
fingerprint recognition.5 Third parties can integrate the ONYX software into their
own platforms by purchasing a license and software development kit.6 Mr. Hatcher
1
The factual recitation of events discussed herein is wholly based on the Plaintiffs’ submissions.
See Hauspie v. Stonington Partners, Inc., 945 A.2d 584, 586 (Del. 2008) (“The effect of a
default in answering [ ] is to deem admitted all the well-pleaded facts in the complaint.”); id. at
587 (“‘[A] default is not treated as an absolute confession by the defendant of his liability and of
the plaintiff’s right to recover . . . Although he may not challenge the sufficiency of the
evidence . . . .’”) (quoting Nishimatsu Const. Co., Ltd. v. Houston Nat. Bank, 515 F.2d 1200, 1206
(5th Cir. 1975)); see also Cigna Worldwide Ins. Co. v. Elegant Inc., 2002 WL 1402348, at *2 (D.
Del. June 25, 2002) (“Once the default [judgment] has been entered, the well-pleaded facts of the
complaint must be accepted as true.”).
2
Compl. ¶¶ 4, 10, Diamond Fortress Technologies, Inc. v. EverID, Inc., N21C-05-048 PRW
CCLD, May 4, 2021 (D.I. 1).
3
Id. ¶¶ 1, 21.
4
Id. ¶ 10.
5
Id.
6
Id.
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is often hired as an advisor by those buyers to assist with the ONYX software
integration and the management of its use thereafter.7
EverID, an entity active in the blockchain and cryptocurrency industry, is a
corporation organized under Delaware law that maintains its principal office in
Poway, California.8 It created the cryptocurrency “ID Tokens.”9 As a component
of ID Tokens, EverID also developed a blockchain-based identity and financial
platform but needed the means to verify and confirm its users’ identities.10
B. THE LICENSE AND ADVISOR AGREEMENTS
In or around September of 2017, the parties conferred about integrating the
ONYX software into EverID’s then-developing cryptocurrency enterprise.11
In addition to integrating the ONYX software into its platform, EverID made
other demands. First, it requested Mr. Hatcher serve as an advisor and mentor for
the integration and duration of its use of ONYX.12 Second, it required Diamond
Fortress to grant EverID an exclusive license to ONYX for digital or blockchain
7
Id. ¶¶ 1, 12.
8
Id. ¶ 6.
9
Id. ¶ 11.
10
Id.
11
Id.
12
Id. ¶ 21.
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wallets; that required Diamond Fortress to halt its then-active endeavors soliciting
other opportunities in the blockchain industry.13 For the award of EverID’s
exclusive ONYX software license, Diamond Fortress and Mr. Hatcher agreed to be
compensated in EverID’s ID Tokens when EverID eventually held its ICO (the
cryptocurrency equivalent of an initial public offering14) and subsequent TDEs.15
The periodic token distributions were to be the means of satisfying EverID’s
payment obligation in lieu of Diamond Fortress’s standard payment requirement of
quarterly license “Run-Time Transaction Fees.”16
Diamond Fortress and Mr. Hatcher agreed to EverID’s demands, and the
respective License and Advisor Agreements (together “Agreements”) negotiations
commenced.17 While the Agreement negotiations were underway, Plaintiffs granted
EverID a software license key to immediately begin its integration and use of
13
Id. ¶ 13.
14
See S.E.C. v. Shavers, 2014 WL 12622292, at *7 (E.D. Tex. Aug. 26, 2014) (holding
cryptocurrency investments offered by the defendant qualified as “securities” and “investment
contracts”).
15
Compl. ¶ 13.
16
Compl., Ex. A, ONYX Software Development Kit License Agreement, § 3.1(c)(i) (“License
Agreement”).
17
Compl. ¶ 12.
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ONYX.18 Mr. Hatcher also began assisting EverID with its mobile application
development utilizing the ONYX software.19
1. ONYX Software Development Kit License Agreement.
In September of 2018, Diamond Fortress and EverID finalized the License
Agreement for EverID’s use of the ONYX software.20 The Agreement is valid for a
ten-year term and is governed by Delaware law.21
The terms and means of compensation are expressly set forth in the
Agreement. Upon execution of the Agreement, an initial license fee of $2,500
U.S. Dollars (“USD”) was to be remitted by EverID.22 EverID was also obligated
to tender “Run-Time Transaction Fees,” which equated to fifteen percent (15%) of
the gross revenues received from its use of ONYX, to be paid quarterly. 23 As
discussed above, these fees were negotiated away in exchange for a set amount of
ID Tokens and subsequent periodic token distributions.
18
Id.
19
Id.
20
Compl., Ex. A, License Agreement.
21
Id. §§ 11, 17.
22
Id. § 3.1(a). The record is unclear whether this payment was ever tendered.
23
Id. § 3.1(b).
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Thus, Diamond Fortress’s real economic interest for entering into this
transaction—and its concession to give EverID an exclusive license to use ONYX—
is EverID’s assurance “to engage in a token sale” and award Diamond Fortress for
its services accordingly:
Ten Million (10,000,000) of ID tokens at the ICO or TDE to
[Diamond Fortress]. This token grant shall be deemed to be an
advance of, and credited to, [EverID] as payment for the Run-
Time Transaction Fees. The value of this token grant shall be
determined by multiplying the number of tokens granted times
the ICO or last TDE price.24
Additionally, the token grants are subject to a distribution lock-up, awarding
the initial 25% of the tokens at the ICO or final TDE and the remaining 75% to be
“distributed in 20 equal quarterly distributions” after the ICO or final TDE.25
2. Charles Hatcher’s Advisor Agreement.
EverID executed a separate Advisor Agreement with Mr. Hatcher. 26 Under
this Agreement, Mr. Hatcher’s role was that of an independent contractor to mentor
or advise EverID on an as-needed basis.27
Mr. Hatcher’s compensation structure mostly mirrors Diamond Fortress’s,
with just a variation in the number of tokens allocated and the distribution schedule.
24
Id. § 3.1(c)(i).
25
Id. § 3.1(c)(ii) (emphasis added).
26
Compl., Ex. B, Advisor Agreement.
27
Id. §§ 1, 5.
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EverID was to distribute Two Million Five Hundred Thousand (2,500,000) tokens
to Mr. Hatcher at the ICO or final TDE.28 Similar to Diamond Fortress’s lock-up
distribution, the initial 25% of the tokens were to be distributed at the ICO or final
TDE, with the remaining 75% of tokens to be “distributed in 24 equal monthly
distributions after the ICO or final TDE.”29
As some clue as to how the parties intended the ID Tokens be treated or
classified, both Agreements expressly provide that the token distributions “will also
be subject to regulatory compliance such a [sic] Rule 144 of the Securities Act of
1933 . . . .”30
C. EVERID’S BREACH AND THE INSTANT LITIGATION
EverID’s ICO occurred on February 8, 2021, and EverID should have then
tendered its first partial payments to the Plaintiffs.31 EverID didn’t.32 Despite
numerous efforts to obtain EverID’s assurances that the token distributions were
28
Id. § 2.
29
Id. (emphasis added).
30
Id.; see also License Agreement § 3.1(c)(iii) (“[T]he foregoing grants of tokens are subject to
. . . (c) regulatory compliance including, but not limited to, lock-ups and restrictions, including but
not limited to Rule 144 Restrictions . . . .”).
31
Damages Hr’g Tr., 3-4, Diamond Fortress Technologies, Inc. v. EverID, Inc., N21C-05-048
PRW CCLD, Oct. 28, 2021 (D.I. 27).
32
Id. at 4; see also Pls.’ Mot. for Default J. ¶ 21, Diamond Fortress Technologies, Inc. v. EverID,
Inc., N21C-05-048 PRW CCLD, July 16, 2021 (D.I. 12).
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forthcoming—both directly and via counsel—EverID refused to respond or
distribute the tokens.33
Diamond Fortress and Mr. Hatcher initiated suit here alleging two counts of
Breach of Contract—one count for each Plaintiff.34 Upon EverID’s failure to
respond or otherwise defend itself, the Plaintiffs filed a motion for default
judgment.35
Consistent with this Court’s Civil Rule 55(b), which provides for entry of
default judgment “when a party against whom a judgment for affirmative relief is
sought, has failed to appear, plead or otherwise defend as provided by these Rules,”36
the Court granted the Plaintiffs’ motion with respect to EverID’s liability for its
breaches. EverID’s failure to provide any assurance within a reasonable time, as
well as its non-performance of payment, constituted a repudiation and total breach
of both Agreements.37 But what then is the remedy?
33
Hr’g Tr. at 5; see also Compl. ¶¶ 30-32.
34
See generally Compl.
35
D.I. 12.
36
Campbell v. Robinson, 2007 WL 1765558, at *1 n.6 (Del. Super. Ct. June 19, 2007) (citing
Del. Super. Ct. Civ. R. 55(b)(2)).
37
Order Granting Pls.’ Mot. for Default J. in Part ¶¶ 2-3, Diamond Fortress Technologies, Inc.
v. EverID, Inc., N21C-05-048 PRW CCLD, Aug. 24, 2021 (D.I. 17); see also Hr’g Tr. at 7, 12-15.
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As observed recently, “Delaware law largely remains silent” on scenarios
such as this.38 That said, “significant authority supports the conclusion that a
repudiation coupled with simultaneous non-performance gives rise to an action for
total breach.”39
For instance, Corbin on Contracts teaches:
Suppose next that the contract requires performance in
installments or continuously for some period and that there has
been such a partial failure of performance as justifies immediate
action for a partial breach. If this partial breach is accompanied
by repudiation of the contractual obligation such repudiation is
anticipatory with respect to the performances that are not yet due.
In most cases, the repudiator is now regarded as having
committed a “total” breach, justifying immediate action for the
remedies appropriate thereto . . . . The non-performance plus the
repudiation constitute one and only one cause of action.40
And though Delaware has not per se adopted the Restatement (Second) of
Contracts rule regarding repudiation and adequate assurances, our courts have
historically relied on its guidance in such situations.41 The rule prescribes that upon
38
BioVeris Corp. v. Meso Scale Diagnostics, LLC, 2017 WL 5035530, at *8 (Del. Ch. Nov. 2,
2017), aff’d, 2019 WL 244619 (Del. Jan. 17, 2019).
39
Id.40
Id. at *9 (quoting 9 Arthur Linton Corbin, Corbin on Contracts § 954 (interim ed. 2002)
(citations omitted)); 10 John E. Murray, Jr., Corbin on Contracts § 53.12 (Joseph M. Perillo, ed.,
rev. ed. 2014) (internal citations omitted)).
41
See, e.g., Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027, at *28 n.184 (Del. Ch. Apr.
29, 2005) (relying on the Restatement regarding “the nature of a demand for adequate
assurances[.]”).
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an obligee’s request for adequate assurance of performance by the obligor, “the
obligee may treat as a repudiation the obligor’s failure to provide” such assurance
within a reasonable time.42 And “a repudiation coupled with simultaneous non-
performance gives rise to an action for total breach, allowing the non-breaching
party to bring an action for the entire contract price.”43
Accordingly, the Court determined EverID had indeed repudiated and was in
total breach of both Agreements.44 Given the novel circumstances of this case,
however, a decision on damages was reserved pending further record development.
Under this Court’s Civil Rule 55(b), “[j]udgment is to be entered by the Court when
the plaintiff’s claim is for a sum which is uncertain or cannot be fixed with certainty
by computation.”45 And when such uncertainty is present, and the Court must
“determine the amount of damages[,]” Rule 55(b)(2) authorizes the Court to
“conduct such hearings . . . as it deems necessary and proper . . . .”46
42
Restatement (Second) of Contracts, § 251 (1981).
43
BioVeris Corp., 2017 WL 5035530, at *8 (emphasis added); see also Mumford v. Long, 1986
WL 2249, at *3 (Del. Ch. Feb. 21, 1986) (holding where repudiation is found “the non-breaching
party is entitled to treat the contract as terminated, i.e., as being at an end”).
44
Order Granting Pls.’ Mot. for Default J. in Part ¶¶ 2-3.
45
Campbell, 2007 WL 1765558, at *1 n.6 (citing Del. Super. Ct. Civ. R. 55(b)(2)).
46
Id at n.7.; see also Dill v. Dill, 2016 WL 4127455, at *1 (Del. Super. Ct. Aug. 2, 2016) (“After
a default judgment is ordered, an inquisition hearing is held to determine the amount of damages
due. At an inquisition hearing, the Court’s findings on damages must be based on a preponderance
of the evidence. The ‘sole focus of inquisition hearings is the amount of damages owed to the
plaintiff, which is determined by the ... judge.’ Preponderance of the evidence means ‘the side on
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The Plaintiffs supplemented the record with additional briefing supporting
their damages claim.47 The Court heard Diamond Fortress and Mr. Hatcher on the
supplemented record. This is the Court’s judgment and explication on the
computation of damages arising out of EverID’s failure to distribute the ID tokens
as required under the License and Advisor Agreements.
II. LEGAL ANALYSIS
A. CRYPTOCURRENCY, BLOCKCHAIN TECHNOLOGY, AND BITCOIN
It seems no Delaware court has yet grappled with the question posed here:
When the consideration to be paid on a contract is in cryptocurrency and the contract
is breached, how does the Court calculate the judgment to be entered?
A brief history of cryptocurrency, Bitcoin, and blockchain technology might
help one understand the Court’s answer here.
Cryptocurrency is a type of digital or virtual currency “maintained by a
decentralized network of participants’ computers.”48 Cryptocurrencies are unique
which the greater weight of the evidence is found.’ Additionally, the standard remedy, or damages,
for a breach of contract is based upon the reasonable expectations of the parties, in an amount that
is equal to the loss in value of defendant’s nonperformance, or breach. Damages for a breach of
contract must be proven with reasonable certainty. Recovery is not available to the extent that the
alleged damages are uncertain, contingent, conjectural, or speculative.”) (internal citations
omitted).
47
D.I. 21.
48
Archer v. Coinbase, Inc., 267 Cal. Rptr. 3d 510, 513 (2020).
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as they “exist solely on the internet and are unregulated and unmanaged by third
parties, such as banks or governments.”49 It uses cryptography for security, and
“[l]ike traditional forms of currency, cryptocurrency can be bought and sold on
digital exchanges.”50 Like an initial public offering in a securities context, an initial
coin offering, or ICO, occurs when a new species of cryptocurrency token is issued
in exchange for fiat or already circulating virtual currencies to raise capital.51
Cryptocurrency relies on blockchain technology, a distributed ledger system,
to ensure the security and integrity of the virtual currency.52 Blockchain technology
is a peer-to-peer system that tracks and records digital transactions around the
globe.53
To use a blockchain system, a user first creates a wallet, which
contains information used to move units of a cryptocurrency on
a blockchain. When the user downloads or purchases a wallet,
software in the wallet generates a private key (a large integer
number). That private key is then used to mathematically
generate a public key (also a large integer number), which is used
to create an address (a mix of numbers and symbols). This
49
Blocktree Props., LLC v. Pub. Util. Dist. No. 2 of Grant Cnty. Washington, 380 F. Supp. 3d
1102, 1110 (E.D. Wash. 2019).
50
Balestra v. Giga Watt, Inc., 2018 WL 8244006, at *1 (E.D. Wash. June 18, 2018).
51
Id.52
Zietzke v. United States, 2020 WL 264394, at *1 (N.D. Cal. Jan. 17, 2020).
53
Josephine Shawver, Commodity or Currency: Cryptocurrency Valuation in Bankruptcy and
the Trustee’s Recovery Powers, 62 B.C. L. REV. 2013, 2018 (2021).
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address functions as the name suggests: it is the destination for
a cryptocurrency payment.54
To avoid risks of double-spending, blockchain places a series of transactions
into a block, issues a timestamp, then chronologically incorporates the blocks into a
larger chain of all the blocks within the ledger.55 “Each block is irreversibly
connected by a ‘proof-of-work’ protocol, the process by which a computer must
solve a complex puzzle to authenticate each transaction and add it to the growing
blockchain.”56 This authentication process is known as “mining,” or rather, the
production of new coins or tokens.57
Bitcoin is a well-known name in the cryptocurrency world and is a type of
digital currency that uses the blockchain technology.58 “Generally speaking,
‘Bitcoin’ in the capitalized singular refers to the cryptocurrency with the symbol
BTC, while ‘bitcoin’ or ‘bitcoins’ refers more generally to cryptocurrency, inclusive
of the cryptocurrency modeled on Bitcoin.”59
54
Zietzke, 2020 WL 264394, at *1.
55
Shawver, supra at 2021.
56
Id. at 2022.
57
Id.
58
Larissa Lee, New Kids on the Blockchain: How Bitcoin’s Technology Could Reinvent the Stock
Market, 12 HASTINGS BUS. L.J. 81, 90 (2016).
59
BDI Cap., LLC v. Bulbul Invs. LLC, 446 F. Supp. 3d 1127, 1131 n.3. (N.D. Ga. 2020). See also
United Am. Corp. v. Bitmain, Inc., 530 F. Supp. 3d 1241, 1251 (S.D. Fla. 2021) (where one litigant
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Bitcoin uses the “Bitcoin Blockchain” to track ownership and transfers “of
every bitcoin in existence.”60 To transfer bitcoins, a user must have a wallet, which,
again, is a unique digital file that stores the bitcoin information.61 Bitcoins can be
acquired either by the mining process or simply by receiving them from someone
else.62 The premise of Bitcoin was to use the blockchain technology for a “peer-to-
peer version of electronic cash” that prevents fraudulent spending but without the
oversight of regulatory policing.63
B. SECURITY VS. COMMODITY
Incidentally, the lack of regulatory policing of cryptocurrency is not without
its problems and is on full display in the instant litigation. Before the Court can
fashion a proper damages award, it must first determine how to classify
cryptocurrency, i.e., is it a security/investment contract, a commodity, property, or
currency?
Lending to this problem is a lack of consensus among certain authorities on
how to treat cryptocurrency. For instance, the Commodity Futures Trading
characterized Bitcoin as “the most widely adopted form of peer-to-peer cryptocurrency cash-like
system in the world.”).
60
Kleiman v. Wright, 2018 WL 6812914, at *1 (S.D. Fla. Dec. 27, 2018).
61
Id.62
Id.63
See Shawver, supra at 2021.
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Commission (CFTC) insists digital currencies are commodities subject to its
regulatory authority.64 While the United States Securities & Exchange Commission
(SEC) determined, in its now-familiar “DAO Report,” that virtual currencies are
securities subject to the Securities Act of 1933 and the Securities Exchange Act of
1934.65
Too, the few courts that have tackled the issue are a bit stuck on the
classification quandary.66 One recently observing the complicator that “several
agencies may have concurrent regulatory authority in the cryptocurrency space.”67
Thus, the fact that cryptocurrency may be regulated as an “investment contract”
64
CFTC v. McDonnell, 287 F. Supp. 3d 213, 226 (E.D.N.Y. 2018) adhered to on denial of
reconsideration, 321 F. Supp. 3d 366 (E.D.N.Y. 2018).
65
Tetragon Fin. Grp. Ltd. v. Ripple Labs Inc., 2021 WL 1053835, at *7, n.87 (Del. Ch. Mar. 19,
2021) (citing SEC, REPORT OF INVESTIGATION PURSUANT TO SECTION 21(A) OF THE SECURITIES
EXCHANGE ACT OF 1934: THE DAO (2017), https://www.sec.gov/litigation/investreport/34-
81207.pdf)).
66
See McDonnell, 287 F. Supp. 3d at 217 (holding virtual currencies are commodities subject to
CFTC regulatory protections); Lagemann v. Spence, 2020 WL 5754800, at *11-12 (S.D.N.Y. May
18, 2020) (holding that plaintiffs had established their right to a judgment under the CEA after the
defendant misappropriated their cryptocurrency investments); CFTC v. Gelfman Blueprint, Inc.,
2018 WL 6320653, at *4 (S.D.N.Y. Oct. 2, 2018) (holding virtual currencies are encompassed in
the definition of commodity under the Commodity Exchange Act); contra S.E.C. v. Kik Interactive
Inc., 492 F. Supp. 3d 169 (S.D.N.Y. 2020) (holding that a company’s public sale of virtual currency
was an investment contract subject to SEC registration requirements); Balestra v. ATBCOIN LLC,
380 F. Supp. 3d 340 (S.D.N.Y. 2019) (holding that digital tokens are considered securities).
67
United States v. Samuel Reed, 2022 WL 597180, *4 (S.D.N.Y. Feb. 28, 2022).
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under the Securities Act of 1933, “does not mean that a cryptocurrency is not a
‘commodity’ within the meaning of the [Commodity Exchange Act or] CEA.”68
In mid-2021, Congress introduced the Digital Asset Market Structure and
Investor Protection Act—a bill providing for the regulation of digital assets and
digital asset securities.69 The proposed bill includes amendments to current federal
securities laws and the CEA, defining and distinguishing a “digital asset” versus a
“digital asset security” under the respective bodies of law.70
In short, under the proposed legislation, it appears a cryptocurrency’s
characteristics at a given time best determine whether it is subject to SEC or CFTC
regulation (e.g., an ICO is generally considered a security because its purpose, like
an IPO, is to raise capital by selling new tokens or coins to investors).71
Within one-hundred-fifty (150) days of the bill’s enactment, the SEC and
CFTC are to jointly publish “a proposed rulemaking that classifies each of the major
digital assets by (i) highest market capitalization and (ii) highest daily trading
68
Id.69
Digital Asset Market Structure and Investor Protection Act, H.R. 4741, 117th Cong. (2021).
70
Id.71
Eva Su, Digital Assets and SEC Regulation, CONGRESSIONAL RESEARCH SERVICE (June 23,
2021) https://sgp.fas.org/crs/misc/R46208.pdf (“When a digital asset meets the criteria defining a
security, it would be subject to securities regulation, per existing SEC jurisdiction. For example,
most of the initial coin offerings (ICOs) are securities, but Bitcoin is not a security, mainly because
it does not have a central third-party common enterprise.”).
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volume as either (1) a digital asset; or (2) a digital asset security.”72 Notably, in
defining “major digital assets,” the mandate refers the CFTC and SEC to
“CoinMarketCap” as “an appropriate publicly available website” that publishes data
on digital assets.73
C. THE SEC, HOWEY, AND CRYPTOCURRENCY AS AN INVESTMENT CONTRACT
The Securities Act of 193374 and the Securities Exchange Act of 193475
regulate the issuance and sales of investment products that qualify as securities under
each Act. Congress’s intent in enacting these laws “was to regulate investments, in
whatever form they are made and by whatever name they are called.”76 This was to
ensure the application of securities laws would “turn on the economic realities
underlying a transaction, and not on the name appended thereto.”77
Among many other investment-related terms, Section 77b(a)(1) of the 1933
Act defines a “security” to mean an “investment contract.”78 The United States
72
See HR 4741.
73
Id. As of the date of this Opinion, the proposed legislation has yet to be enacted.
74
15 U.S.C. § 77a et seq.
75
15 U.S.C. § 78a et seq.
76
S.E.C. v. Edwards, 540 U.S. 389, 393 (2004) (quoting Reves v. Ernst & Young, 494 U.S. 56,
61 (1990)) (emphasis in original).
77
United Housing Found., Inc. v. Forman, 421 U.S. 837, 849 (1975).
78
15 U.S.C. § 77b(a)(1) (2021) (Definitions; promotion of efficiency, competition, and capital
formation).
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Supreme Court animated those terms via the now well-accepted Howey test: an
investment contract is “a contract, transaction or scheme whereby a person invests
his money in a common enterprise and is led to expect profits solely from the efforts
of the promoter or a third party.”79 This definition “embodies a flexible rather than
a static principle, one that is capable of adaption to meet the countless and variable
schemes devised by those who seek the use of the money of others on the promise
of profits.”80
Not surprisingly, courts have looked to Howey to ascertain whether
cryptocurrencies qualify as an unconventional scheme or contract that is governed
by securities laws.81 “Whether a transaction or instrument qualifies as an investment
contract is a highly fact-specific inquiry.”82 A court must “examine the series of
understandings, transactions, and undertakings at the time they were made.”83
Accordingly, an application of the Howey test “requires an examination of the
entirety of the parties’ understandings and expectations.”84
79
S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946).
80
Id. at 299.
81
See, e.g., S.E.C. v. Telegram Grp. Inc., 448 F. Supp. 3d 352, 364–65 (S.D.N.Y. 2020).
82
United States v. Zaslavskiy, 2018 WL 4346339, at *4 (E.D.N.Y. Sept. 11, 2018).
83
Telegram, 448 F. Supp. 3d at 368 (emphasis added).
84
See id. at 379 (citing Howey, 328 U.S. at 297-98).
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1. Courts Applying Howey Have Determined Cryptocurrency is a Security.
a. Investment of Money
The first consideration under Howey is “whether an investment of money was
part of the relevant transaction.”85 An investment of money “need not be made in
cash and refers more generally to ‘an arrangement whereby an investor commits
assets to an enterprise or venture in such a manner as to subject himself to financial
losses.’”86 Several federal district courts have recently had occasion to apply Howey
in digital currency contexts. And in each, the first prong was rather easily met.
For example, one court determined the plaintiff-investors’ assets that were
contributed in advance of a scheduled ICO—“even if such investments were in the
form of cryptocurrencies”—was satisfactory.87 In another similar matter, the
plaintiff-investors’ exchange of one form of cryptocurrency for a number of
forthcoming digital coins that the defendant marketed and promised to distribute at
its ICO event satisfied the investment-of-money prong.88 And finally, this criterion
85
Id. at 368.
86
Hodges v. Harrison, 372 F. Supp. 3d 1342, 1348 (S.D. Fla. 2019) (quoting S.E.C. v. Friendly
Power Co. LLC, 49 F. Supp. 2d 1363, 1368-69 (S.D. Fla. 1999)); see also Uselton v. Comm.
Lovelace Motor Freight, Inc., 940 F.2d 564, 574 (10th Cir. 1991) (“[I]n spite of Howey’s reference
to an ‘investment of money,’ it is well established that cash is not the only form of contribution or
investment that will create an investment contract.”).
87
Hodges, 372 F. Supp. 3d at 1348.
88
Balestra v. ATBCOIN LLC, 380 F. Supp. 3d 340, 347, 353 (S.D.N.Y. 2019).
-19-
was satisfied in yet another case where the investors’ initial contributions in the form
of dollars and euros were in exchange for the future delivery of the defendants’ soon-
to-be-launched cryptocurrency.89
b. Common Enterprise
The Court next looks to see if “a common enterprise exists where the ‘fortunes
of the investor are interwoven with and dependent upon the efforts and success of
those seeking the investment of third parties.’”90 Often considered here is whether
“horizontal commonality” or “vertical commonality” inheres in the arrangement.91
Horizontal commonality requires one to show a “pooling” of the investors’ interests
or assets, such that all involved share in the profits and risks of the enterprise alike.92
While vertical commonality “requires that the fortunes of investors be tied to the
fortunes of the promoter.”93
ICOs have constituted a common enterprise because the investees “pool” the
contributed funds for the purpose of securing a profit for themselves and the
89
Telegram, 448 F. Supp. 3d at 368-69.
90
Hodges, 372 F. Supp. 3d at 1348 (quoting S.E.C. v. Unique Fin. Concepts, Inc., 196 F.3d 1195,
1199 (11th Cir. 1999)).
91
Telegram, 448 F. Supp. 3d at 369.
92
Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994).
93
Id. at 88 (emphasis in original); see also In re J.P. Jeanneret Assocs., 769 F. Supp. 2d 340, 360
(S.D.N.Y. 2011) (holding “that strict vertical commonality (like horizontal commonality) is
sufficient to establish a common enterprise under Howey”).
-20-
investors, and the risks and benefits are shared equally among the parties.94
Horizontal commonality has been found to exist both before and after the
launch of a defendant’s cryptocurrency and blockchain platform.95 Where one
initially “pools” his investors’ money in order to develop and launch a digital token
and blockchain platform, he effectively renders his investors’ profits entirely
dependent upon the blockchain’s successful launch.96 If the launch is unsuccessful,
the investors are equally affected and lose any opportunity to profit.97 Horizontal
commonality can also exist post-launch because the value of each token to be
distributed thereafter is “dictated by the success [or failure] of the [blockchain]
enterprise as a whole.”98 So the “plain economic reality” post-launch is that the
distribution of the tokens continues to represent the investors’ initial pooled funds.99
94
Hodges, 372 F. Supp. 3d at 1348.
95
Telegram, 448 F. Supp. 3d at 369-70; see also Balestra, 380 F. Supp. 3d at 353-54 (plaintiffs
plausibly demonstrated the “pooling of the investors’ funds” because the “Defendants encouraged
investors to purchase ATB Coins based on the claim that the speed and efficiency of the ATB
Blockchain would result in an increase in the coins’ value”); Revak, 18 F.3d at 87 (holding
“horizontal commonality” exists where the investors’ profits are tied “to the success of the overall
venture”).
96
Telegram, 448 F. Supp. 3d at 369-70.
97
Id.
98
Id. at 370.
99
Id. at 369; see also Balestra, 380 F. Supp. 3d at 354 (finding a pooling of investments after the
launch of a digital asset).
-21-
c. Expectation of Profits Derived Solely from the Efforts of Others
The final Howey factor is whether an investor entered into a transaction
expecting to make a profit. “An investor possesses an expectation of profit when
their motivation to partake in the relevant ‘contract, transaction or scheme’ was ‘the
prospects of a return on their investment.’”100 A profit has been interpreted to mean
an “income or return, to include, for example, dividends, other periodic payments,
or the increased value of the investment.”101 Here, a court considers “whether the
efforts made by those other than the investor are the undeniably significant ones,
those essential managerial efforts which affect the failure or success of the
enterprise.”102
This criterion is satisfied where investors’ fortunes are “directly tied to the
failure or success of the products the [investee] purport[s] to develop, and no
individual investor c[an] exert control over the success or failure of his or her
investment.”103 Indeed, an investor’s expectation of profits relies on the “essential
efforts” of investee when he or she wholly depends on that investee “to develop,
100
Telegram, 448 F. Supp. 3d at 371 (citing Howey, 328 U.S. at 301).
101
S.E.C. v. Edwards, 540 U.S. 389, 394 (2004).
102
Bamert v. Pulte Home Corp., 445 F. App’x. 256, 262 (11th Cir. 2011) (quoting S.E.C. v. Glenn
W. Turner Enters., 474 F.2d 476, 482 (9th Cir. 1973)).
103
Hodges, 372 F. Supp. 3d at 1348.
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launch, and support the [blockchain].”104
In finding whether investors were “led to expect profits solely from the
efforts” of the investee-defendants, one court was particularly persuaded by the
defendants’ marketing materials.105 In that case, the investors were induced by the
defendants’ marketing materials touting the potential profitability of their coins as
well as their sole responsibility for developing and launching the blockchain
platform—“the performance of which largely dictated the value of [the coins].”106
Thus, it was the investee-defendants’ “essential managerial efforts which affect the
failure or success of the enterprise” that the investor-plaintiffs relied on to yield a
return on their investment.107
D. “ID TOKENS” IS A SECURITY
Courts commonly classify a cryptocurrency as a security when the economic
harm directly relates to or arises from its ICO.108 The proposed federal legislation
104
Telegram, 448 F. Supp. 3d at 375-79 (holding the totality of the evidence and economic
realities indicate that defendants’ initial sales of the coins were part of a larger scheme, manifested
by its “actions, conduct, statements, and understandings . . . with the intent and purpose that the
[coins] be distributed in a secondary public market, which is the offering of securities under
Howey”).
105
Balestra, 380 F. Supp. 3d at 357.
106
Id.
107
Id. at 355-57.
108
See S.E.C. v. Kik Interactive Inc., 492 F. Supp. 3d 169 (S.D.N.Y. 2020) (holding that a
company’s public sale of virtual currency was an investment contract subject to SEC registration
-23-
seeking to resolve the classification question, too, draws the line at the ICO. Just
like any security, the purpose of an ICO is to raise capital by selling new coins or
tokens to investors. Here, EverID’s failure to distribute the due ID Tokens on the
date of the ICO is the direct cause of the Plaintiffs’ injury, i.e., the ICO is the
triggering event underlying this litigation.
Scrutiny under Howey of ID Tokens’ characteristics, its distribution scheme,
and the transaction mapped out by the Agreements leads inexorably to its
classification as a security.
1. ID Tokens is a Security Under Howey.
At bottom, the Plaintiffs invested their expertise and proprietary resources to
EverID’s cryptocurrency enterprise, solely relying on EverID’s development and
management of the blockchain platform to yield a return on their investment.
a. Investment of Money
To determine “whether an investment of money was part of the relevant
transaction”,109 our courts have been clear that money per se isn’t required to satisfy
the first prong of Howey.110 All that’s required is an investor who “commits assets
requirements); see also Balestra, 380 F. Supp. 3d 340 (S.D.N.Y. 2019); Telegram, 448 F. Supp.
3d 352 (S.D.N.Y. 2020); Hodges v. Harrison, 372 F. Supp. 3d 1342 (S.D. Fla. 2019).
109
Telegram, 448 F. Supp. 3d at 368.
110
Uselton v. Comm. Lovelace Motor Freight, Inc., 940 F.2d 564, 574 (10th Cir. 1991).
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to an enterprise or venture in such a manner as to subject himself to financial
losses.”111
The Plaintiffs committed both an exclusive license to their ONYX software
and related professional services to EverID’s then-developing, blockchain-based
cryptocurrency platform. In turn, the Plaintiffs elected to be paid in eventual token
distributions rather than by traditional means—knowing full well that
cryptocurrency value is ever-fluctuating.112 The Plaintiffs “bore the risk of those
fluctuations by agreeing to accept the cryptocurrency as payment instead of dollars”
and subjected themselves to any attendant financial losses.113 So, the first prong of
Howey is satisfied here.
b. Common Enterprise
“[A] common enterprise exists where the ‘fortunes of the investor are
interwoven with and dependent upon the efforts and success of those seeking the
investment of third parties.’”114 EverID relied on the Plaintiffs’ software license and
professional services (i.e., Plaintiffs’ investments) to successfully develop and
111
S.E.C. v. Friendly Power Co. LLC, 49 F. Supp. 2d 1363, 1368-69 (S.D. Fla. 1999).
112
Hr’g Tr. at 10.
113
Id.114
Hodges, 372 F. Supp. 3d at 1348 (quoting S.E.C. v. Unique Fin. Concepts, Inc., 196 F.3d 1195,
1199 (11th Cir. 1999)).
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launch its blockchain platform. And in turn, the Plaintiffs’ ability to recover any
remuneration for their investment was interwoven with and wholly dependent upon
the successful launch of EverID’s blockchain. In other words, it was EverID’s
efforts—using Plaintiffs’ investments—to develop a successful token that created a
common enterprise.
It “is the nature of a common enterprise, to pool invested proceeds to increase
the range of goods and services from which income and profits could be earned.”115
And the economic reality of this transaction—pre- and post-ICO—is that any future
distribution, or continued growth of ID Tokens’ value, is representative of the
Plaintiffs’ investments in EverID’s blockchain platform.116 The value of each
subsequent token distribution is “dictated by the success of the [blockchain]
enterprise as a whole.”117 And so, Howey’s common enterprise criterion is met.
c. Expectation of Profits Derived from the Efforts of Others
The third Howey factor also exists here. No doubt, Plaintiffs had “an
expectation of profit when their motivation” to enter into the negotiated Agreements
was based on the promise of payment in the form of (and profit from) token
115
Kik Interactive Inc., 492 F. Supp. 3d at 179.
116
See Balestra, 380 F. Supp. 3d at 354 (finding a pooling of investments after the launch of a
digital asset).
117
Id.
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distributions.118 EverID’s successful development and launch of the ID Tokens’
enterprise was integral to the Plaintiffs’ “prospects of a return on their
investment.”119
The Plaintiffs acquiesced to EverID’s demand for an exclusive ONYX
software license on the condition that EverID allocate and distribute a significant
amount of ID Tokens at the ICO. The token grant wasn’t in addition to payment for
Plaintiffs’ services, but rather in lieu of traditional compensation for their
contributions to EverID.120 Notwithstanding the attendant risks involved with
cryptocurrency transactions, the substantial deferral of payment for their services,
and the onerous distribution lock-up, the Plaintiffs reasonably believed this
compensation arrangement would provide a proportional return of profit in relation
to their initial investment.
Because the Plaintiffs could not be reimbursed until after EverID’s initial
ICO, their expected profits “were directly tied to the failure or success” of EverID’s
blockchain platform.121 Their dependence on EverID “to develop, launch, and
118
Telegram, 448 F. Supp. 3d at 371 (citing Howey, 328 U.S. at 301).
119
Id.120
See generally License and Advisor Agreements.
121
Hodges, 372 F. Supp. 3d at 1348.
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support the [blockchain]” is sufficient to find that the Plaintiffs’ expectation of
profits relied on the “essential efforts” of EverID.122
The economic reality of the parties’ entire transaction here establishes each
Howey factor. The Plaintiffs’ overall investment into the platform was based on
their expectation to be paid in eventual distributions of ID Tokens after the ICO.
This expectation is no different than that of a traditional investment contract entered
into before an IPO, and thus, ID Tokens is in this circumstance like a security.123
2. Both License Agreements Expressly Require Adherence to SEC
Regulatory Compliance.
Delaware law governs the parties’ respective License Agreements,124 and in
Delaware, a contract’s proper construction is a question of law.125 The goal of
contract interpretation “is to fulfill the parties’ shared expectations at the time they
contracted.”126
The parties took care to include language in both Agreements that token
distributions were subject to regulatory compliance under Rule 144 of the Securities
122
Telegram, 448 F. Supp. 3d at 375-79.
123
Id. at 379 (citing Howey, 328 U.S. at 297-98) (requiring “an examination of the entirety of the
parties’ understandings and expectations”).
124
Compl., Ex. A, License Agreement § X2-6.3.
125
Exelon Generation Acquisitions, LLC v. Deere & Co., 176 A.3d 1262, 1266–67 (Del. 2017).
126
Leaf Invenergy Co. v. Invenergy Renewables LLC, 210 A.3d 688, 696 (Del. 2019) (internal
quotation marks omitted).
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Act of 1933.127 The Licensing Agreement also subjects token grants to “verification
as an accredited investor, unless [User’s Board], in its discretion, utilizes another
valid exemption outside of, and separate from, its token offering under 506(c) such
as Rule 701 . . . .”128
Because the Court’s role is to “give priority to the parties’ intentions as
reflected in the four corners of the [A]greement,”129 it is manifest from each
Agreement that the parties intended to treat the ID Tokens at each distribution as a
security. Surely, it is not mere happenstance the parties included these references to
SEC regulations in each Agreement.
The Agreements were signed almost one month apart, the later-signed
Advisor Agreement doesn’t mimic the terms of License Agreement, and both
Agreements include language the other does not. Most notably, the provisions
referencing the SEC regulations are phrased differently in each. This suggests
nothing other than the parties deemed it prudent to include the regulatory compliance
127
Compl., Ex. B, Advisor Agreement; see also id. at Ex. A, License Agreement § 3.1(c)(iii)
(“[T]he foregoing grants of tokens are subject to . . . (c) regulatory compliance including, but not
limited to, lock-ups and restrictions, including but not limited to Rule 144 Restrictions . . . .”).
128
Id., Ex. A, License Agreement § 3.1(c)(iii). Rule 506(c) is the S.E.C.’s “small business exempt
offerings” rule that governs general solicitations and advertisements of a public offering. See U.S.
SECURITIES AND EXCHANGE COMM’N, GENERAL SOLICITATION-RULE 506(C) (2022),
https://www.sec.gov/smallbusiness/exemptofferings/rule506c.
129
In re Viking Pump, Inc., 148 A.3d 633, 648 (Del. 2016) (internal quotation marks omitted).
-29-
references in both Agreements and anticipated treating the ICO and forthcoming
distributions like those of a security.
III. DAMAGES
“Under Delaware law, the standard remedy for breach of contract is based on
the reasonable expectations of the parties that existed before or at the time of the
breach.”130 It is well-settled that breach of contract damages “are designed to place
the injured party . . . in the same place as he would have been if the contract had
been performed. Such damages should not act as a windfall.”131 Accordingly, when
assessing such damages, “the non-breaching party is entitled to recover ‘damages
that arise naturally from the breach or that were reasonably foreseeable at the time
the contract was made.’”132
But in a case such as this—where the damages were unforeseeable at the time
of contracting and it cannot be determined what the Plaintiffs would have received
had the contract been performed—how does the Court fashion a reasonable remedy
that accounts for: (1) the volatile and unregulated nature of cryptocurrency; (2) the
express terms of the Agreements requiring immediate distribution of 25% of the total
130
Siga Tech., Inc. v. PharmAthene, Inc., 132 A.3d 1108, 1132-33 (Del. 2015) (citing Duncan v.
Theratx, Inc., 775 A.2d 1019, 1022 (Del. 2001)).
131
Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 146 (Del. 2009).
132
Id. (quoting Tackett v. State Farm Fire & Cas. Ins. Co., 653 A.2d 254, 264–65 (Del.1995)).
-30-
token grant at the ICO (a concrete and discernible amount); and (3) the remaining
periodic token distributions whose values are so unpredictable that a blanket
damages calculation indeed could operate as a windfall?
The damages calculation here is two-fold. First, the Court must find a reliable
cryptocurrency valuation source to ensure the proper input of values. Then the Court
must ascertain the proper method for calculating the damages such that it will place
the Plaintiffs in the same position they would have been had the Agreements been
fully performed.
A. PROPER VALUATION SOURCE – COINMARKETCAP
The few courts that have endeavored to do so have found CoinMarketCap to
be a “reliable valuation tool” for determining the USD value of cryptocurrency
tokens.133 As one rightly observed, “CoinMarketCap is used frequently by news
publications to report on prices of virtual currencies, including publications that
focus on virtual currencies such as CoinDesk and general financial newspapers like
the Wall Street Journal and the Financial Times.”134
133
CFTC v. McDonnell, 332 F. Supp. 3d 641, 670–71 (E.D.N.Y. 2018); CFTC v. Reynolds, 2021
WL 796683, at *4 n.2 (S.D.N.Y. Mar. 2, 2021) (citing McDonnell, 332 F. Supp. 3d at 670–71)
(holding “CoinMarketCap is a reliable valuation tool for these purposes”); Hodges v. Harrison,
372 F. Supp. 3d 1342, 1353 n.1 (S.D. Fla. 2019) (holding an evidentiary hearing “to determine the
appropriate manner of calculating the value of Plaintiffs investments” before determining
CoinMarketCap was a reliable source to convert cryptocurrency into USD).
134
McDonnell, 332 F. Supp. 3d at 670–71.
-31-
Tellingly, Congress’s proposed Digital Asset Market Structure and Investor
Protection Act encourages the SEC and CFTC to publish joint rulemaking
concerning digital asset classification.135 And in so doing, it nods to CoinMarketCap
as “an appropriate publicly available website . . . that publishes” data on digital
assets.136
Against this backdrop, the Court is satisfied CoinMarketCap is a reliable
cryptocurrency valuation tool. As such, the Court will rely on historical pricing data
published by CoinMarketCap to determine the proper USD value of ID Tokens in
calculating the Plaintiffs’ forthcoming judgment.
B. PROPER VALUATION METHOD
The Plaintiffs posit EverID’s failure to distribute the ID Tokens is analogous
to Delaware’s “failure to deliver securities” cases, where damages are determined
by the highest market price of the security within a reasonable time of a plaintiff’s
discovery of the breach.137
Just so. But for the novelty of the subject instrument being units of
cryptocurrency this suit mirrors any other failure to deliver securities case—a run-
135
Digital Asset Market Structure and Investor Protection Act, H.R. 4741, 117th Cong. (2021).
136
Id.
137
Pls.’ Mot. for Default J. ¶ 28 (citing Am. Gen. Corp. v. Cont’l Airlines Corp., 622 A.2d 1 (Del.
Ch. 1992)).
-32-
of-the-mill action for Delaware courts. The Court will, therefore, calculate the
Plaintiffs’ forthcoming judgment applying established Delaware precedent.
1. Highest Value Within a Reasonable Time.
Known as the New York Rule, the “highest value within a reasonable time”
framework is a judicially-created breach-of-contract remedy for reckoning
“damages where stock or ‘properties of like character’ were converted, not delivered
according to contractual or other legal obligation, or otherwise improperly
manipulated.”138 It’s frequently employed in wrongful stock conversion litigation
and measures damages by: “the highest intermediate value reached by the stock
between the time of the wrongful act complained of and a reasonable time thereafter,
to be allowed to the party injured to place himself in the position he would have been
in had not his rights been violated.”139
This slight variation of the old English rule—which measured damages by the
highest value of the stock on or before the day of trial140—allows for a more just
138
Schultz v. CFTC, 716 F.2d 136, 141 (2d Cir. 1983) (citing McKinley v. Williams, 74 F. 94, 103
(8th Cir. 1896)).
139
Id. at 139-40 (quoting Galigher v. Jones, 129 U.S. 193, 200 (1889)); see also McKinley, 74 F.
at 102-03 (holding the “true and just measure of damages” is “the highest intermediate value of
the stock between the time of its conversion and a reasonable time after the owner has received
notice of it to enable him to replace the stock”).
140
Galigher, 129 U.S. at 201.
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recovery.141 The rule was modified in an effort to alleviate the drastic fluctuating
values of the asset—yet another a hardship borne by the victim—since trial was an
event that often occurred long after the conversion.142 So in the case of volatile-
stock values, the modification allows recovery for those “profits possibly lost as a
result of the wrongful conduct.”143
For practical reasons, the modified rule doesn’t require the injured party to
“reenter the market.”144
The value of lost securities may rise dramatically the day after a
wrongful conversion and then embark on a prolonged downward
spiral. Had the owner of such securities not been wrongfully parted
with them, he might well have been prompted to sell them within a
few days, as their value began to plummet. To require him actually
to reenter the market and repurchase the same securities as a
predicate for a damage claim, when steadily falling prices render
such an investment imprudent, would frustrate the rule which seeks
to make an investor whole. Rather than mitigating damages, as this
example illustrates, a requirement that there be an actual repurchase
could result in an increase in damages.145
But the rule is careful to avoid windfall awards to injured parties. Should the
highest value occur after the stock has been converted, but before the injured party
141
Schultz, 716 F.2d at 140.
142
Id.143
Id.144
Id.145
Id. (emphasis in original).
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learns of the conversion, he cannot rely on that value for his damages.146 No, the
injured party’s “reasonable time” period begins after or upon the date the conversion
is discovered.147
Accordingly, the measure of damages for wrongful conversion of stock or
properties of like character is the higher value of either: “(1) its value at the time of
conversion or (2) its highest intermediate value between notice of the conversion
and a reasonable time thereafter during which the stock could have been
replaced . . . .”148
2. Delaware Follows the New York Rule.
Our Court of Chancery adopted the New York rule in American Gen. Corp.
v. Continental Airlines Corp., where it was asked to determine the value of damages
for improperly converted stock options.149
There, the plaintiffs recommended “a variation of the damage formula used in
cases involving the conversion of securities of fluctuating value . . . [that is] based
on the highest market price the stock reached within a reasonable time of plaintiff’s
146
Id. at 140-41.
147
Id. at 141.
148
Id. at 141.
149
622 A.2d 1 (Del. Ch. 1992).
-35-
discovery of the breach.”150 The court accepted the recommended “highest market
price of the stock” approach, but modified the amount because the date the plaintiffs
used was arbitrary and self-serving.151 Instead, the court used the date the plaintiff’s
became absolutely entitled to be issued the options because that was the date the
stockholders “approved the Employee Option” at issue in the litigation.152
Now, “[w]hat constitutes a reasonable period of time is a question of law for
the court to determine.”153 A plaintiff can’t cherry-pick dates to trump up the
maximal value.154 “Rather, the date should be established by resort to a ‘constructive
replacement’ purchase by the plaintiff, i.e., how long it would have taken the plaintiff
to replace the securities on the open market.”155 Two or three months has been
accepted as a reasonable period of time to replace an asset on the open market.156
150
Id. at 8.
151
Id. at 11-13.
152
Id. at 8, 14.
153
Segovia v. Equities First Holdings, LLC, 2008 WL 2251218, *21 (Del. Super. Ct. May 30,
2008).
154
Am. Gen. Corp, 622 A.2d at 13.
155
Id. (citing Madison Fund, Inc. v. Charter Co., 427 F. Supp. 597, 609 (S.D.N.Y. 1977)).
156
Segovia, 2008 WL 2251218, at *22 (finding three months was appropriate for determining
damages); see also Comrie v. Enterasys Networks, Inc., 837 A.2d 1, 20 (Del. Ch. 2003)
(calculating damages within a 90-day period because the parties’ agreement gave the plaintiff
ninety days from date of vesting to sell the disputed shares); Galigher v. Jones, 129 U.S. 193, 199-
200 (1889) (affirming two-months’ time was appropriate for calculating damages).
-36-
C. APPLICATION OF METHOD AND SOURCE
The Court is satisfied that the New York Rule is the proper method, and
CoinMarketCap is the proper valuation source, to calculate the Plaintiffs’ damages.
Too, the Court is satisfied this approach best represents the parties’ intentions at the
time of contracting.157 So Diamond Fortress’s and Mr. Hatcher’s damages will be
calculated by multiplying the total tokens awarded under the respective Agreements
by ID Tokens’ highest intermediate value within three months of the discovery of
EverID’s breach.
Between the ICO date of February 8, 2021, and through March 4, 2021, the
Plaintiffs attempted to contact EverID to discuss then-due token distributions and
obtain adequate assurances of payment. After hearing crickets, the Plaintiffs sent
their final communication to EverID on March 4, 2021, declaring their intent to treat
the Agreement as breached and to pursue legal remedies. March 4 is therefore the
date the Plaintiffs became absolutely entitled to issuance of their ID Tokens. Hence,
the proper three-month “reasonable time” period ran from March 4, 2021, to June 3,
2021.
CoinMarketCap recorded and published the daily values of ID Tokens during
that March 4, 2021 to June 3, 2021 span. The highest market price within that time
157
See Compl., Ex. A, License Agreement at § 3.1(c)(i) (containing unambiguous references to
SEC regulatory compliance).
-37-
period was recorded on April 9, 2021, at a value of 2.01 USD.158
Consequently, the Plaintiffs’ base damages are calculated as follows:
DIAMOND FORTRESS
CHARLES HATCHER, II
TECHNOLOGIES
Total Tokens Awarded 10,000,000 2,500,000
Highest Value of ID
Tokens from $2.01 $2.01
3/4/2021–6/3/2021
TOTAL BASE
DAMAGES TO BE $20,100,000.00 $5,025,000.00
AWARDED
Plaintiffs are also awarded pre-judgment interest on the above total figures, at
the statutory rate accruing from March 4, 2021, the date they became absolutely
entitled to the token distributions, until the entry date of this Opinion and Order.159
Plaintiffs are further entitled to post-judgment interest, again at the statutory rate,
accruing as of the entry date of this Opinion and Order.160
158
Pls.’ Suppl. Submission in Supp. of Mot. for Default J., Ex. A, CoinMarketCap “Historical
Data for Everest” (https://coinmarketcap.com/currencies/everest/historical-data/).
159
See DEL. CODE ANN. tit. 6, § 2301 (2012); see also Brandywine Smyrna, Inc. v. Millennium
Builders, LLC, 34 A.3d 482, 486 (Del. 2011) (holding that “prejudgment interest in Delaware cases
is awarded as a matter of right”).
160
See Wilmington Country Club v. Cowee, 747 A.2d 1087, 1097 (Del. 2000) (observing that
post-trial interest “is a right belonging to the prevailing plaintiff and is not dependent upon the trial
court’s discretion”).
-38-
IV. CONCLUSION
For reasons set forth herein, judgment for both Diamond Fortress and
Mr. Hatcher shall be entered accordingly. Within 20 days of entry of this Opinion
and Order, their counsel shall submit to the Court a proposed form of final judgment
that incorporates the Court’s award, including pre- and post-judgment calculations.
IT IS SO ORDERED.
_________________________
Paul R. Wallace, Judge
Original to Prothonotary
cc: All Counsel via File & Serve
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