DIAMOND FORTRESS TECHNOLOGIES, INC., and CHARLES HATCHER, II, Plaintiffs, v. EVERID, INC., Defendant.
C.A. No. N21C-05-048 PRW CCLD
IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
Submitted: January 18, 2022; Decided: April 14, 2022
WALLACE, J.
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.
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
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.
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 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
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 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 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
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. 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 forthcoming—both directly and via counsel
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?
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
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
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
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
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
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
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
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
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 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”
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
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 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
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
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
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
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
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, launch, and support the [blockchain].”104
In finding whether investors were “led to expect profits solely from the efforts” of
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 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 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
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 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 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
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 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
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 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
Tellingly, Congress‘s proposed Digital Asset Market Structure and Investor Protection Act encourages the SEC and CFTC to publish joint rulemaking concerning
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- 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 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
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 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 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
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 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 TECHNOLOGIES | CHARLES HATCHER, II | |
|---|---|---|
| Total Tokens Awarded | 10,000,000 | 2,500,000 |
| Highest Value of ID Tokens from 3/4/2021–6/3/2021 | $2.01 | $2.01 |
| TOTAL BASE DAMAGES TO BE AWARDED | $20,100,000.00 | $5,025,000.00 |
Plaintiffs are also awarded pre-judgment interest on the above total figures, at
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