Block Mining Inc v. Hosting Source LLC

Opinion

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE

BLOCK MINING, INC., CASE NO. C24-0319JLR Plaintiff, ORDER v. HOSTING SOURCE, LLC, Defendant.

Before the court is Defendant / Counterclaimant Hosting Source, LLC’s (“Hosting Source”) motion to dismiss Plaintiff / Counter-Defendant Block Mining, Inc.’s (“Block Mining”) claims for conversion, trespass to chattels, and a permanent injunction. (Def. MTD (Dkt. # 25); Def. Reply (Dkt. # 40); see also Compl. (Dkt. # 1).) Block Mining opposes Hosting Source’s motion. (Pl. Resp. (Dkt. # 38).) Also before the court is Block Mining’s motion to dismiss Hosting Source’s breach of contract counterclaim. (Pl. MTD (Dkt. # 37); Pl. Reply (Dkt. # 47); see also Answer (Dkt. # 27).) Hosting Source opposes Block Mining’s motion. (Def. Resp. (Dkt. # 46).) The court has reviewed the motions, the parties’ submissions in support of and in opposition to the motions, the relevant

portions of the record, and the governing law. Being fully advised,1 the court GRANTS in part and DENIES in part Hosting Source’s motion and GRANTS Block Mining’s motion. This dispute arises between two entities engaged in the business of mining Bitcoin, a cryptocurrency. The court provides background information on Bitcoin and

cryptocurrencies in general before setting forth the relevant factual background, as pleaded by the parties, and the procedural history of this case. A. Bitcoin Background Bitcoin (“BTC”) is a popular cryptocurrency. (Compl. (Dkt. 1) ¶ 12.) Block Mining describes cryptocurrencies as “digital assets” that, like any other currency, “hold

value and can be used to buy goods and services.” (Id.) All cryptocurrencies exist on a “blockchain,” which “is an open-sourced string of code” comprising “the underlying technology that facilitates the creation of and subsequent transaction in a particular cryptocurrency.” (Id. ¶ 13.) When consumers transact in cryptocurrency, those transactions are validated on the blockchain in batches, known as “blocks.” (Id. ¶ 14.)

The blockchain is publicly available and reflects all of the “blocks” of validated

1 Hosting Source requests oral argument and Block Mining does not. (See Def. MTD at 1; Pl. MTD at 1.) The court concludes that oral argument would not aid in its disposition of the motions. See Local Rules W.D. Wash. LCR 7(b)(4). transactions that occurred at a particular point in time, ordered by date in a “chain”— hence, “blockchain.” (Id. ¶ 15.) BTC is a “decentralized, open-source, and peer-to-peer

cryptocurrency.” (Id. ¶ 16.) In other words, there is no single central authority that regulates BTC; instead, the public controls the supply of and validates transactions in BTC. (Id.) This process of validating transactions in BTC and thereby creating new BTC is known as “mining.” (Id. ¶ 17.) BTC miners use high-powered computers, commonly known as “rigs,” to solve complex cryptographic puzzles on the BTC network. (Id. ¶ 17.) By solving the puzzle, the miner validates a BTC transaction,

creates a new block in the blockchain, and unlocks newly minted BTC. (Id. ¶¶ 17-18.) Newly minted BTC is awarded to successful miners in order to generally incentivize participation in the validation of BTC transactions. (Id. ¶ 18.) At the time Block Mining initiated this lawsuit, the reward for mining one block was 6.25 BTC.2 (Id.) Because BTC was “designed with scarcity as a central feature,” there is only a

limited amount of BTC on the cryptocurrency market and available to be mined. (Id. ¶ 19.) All together, there exists a maximum supply of 21 million BTC. (Id.) Approximately 19 million BTC has already been mined, leaving just 2 million remaining to be mined. (Id.) To ensure scarcity and prevent inflation, the BTC network also executes “a periodic Bitcoin-halving event” every time that 210,000 BTC blocks have

been mined, or approximately once every four years. (Id.) The Bitcoin Halving reduces

2 As of this writing, Bloomberg values 1 BTC at $66,661.63 USD. BXBT-USD Cross Rate, Bloomberg, https://www.bloomberg.com/quote/XBTUSD:CUR (last visited June 13, 2024). the reward for mining BTC by half. (Id.) The most recent halving event occurred on April 19, 20243 and reduced the reward for mining one block to 3.125 BTC, making it

comparatively more expensive to mine a single BTC. (See id.) As Block Mining explains, “crypto mining is an extremely competitive and difficult industry in which to operate.” (Id. ¶ 20.) One challenge is that BTC mining requires significant computer power, which is measured “in terms of a ‘hash rate.’” (Id. ¶ 24; see also id. ¶¶ 17, 21-23.) The “hash rate” is “oftentimes expressed in terms of PetaHash per second (‘PH/s’).” (Id. ¶ 24.) Rigs can operate at varying power levels; the

higher the hash rate, “the more BTC the Rigs are able to mine over time.” (Id. ¶ 47.) The rise of BTC and the challenges that come with mining it have spawned an entire pseudo-industry of mining-related services known as “colocation services.” (See id. ¶¶ 20-23.) These services typically involve “hous[ing] large numbers of rigs dedicated to mining cryptocurrencies every hour of every day, . . . monitoring electricity costs,

providing the facility with the appropriate temperature for rigs to operate, and ensuring that rigs maintain internet connectivity to participate in cyptocurrency mining.” (Id. ¶¶ 21-22.) The instant dispute stems from a contract between Block Mining and Hosting Source for the provision of these colocation services. (Id. ¶¶ 1-2.) //

//

3 Patrick McGimpsey, Bitcoin Halving 2024: Not with a Bang, but a Whimper, Forbes Advisor (Apr. 20, 2024), https://www.forbes.com/advisor/investing/cryptocurrency/bitcoin- halving-2024/. B. The Contract and the Fallout In July 2021, Block Mining and Hosting Source entered into a Colocation Mining

Services Agreement (the “Agreement”) with respect to 1,610 rigs (the “Rigs”) that Block Mining had purchased from a third party for approximately $6,400,000. (Id. ¶¶ 1-2, 25-26; see also Marchiori Decl. (Dkt. # 5) ¶ 20 & Ex. A (Dkt. # 5-1) (“Agreement”).) Hosting Source agreed to house and operate the Rigs at its mining facility located in East Wenatchee, Washington (the “Facility”).4 (Compl. ¶ 26.) Under the Agreement, Hosting Source was to install the Rigs and power them at a hash rate of 141.704 PH/s, allowing

the Rigs to efficiently perform cryptographic functions and mine BTC. (Id. ¶¶ 26-28; see also Agreement, Ex. A §§ 1.8, 4, Exs. B-C.) The Agreement also provided Block Mining with certain physical and remote VPN access rights so it could monitor and inspect its Rigs. (Compl. ¶¶ 30-32; see also Agreement, Ex. A §§ 2.5, 2.7.) In exchange for colocation services, Hosting Source earned a portion of the BTC rewards generated by

Block Mining’s Rigs at the Facility. (Compl. ¶¶ 34-35; see also Agreement, Ex. A § 6.) In early 2023, Hosting Source received notice from third party lender NYDIG ABL, LLC (“NYDIG”) that Block Mining had defaulted on its loan obligation with respect to the Rigs. (Compl. ¶ 39.) Thereafter, Hosting Source began reducing the power ouput to Block Mining’s Rigs. (Id. ¶¶ 43-44.) Block Mining cured the delinquency by

February 28, 2023. (Id. ¶ 41.) Nevertheless, Hosting Source continued to operate the

4 Block Mining ultimately delivered 1,508 Rigs to the Facility for colocation services. (Marchiori Decl. ¶ 20.) Although this fact is not alleged in the complaint, the court includes it here for clarity purposes. (See generally Compl.) Rigs on “low power mode” despite Block Mining’s requests to restore them to full power as set forth in the Agreement. (Id. ¶¶ 51-55.) This was concerning to Block Mining,

because by placing a miner in low power mode, the miner does not hash at its highest rate, thereby decreasing the amount of BTC that is mined on any given day. (See id. ¶¶ 46-51.) According to Block Mining, the loan arrangement had no bearing on the Agreement and Hosting Source therefore had no right to reduce the power output. (See id. ¶ 45.) Yet Hosting Source kept Block Mining’s Rigs running at low power, continuing to cite the unrelated loan as cause to do so. (See id. ¶¶ 42, 52-55.) Block

Mining asserts that, during this time, Hosting Source was “redirecting power to its own or other customers[’] miners that [were] more profitable to Hosting Source.” (Id. ¶ 44.) In November 2023, Hosting Source elected to terminate the Agreement with respect to 402 Rigs and the parties arranged for their removal, which was completed by January 2024. (Id. ¶¶ 56-60.) Block Mining consented to the removal on the

understanding that Hosting Source would restore full power to the remaining 1,106 Rigs. (Id. ¶ 60.) Block Mining alleges Hosting Source never restored the remaining Rigs to full power and instead terminated the Agreement entirely. (Id. ¶¶ 60-62.) Hosting Source proposed a schedule to remove the remaining Rigs in batches over the course of several months through July 2024, citing a provision of the Agreement that

states: “In the event of any termination by [Hosting Source], [Block Mining] shall be obligated to remove no more than 400 pieces of Equipment per month.” (Agreement, Ex. A § 11.1; Compl. ¶¶ 63, 66.) Block Mining initially agreed to this proposal based on Hosting Source’s representations that it would restore the remaining Rigs to full power until all of the Rigs could be removed from the Facility. (Compl. ¶¶ 65-67.) But soon thereafter, Hosting Source demanded that Block Mining pay it $278,242.41 in claimed

fees, “completely and unilaterally” shut down Block Mining’s Rigs, and removed Block Mining’s VPN access, preventing Block Mining from monitoring its Rigs. (Id. ¶¶ 69-71.) Block Mining refused to pay, denying that it owed any fees to Hosting Source. (See id. ¶¶ 71-72.) Hosting Source maintains that “Block Mining failed to timely pay all monies due and owing to Hosting Source.” (Answer ¶ 1.10.) On March 2, 2024, Block Mining informed Hosting Source that it intended to

retake possession of all of the Rigs beginning on March 5, 2024, citing a provision of the Agreement that states: “Upon Termination of this Agreement for any reason, [Hosting Source] shall permit [Block Mining] to retake possession of the Mining Equipment within 72 hours notice.” (Agreement, Ex. A § 2.4; Compl. ¶¶ 73-74.) Block Mining representatives traveled from Chicago, Illinois to East Wenatchee, Washington on March

5 to collect the Rigs, but arrived to a deserted Facility “with no signs of personnel.” (Compl. ¶¶ 75-76.) Block Mining was unable to recover its Rigs. (See id. ¶¶ 1, 77.) C. Procedural History Block Mining filed this lawsuit on March 8, 2024, raising claims for breach of contract, conversion, trespass to chattels, and a permanent injunction. (Id. ¶¶ 78-100.)

Block Mining alleges that “Hosting Source has either turned the Rigs off altogether or, despite its representations, may be using the Rigs without permission or approval from Block Mining to mine BTC for itself, effectively stealing Block Mining’s property.” (Id. ¶ 4.) Concurrently with its complaint, Block Mining filed an emergency motion for a temporary restraining order (“TRO”) and preliminary injunction, arguing that Hosting Source was holding its Rigs “hostage” at a critical time in the Bitcoin mining industry—

just one month before the Bitcoin Halving. (TRO Mot. (Dkt. # 2) at 1.) The court denied the motion, concluding Block Mining failed to show a likelihood of irreparable harm because the alleged harm was purely economic and could thus be remedied by monetary damages. (3/18/24 Order (Dkt. # 20) at 13.) On March 29, 2024, Hosting Source took the somewhat unusual step of filing both a motion to dismiss and an answer to the complaint. (See generally Def. MTD; Answer.)

In its motion, Hosting Source argues Block Mining fails to state a claim for conversion, trespass to chattels, and a permanent injunction. (See generally Def. MTD.) In its answer, Hosting Source asserts a breach of contract counterclaim based on Block Mining’s alleged failure to pay all amounts due under the Agreement. (Answer ¶¶ 1.1-1.17.) On April 19, 2024, Block Mining moved to dismiss the counterclaim based

on lack of subject matter jurisdiction and the failure to state a claim. (See generally Pl. MTD.) The motions are now ripe for decision. III. ANALYSIS5 Below, the court sets forth the relevant legal standards before turning to the parties’ motions.

5 As an initial matter, Hosting Source asks the court to consider several documents not attached to the complaint in ruling on its motion to dismiss. (Def. MTD at 4-6.) “As a general rule, ‘a district court may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion” without converting the motion into one for summary judgment. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (quoting Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994)). Nevertheless, in ruling on a motion to dismiss, a court may properly consider A. Legal Standards Subject matter jurisdiction is a threshold issue that goes to the court’s power to

hear a case. Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94-95 (1998). Federal Rule of Civil Procedure 12(b)(1) allows a party to seek dismissal of a claim for lack of subject matter jurisdiction. Fed. R. Civ. P. 12(b)(1). When subject matter jurisdiction is challenged, the party asserting that jurisdiction exists bears the burden of proof. Vacek v. U.S.P.S., 447 F.3d 1248, 1250 (9th Cir. 2006). In addition, Federal Rule of Civil Procedure 12(b)(6) provides for dismissal when

a complaint “fail[s] to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6); see also Fed. R. Civ. P. 8(a)(2) (requiring the plaintiff to provide “a short and plain statement of the claiming showing that the pleader is entitled to relief”). Under this standard, dismissal is proper when there is either a “lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v.

Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988). The court must construe the allegations in the light most favorable to the nonmoving party, Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 946 (9th Cir. 2005), but need not accept as material “not physically attached to the complaint” if the documents’ authenticity is not contested and the plaintiff’s complaint necessarily relies on them. Id. (reviewing the district court’s decision to consider extrinsic material for abuse of discretion). The court agrees with Hosting Source that the court may properly consider the Agreement in ruling on the instant motions, as the complaint necessarily relies upon the Agreement and neither party contests its authenticity. (See generally Compl.; see also Def. MTD at 4-6; Pl. Resp. at 2 n.1 (“While Block Mining has no objection to Hosting Source citing documents that Block Mining has already placed in the record . . . Hosting Source’s submittion of additional documents outside the pleadings is improper.”); Agreement (filed by Block Mining).) But the court, in its discretion, declines to consider the remaining documents at this juncture and will instead limit its review to the pleadings and the Agreement. true legal conclusions, “formulaic recitation[s] of the legal elements of a cause of action,” Chavez v. United States, 683 F.3d 1102, 1008 (9th Cir. 2012), or “allegations that are

merely conclusory, unwarranted deductions of fact, or unreasonable inferences,” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). Although the pleading standard announced by Federal Rule of Civil Procedure 8 does not require “detailed factual allegations,” it demands more than “an unadorned, the-defendant-unlawfully harmed-me accusation.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555); see also Fed. R. Civ. P. 8(a). “[A]ll the Rules require is a short and plain statement of the

claim’ that will give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests.’” Yamaguchi v. U.S. Dep’t of the Air Force, 109 F.3d 1475, 1481 (9th Cir. 1997) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). B. Hosting Source’s Motion to Dismiss Hosting Source moves to dismiss Block Mining’s claims for conversion, trespass

to chattels, and a permanent injunction pursuant to Rule 12(b)(6). The court concludes that Block Mining’s tort claims meet minimum pleading standards, but that its claim for a permanent injunction must be dismissed with prejudice. 1. Conversion “Conversion is the unjustified, willful interference with a chattel which deprives a

person entitled to the property of possession.” In re Marriage of Langham & Kolde, 106 P.3d 212, 218 (Wash. 2005) (quoting Meyers Way Dev. Ltd. P’ship v. Univ. Sav. Bank, 910 P.2d 1308, 1320 (Wash. Ct. App. 1996)); see also id. (“A chattel is ‘[a]n article of personal property, as distinguished from real property. A thing personal and moveable.’” (quoting Chattel, Black’s Law Dictionary (6th ed. 1990))). “Conversion involves three elements: (1) willful interference with chattel belonging to the plaintiff, (2) by either

taking or unlawful retention, and (3) thereby depriving the owner of possession.”6 Burton v. City of Spokane, 482 P.3d 968, 970 (Wash. Ct. App. 2021). Relevant here, “[o]ne in possession of a chattel as bailee or otherwise, who on demand, refuses to surrender its possession to another entitled to the immediate possession thereof, is liable for its conversion.” Judkins v. Sadler-Mac Neil, 376 P.2d 837, 839 (Wash. 1962) (quoting Restatement (First) of Torts § 237 (Am. L. Inst. 1934)).

Block Mining’s conversion claim is straightforward: Block Mining alleges Hosting Source, as bailee, converted the Rigs—Block Mining’s exclusive personal property—by refusing to surrender them upon Block Mining’s demand for their 6 In its reply brief, Hosting Source confidently but incorrectly asserts that “[i]t has been long held in the State of Washington that intent to deprive the owner of its chattel is integral to recovering on a claim of conversion.” (Def. Reply at 7 (emphasis in original) (citing Spokane Grain Co. v. Great N. Express Co., 104 P. 794, 796 (Wash. 1909)).) In fact, the opposite is true: it is well-established in Washington that “[w]rongful intent is not an element of conversion, and good faith is not a defense.” Brown ex rel. Richards v. Brown, 239 P.3d 602, 610 (Wash. Ct. App. 2010); see also Clapp v. Johnson, 57 P.2d 1235, 1236 (Wash. 1936) (holding defendant “was nevertheless guilty of conversion” despite “act[ing] in good faith and without a willful intent to convert”). Hosting Source’s cited authority, Spokane Grain Co., cannot reasonably be read to support the proposition that intent is an essential element of conversion in Washington. Spokane Grain Co. merely instructs that, “[w]here there is no unlawful taking or exercise of dominion over a chattel,” a conversion action cannot lie. 104 P. at 796 (rejecting conversion claim for the value of two horses injured in defendant’s care during cross-country transport, concluding “there [was] no unlawful taking or exercise of dominion over” the horses and plaintiff’s claims sounded more appropriately in negligence or breach of contract). Defense counsel is reminded of the ethical duty of candor toward the tribunal under RPC 3.3. See Washington Rules of Professional Conduct RPC 3.3, Comment 2 (“[T]he lawyer must not allow the tribunal to be misled by false statements of law or fact evidence that the lawyer knows to be false.”); see also Local Rules W.D. Wash LCR 83.3(a)(2) (requiring “attorneys appearing in this district [to] be familiar with and comply with . . . [t]he Washington Rules of Professional Conduct”). Gross misstatements of the law will not be tolerated, and may result in sanctions in the future. immediate repossession pursuant to the terms of the Agreement. (See Compl. ¶¶ 73-77, 85-91; Pl. Resp. at 6-7; see also Agreement, Ex. A §§ 11.2 (providing that upon

“termination of this Agreement . . . [Block Mining] shall be entitled to the immediate possession of all Mining Equipment”), 11.3 (stating that the Rigs “shall remain the exclusive property of [Block Mining]” and requiring Hosting Source, upon termination of the Agreement for any reason, to “provide [Block Mining] with immediate and unconditional access to” the Facility “to allow [Block Mining] to modify, protect, or remove the [Rigs]”).) These allegations, when taken as true, state a plausible conversion

claim under Judkins, 376 P.2d at 839. Hosting Source argues that Block Mining’s conversion claim must be dismissed for three principal reasons. The court is not persuaded. First, Hosting Source argues Block Mining’s conversion claim fails because “[t]here has been no conversion of any monetary arrangements.” (Def. MTD at 7-8

(citing Davenport v. Wash. Educ. Ass’n, 197 P.3d 686, 698 (Wash. Ct. App. 2008) (stating that the law “treats money as a chattel only if the defendant wrongfully received the money or was under obligation to return the specific money to the party claiming it” (internal quotation marks omitted)).) This argument misapprehends the alleged conversion. Nowhere in the complaint does Block Mining claim that Hosting Source

converted money. (See generally Compl.) Rather, at issue is Hosting Source’s alleged conversion of Block Mining’s Rigs, which are personal property items not subject to special rules governing the conversion of monies. (Id. ¶¶ 85-91.) // Second, Hosting Source asserts that Block Mining “cannot satisfy the [conversion] elements when it willingly agreed to, and required, Hosting Source to physically take

custody and care of the computers” by entering into the Agreement. (Def. MTD at 7.) But Block Mining’s initial consent to Hosting Source’s custody of the Rigs does not bar a conversion claim because a bailee may be liable for conversion under the circumstances alleged here, where the bailee, “on demand, refuses to surrender its possession to another entitled to the immediate possession thereof.” Judkins, 376 P.2d at 839. Third, Hosting Source argues Block Mining fails to state a conversion claim

because it was not contractually entitled to immediately repossess the Rigs. According to Hosting Source, its termination of the Agreement triggered Block Mining’s “obligat[ion] to remove no more than 400 pieces of Equipment per month” under Section 11.1 of the Agreement. (Agreement, Ex. A § 11.1; see also Def. MTD at 7.) Pursuant to Section 11.1, Hosting Source proposed “a removal schedule extending through July 2024” after it

terminated the Agreement, allegedly promising that “it would increase the power output to the Rigs” until “the terms for each miner expired” and they were removed from the Facility. (Compl. ¶¶ 66-67.) Although it disputed Hosting Source’s interpretation of Section 11.1, Block Mining “decided to accept” this arrangement. (Id. ¶ 67.) Hosting Source now argues that, because Block Mining “consented to the termination agreement”

and the removal dates have not yet passed, Block Mining’s conversion claim “lacks merit” and “is not ripe.” (Def. MTD at 7.) Block Mining counters that Section 11.1 merely “sets a cap for how many Rigs Hostin[g] Source can force Block Mining to remove,” and “[n]othing [p]recludes Block Mining from removing as many Rigs as it wants” pursuant to Sections 11.2 and 11.3 of the Agreement (Pl. Resp. at 6-7), which contemplate Block Mining’s “immediate possession” and “access” to the Rigs upon

termination of the Agreement for any reason (Agreement, Ex. A §§ 11.2, 11.3). Block Mining further argues that, even if the parties modified the Agreement by assenting to a subsequent “termination agreement,” Block Mining is not bound by the removal schedule because Hosting Source breached that subsequent agreement by failing to restore the Rigs to full power pending their removal. (Pl. Resp. at 7-9.) The parties offer competing interpretations of the Agreement—specifically,

Sections 11.1 through 11.3, and their effect on Block Mining’s possessory rights in its Rigs. The court must therefore apply Washington contract law to evaluate the sufficiency of Block Mining’s conversion claim. “The purpose of contract interpretation is to ascertain the intent of the parties.” Kelley v. Tonda, 393 P.3d 824, 829 (Wash. Ct. App. 2017). Washington follows “the ‘objective manifestation theory’ of contracts, wherein

the parties’ intent is determined by focusing on the objective manifestations of the agreement, rather than on the unexpressed subjective intent of the parties.” Radliff v. Schmidt, 532 P.3d 622, 625 (Wash. Ct. App. 2023). “Clear and unambiguous contracts are enforced as written.” Grey v. Leach, 244 P.3d 970, 975 (Wash. Ct. App. 2010). “Language in a contract is ambiguous if it is susceptible to two different but reasonable

interpretations or where separate contractual provisions irreconcilably conflict.” Radliff, 532 P.3d at 625; see also id. (“When contract provisions conflict,” the court must “harmonize them to the extent possible.”). “[A]mbiguity will not be read into a contract where it can reasonably be avoided by reading the contract as a whole.” McGary v. Westlake Invs., 661 P.2d 971, 974 (Wash. 1983). “Interpretations giving lawful effect to all the provisions in a contract are favored over those that render some of the language

meaningless or ineffective.” Grey, 244 P.3d at 976. Contractual “ambiguity presents a question of fact that can[] [neither] be determined as a legal matter” nor “resolved at the motion to dismiss stage.” Smokey Point Com., LLC v. Dick’s Sporting Goods, Inc., No. C17-1015JLR, 2017 WL 4882664, at *4 (W.D. Wash. Oct. 30, 2017) (citing GMAC v. Everett Chevrolet, Inc., 317 P.3d 1074, 1078 (Wash. Ct. App. 2014)). Thus, to prevail, Hosting Source must show that its interpretation of the Agreement is the only reasonable

interpretation of the Agreement. See id. Hosting Source does not even attempt to make this showing and would rather ignore Sections 11.2 and 11.3 altogether. (See generally Def. MTD (failing to discuss, cite, or otherwise acknowledge these provisions at all); Def. Reply (same).) The court concludes not only that Hosting Source fails to make the requisite showing, but that

Block Mining offers the only reasonable interpretation of the Agreement. Hosting Source’s reading of Section 11.1 has initial appeal but falls apart when the contract is read as a whole. If the court were to read Section 11.1 in isolation as Hosting Source does, the Agreement would entitle Block Mining to immediate possession of only some of its Rigs upon Hosting Source’s termination of the Agreement. But Sections 11.2 and

11.3 expressly contemplate Block Mining’s right to “immediate possession of all” of its Rigs upon termination of the Agreement “for any reason.” (Agreement, Ex. A §§ 11.2-.3 (emphasis added).) Hosting Source’s interpretation of the Agreement would therefore render Sections 11.2 and 11.3 meaningless. Conversely, if Section 11.1 is properly read as limiting the number of Rigs Hosting Source can force Block Mining to remove upon Hosting Source’s election to terminate the Agreement, Block Mining could still exercise

its rights under Sections 11.2 and 11.3 to immediately repossess as many Rigs as it wants. This understanding gives force to the immediate possessory rights that Sections 11.2 and 11.3 plainly confer to Block Mining. Grey, 244 P.3d at 976. For these reasons, Hosting Source’s interpretation of the Agreement is unreasonable and fails as a matter of law. The Agreement unambiguously entitles Block Mining to immediate possession of all of its Rigs under the circumstances alleged in the complaint.

To the extent Hosting Source argues Block Mining is bound by a subsequent removal agreement (see Def. MTD at 7), Block Mining plausibly alleges that any such agreement required Hosting Source to restore the remaining Rigs to full power (Compl. ¶¶ 65-68). (See Pl. Resp. at 7-8.) Because Hosting Source allegedly failed to do so (id. ¶ 68), Block Mining plausibly alleges that it was discharged from its duties under any

subsequent removal agreement based on Hosting Source’s material breach of that agreement. See Skyline Contractors, Inc. v. Spokane Hous. Auth., 289 P.3d 690, 695 (Wash. Ct. App. 2012) (“One party’s material breach . . . will discharge the duty of the other party.”); see also Moore v. Blue Frog Mobile, Inc., 221 P.3d 913, 917 n.2 (Wash. Ct. App. 2009) (“A material breach is one serious enough to justify the other party’s

abandoning the contract because the contract’s purpose is defeated.”). In sum, the court concludes that Block Mining states a plausible conversion claim under Washington law. The court therefore DENIES Hosting Source’s motion to dismiss this claim. 2. Trespass to Chattels “Trespass to chattels is something less than a conversion.” Sexton v. Brown, No.

61363-4-I, 2008 WL 4616705, at *5 (Wash. Ct. App. 2008) (unpublished). “It is the intentional interference with a party’s personal property without justification that deprives the owner of possession or use.” Id. (citing Restatement (Second) of Torts § 217 (Am. L. Inst. 1965)). “While a plaintiff must show that the interference was intentional, no intent to deprive the owner must be shown.” Id. “In order to sustain an action for trespass to chattel, however, there must be ‘some actual damage to the

chattel.’” G&G Closed Circuit Events, LLC v. Single, LLC, No. C18-1295JLR, 2020 WL 5815050, at *4 (W.D. Wash. Sept. 30, 2020) (quoting W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser & Keeton on Law of Torts 87 (5th ed. 1984)); see also Restatement (Second) of Torts § 218, cmt. e (1965) (“[O]ne who intentionally intermeddles with another’s chattel is subject to liability only if his intermeddling is harmful to the

possessor’s materially valuable interest in the physical condition, quality, or value of the chattel . . . .”). “Generally, there are three types of cognizable harms for a trespass to chattels claim: ‘(1) actual dispossession, which implies that the plaintiff’s access to the chattel is barred or substantially limited for something more than a few moments; (2) physical harm to the chattel; or (3) physical harm to the plaintiff or to someone or

something in which the plaintiff had a legal interest.’” G&G Closed Circuit Events, 2020 WL 5815050, at *4 (quoting D. Dobbs, P. Hayden, & E. Bublick, The Law of Torts § 60 (2d ed. 2015)). // As discussed above, the Agreement contractually entitled Block Mining to immediate possession of its Rigs upon termination of the Agreement for any reason. In

light of this conclusion, Block Mining plausibly alleges that Hosting Source committed trespass to chattels by terminating the Agreement and thereafter intentionally barring Block Mining from physically accessing its Rigs for an extended period of time, despite Block Mining’s desire to retake physical possession of the Rigs. (See Compl. ¶¶ 62-63, 73-77, 92-97.) None of Hosting Source’s arguments persuade the court otherwise, particularly because they appear to be rooted in large part in an objectively unreasonable

reading of the Agreement, which the court has now rejected as a matter of law. (See Def. MTD at 8-10; Def. Reply at 4-7.) To the extent Hosting Source argues Block Mining cannot plead harm based on Hosting Source’s physical possession of the computers (Def. MTD at 10), that argument falls flat under G&G Closed Circuit Events. 2020 WL 5815050, at *4 (recognizing that cognizable harm in the context of trespass to chattels

can include “actual dispossession,” meaning “the plaintiff’s access to the chattel is barred or substantially limited for something more than a few moments”). Moreover, Hosting Source appears to deliberately ignore the nature of the claimed damages, stating “Block Mining would need to argue that their damages were a direct result of denied access.” (Def. MTD at 10 (suggesting this “stance . . . is indefensible in this scenario given that

the alleged financial losses incurred are logically tied to the volatile nature of the cryptocurrency market”).) But Block Mining does make this allegation (among others): it claims that Hosting Source blocked its access to the Rigs and unilaterally shut them down without authorization, causing Block Mining to suffer damages unrelated to market volatility because it is unable to use its own to property to mine new BTC at maximum power and efficiency. (See Compl. ¶¶ 1, 4-5, 69-70, 73-77, 92-97.)

The court concludes that Block Mining states a plausible trespass to chattels claim under Washington law. Therefore, Hosting Source’s motion to dismiss Block Mining’s trespass to chattels claim is DENIED. 3. Permanent Injunction Finally, Hosting Source moves to dismiss Block Mining’s claim for a permanent injunction. (Def. MTD at 11.) As many courts recognize, “an injunction is not a cause of

action, but rather a remedy.” Krusee v. Bank of Am., N.A., No. C13-0824RSM, 2013 WL 3973966, at *5 (W.D. Wash. July 30, 2013); see also Marzan v. Bank of Am., 779 F. Supp. 2d 1140, 1146 (D. Haw. 2011) (collecting cases). Thus, to the extent Block Mining attempts to assert an independent cause of action for a permanent injunction, this claim is DISMISSED with prejudice.

C. Block Mining’s Motion to Dismiss Block Mining moves to dismiss Hosting Source’s breach of contract counterclaim based on the absence of subject matter jurisdiction and failure to state a claim. The court concludes that it has supplemental jurisdiction over Hosting Source’s counterclaim, but that Hosting Source fails to state a breach of contract claim under Washington law.

1. Subject Matter Jurisdiction “It is a fundamental precept that federal courts are courts of limited jurisdiction.” Owen Equip. & Erection Co. v. Kroger, 437 U.S. 365, 374 (1978); see also Fed. R. Civ. P. 12(b)(1) (authorizing dismissal for lack of subject matter jurisdiction). Federal courts have original jurisdiction over all civil actions “arising under the Constitution, laws, or treatises of the United States” and in all civil actions where complete diversity of

citizenship exists and the amount in controversy exceeds $75,000. 28 U.S.C. §§ 1331, 1332. In addition, a district court that has original jurisdiction over a civil action “shall have supplemental jurisdiction,” subject to certain exceptions, “over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution.” 28 U.S.C. § 1367(a). Claims form part of the same case or controversy when they share a

common nucleus of operative fact and would ordinarily be tried together. See Bahrampour v. Lampert, 356 F.3d 969, 978 (9th Cir. 2004). “In exercising its discretion to decline supplemental jurisdiction, a district court must undertake a case-specific analysis to determine whether declining supplemental jurisdiction ‘comports with the underlying objective of most sensibly accommodat[ing] the values of economy,

convenience, fairness and comity.’” Id. (quoting Exec. Software N. Am., Inc. v. U.S. Dist. Ct., 24 F.3d 1545, 1557-58 (9th Cir. 1994)); see also 28 U.S.C. § 1367(c) (setting forth circumstances in which court may appropriately decline to exercise supplemental jurisdiction). Here, the court has original jurisdiction over Block Mining’s claims on the basis of

diversity, but diversity jurisdiction is lacking with respect to Hosting Source’s state law breach of contract counterclaim because Hosting Source fails to plead the amount in controversy. (See generally Answer); see also, e.g., Sparrow v. Mazda Am. Credit, 385 F. Supp. 2d 1063, 1065-66 (E.D. Cal. 2005) (“Diversity jurisdiction cannot provide an independent jurisdictional basis for Defendant’s counterclaims because the amount Defendant is claiming is not over $75,000, as 28 U.S.C. § 1332 requires.”).7 Thus, 28

U.S.C. § 1367 provides the only possible basis for subject matter jurisdiction over Hosting Source’s counterclaim.8 (See Def. Resp. at 8-9 (asserting supplemental jurisdiction).) The court has little trouble concluding that Hosting Source’s breach of contract counterclaim shares a common nucleus of operative facts with Block Mining’s claims, such that they form the same case or controversy sufficient to establish supplemental jurisdiction. All claims arise out of the same contractual relationship and

the same series of events that caused the relationship to fall apart. Further, none of the exceptions to supplemental jurisdiction under 28 U.S.C. § 1367(c) apply to this case, and declining supplemental jurisdiction would not promote economy, convenience, fairness, or comity under the circumstances. Accordingly, the court will exercise supplemental jurisdiction over Hosting Source’s breach of contract counterclaim pursuant to 28 U.S.C.

§ 1367. //

7 “The essential elements of diversity jurisdiction . . . must be affirmatively alleged in the pleadings.” Rainero v. Archon Corp., 844 F.3d 832, 840 (9th Cir. 2016) (cleaned up). The court therefore declines Hosting Source’s invitation to look outside the pleadings for information respecting the amount in controversy. (See Def. Resp. at 8.) 8 The parties dispute whether Hosting Source’s counterclaim is compulsory or permissive. (See Def. Resp. at 6-8; Pl. Reply at 2.) This issue is a red herring because 28 U.S.C. § 1367 governs the question of subject matter jurisdiction over Hosting Source’s counterclaim: “Prior to the passage of § 1367, courts relied on the distinction between compulsory and permissive counterclaims to determine whether jurisdiction over a counterclaim was proper absent an independent basis for subject matter jurisdiction,” but “§ 1367 now governs the limits on supplemental jurisdiction.” Ader v. SimonMed Imaging Inc., 324 F. Supp. 3d 1045, 1051 (D. Ariz. 2018). 2. Facial Plausibility A party asserting a breach of contract claim must allege the existence of a valid

contract between the parties, breach, and resulting damage. See Lehrer v. Wash. Dep’t of Soc. & Health Servs., 5 P.3d 722, 727 (Wash. Ct. App. 2000); see also Nw. Indep. Forest Mfrs. v. Dep’t of Lab. & Indus., 899 P.2d 6, 9 (Wash. Ct. App. 1995) (“A breach of contract is actionable only if the contract imposes a duty, the duty is breached, and the breach proximately causes damage to the claimant.”). The parties here do not dispute the existence of a contract and associated contractual duties. (See Pl. MTD at 8; Def. Resp.

at 5.) Rather, Block Mining argues Hosting Source “falls woefully short” of minimum pleading standards because it fails to identify the specific contract provisions Block Mining allegedly breached, offering only “vague and conclusory allegations” that Block Mining generally owes Hosting Source “unspecified ‘expenses’” under the Agreement. (Pl. MTD at 8-9.) Block Mining further argues that Hosting Source fails to sufficiently

plead damages because “Hosting Source seems to allege that its damages are amounts it incurred to defend Block Mining’s lawsuit, rather than any damages resulting from” the alleged breach of contract. (Pl. Reply at 6-7.) The court agrees with Block Mining. The allegations relevant to Hosting Source’s counterclaim are as follows: • “Block Mining and Hosting Source entered into a profit-sharing colocation agreement that was fully executed on or about December 29, 2021, with an effective date of July 1, 2021 (the ‘Contract’).” (Answer ¶ 1.1.) • “Under the terms of the Contract, the ‘Customer is solely responsible for the Costs associated with Generated Digital Assets for each month.’” (Id. ¶ 1.3.) // • “Under the terms of the Contract, Block Mining and Hosting Source agreed to a profit-sharing split concerning mining of the digital assets, Bitcoin.” (Id. ¶ 1.4.) • “Under the terms of the contract, Block Mining acknowledged the inherent risks in mining Bitcoin, but still agreed to be ‘solely responsible for the Costs associated with Generated Digital Assets for each month.’” (Id. ¶ 1.7.) • “Block Mining incurred expenses in the colocation agreement, which were anticipated to be offset by Bitcoin mining profits. However, any negative shortfall of Bitcoin would be added to the Costs. There were months where the electricity costs incurred were not fully offset by Bitcoin, and thus there were monies due and owing to Hosting Source for providing energy to the computers.” (Id. ¶ 1.8.) • “Block Mining paid for monthly costs with a wire to Hosting Source in USD. Block Mining significantly reduced the amount of the monthly USD wire and were no longer attempting to pay the monthly costs.” (Id. ¶ 1.9.) • “Block Mining failed to timely pay all monies due and owing to Hosting Source.” (Id. ¶ 1.10.) • “Block Mining seeks to frustrate the terms of the contract to the financial detriment of Hosting Source.” (Id. ¶ 1.14.) • “Hosting Source’s damages are proximately and directly caused by Block Mining’s actions or failure to act.” (Id. ¶ 1.15.) • “Hosting Source continues to incur damages because of Block Mining’s conduct.” (Id. ¶ 1.16.) • “Hosting Source is entitled to recover against Block Mining for all damages caused by the wrongful filing of this breach of contract claim, plus reasonable attorney fees and costs in defending this lawsuit.” (Id. ¶ 1.17.) These allegations fall well short of pleading a breach of contract claim. First, Hosting Source does not identify the specific provision of the Agreement that Block Mining allegedly breached. Block Mining is correct that “[t]he Agreement contains multiple terms relating to payments.” (Pl. Reply at 5; see Agreement, Ex. A §§ 2.2, 5-6, 17.12) Yet, Hosting Source’s generalized allegations regarding outstanding payment obligations are untethered to any specific duty outlined in the Agreement.

Although Hosting Source makes passing reference to several provisions of the Agreement, it fails to explain which provisions were breached, and how. Without more, the court cannot evaluate the sufficiency of the counterclaim. Hosting Source baldly asserts, without citation to authority, that “[t]here is no requirement to specifically plead exact contract provisions in general failure to pay allegations stemming from a services contract.” (Def. Resp. at 12-13.) But in fact, federal courts regularly dismiss unadorned

breach of contract claims where the claimant fails to cite the contractual provision that was allegedly breached. See Corner Computing Sols. v. Google LLC, No. C23-0939TL, 2024 WL 841462, at *3 (W.D. Wash. Feb. 28, 2024); Lemelson v. Wells Fargo Bank, N.A., 641 F. Supp. 3d 1005, 1011-12 (W.D. Wash. 2022) (Robart, J.); Engage BDR v. GoDaddy, No. 2:21-cv-02014-JVC (ASx), 2021 WL 8820555, at *2-3 (C.D. Cal. Sept.

23, 2021); McClellon v. Citigrp. Glob. Mkts., Inc., No. C18-0978JCC, 2018 WL 5808440, at *5 (W.D. Wash. Nov. 6, 2018); Ill. Nat’l Ins. Co. v. Nordic PCL Constr., Inc., 870 F. Supp. 2d 1015, 1034-36 (D. Haw. 2012); Young v. Facebook, Inc., 790 F. Supp. 2d 1110, 1117 (N.D. Cal. 2011); Miron v. Herbalife Int’l, Inc., 11 F. App’x 927, 929 (9th Cir. 2001) (unpublished). Here, Hosting Source’s failure to specifically identify

the relevant contract provisions or sufficiently describe the allegedly breaching conduct // // // leaves Block Mining without fair notice of the factual basis of the counterclaim, warranting dismissal.9

Second, Hosting Source fails to adequately plead that Block Mining’s alleged breach proximately caused its damages. Although Hosting Source alleges its damages “are proximately and directly caused by Block Mining’s actions or failure to act” (Answer ¶ 1.15), the allegations suggest Hosting Source’s claimed damages stem from Block Mining’s initiation of this lawsuit—not from any alleged breach of contract. (See id. ¶ 1.17 (“Hosting Source is entitled to recover against Block Mining for all damages

caused by the wrongful filing of this breach of contract claim.”).) Hosting Source’s argument that “[g]eneral damages do not need to be pled with specificity” misses the point. (Def. Resp. at 13 (citing Prudence Co. v. Fid. & Deposit Co. of Md., 297 U.S. 198, 9 Block Mining raises an additional, related argument that its payment obligations under Section 5 of the Agreement were conditioned upon Hosting Source first providing “the estimated Costs for each month by the 5th day of each month.” (Agreement, Ex. A § 5; see also Pl. MTD at 9-10; Pl. Reply at 6.) According to Block Mining, Hosting Source fails to state a breach of contract claim for the independent reason that it offers no factual allegations showing that it provided those cost estimates so as to trigger Block Mining’s obligation to pay the estimated costs. The court disagrees. In Washington, “failure o[f] a condition precedent will discharge the duty of the other party.” Skyline Contractors, 289 P.3d at 695. “A condition precedent is contrasted with a promise, which ‘subjects the promisor to liability for damages, but does not necessarily discharge the other party’s duty of performance.’” BOFI Fed. Bank v. Advance Funding LLC, 105 F. Supp. 3d 1215, 1219-20 (W.D. Wash. 2015) (quoting Jones Assocs., Inc. v. Eastside Props., Inc., 704 P.2d 681, 684 (Wash. Ct. App. 1985)). Whether a contractual provision is a condition precedent or a mere promise depends on the intent of the parties. Jones Assocs., 704 P.2d at 684. “An intent to create a condition is often revealed by such phrases and words as ‘provided that,’ ‘on condition,’ ‘when,’ ‘so that,’ ‘while,’ ‘as soon as,’ and ‘after.’” Id. (quoting Vogt v. Hovander, 616 P.2d 660, 666 (Wash. Ct. App. 1979)); see also id. (“Where it is doubtful whether the words create a promise or an express condition, they are interpreted as creating a promise.”). Here, Section 5 contains no language indicating an intent to condition Block Mining’s duty to pay upon Hosting Source first providing the cost estimates. (See Agreement, Ex. A § 5.) Section 5 is properly read as creating mere promises. 207-08 (1936)). The problem is not that Hosting Source fails to specify an exact amount of claimed damages, but that it fails to allege Block Mining’s supposed breach

proximately caused its damages, which is an essential element of a breach of contract claim. Nw. Indep. Forest Mfrs., 899 P.2d at 9. Because Hosting Source fails to state a claim for breach of contract, the court GRANTS Block Mining’s motion to dismiss this counterclaim pursuant to Rule 12(b)(6). D. Leave to Amend A district court that dismisses a claim under Rule 12(b)(6) should generally grant

leave to amend, “unless it determines that the pleading could not possibly be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (quoting Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995)). Block Mining’s “claim” for a permanent injunction fails as a matter of law, and is therefore dismissed with prejudice, as explained above. But because Hosting Source could cure its breach of contract

counterclaim by alleging other facts, the court GRANTS Hosting Source leave to amend. // // // //

// // // // For the foregoing reasons, the court GRANTS in part and DENIES in part Hosting

Source’s motion to dismiss (Dkt. # 25), and GRANTS Block Mining’s motion to dismiss (Dkt. # 37), as set forth above. Hosting Source shall file its amended counterclaim by no later than June 28, 2024. Dated this 14th day of June, 2024. A JAMES L. ROBART United States District Judge