Shin v. ICON Foundation

District Court, N.D. California·Decided December 27, 2021·No. 3:20-cv-07363·Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 MARK SHIN, Case No. 20-cv-07363-WHO

8 Plaintiff, ORDER DENYING MOTION TO 9 v. DISMISS COUNTERCLAIM

10 ICON FOUNDATION, Re: Dkt. No. 77 Defendant. 11

12 13 Plaintiff Mark Shin moves to dismiss a class action counterclaim filed by defendant ICON 14 Foundation (“ICON”), arguing that ICON’s claims of money had and received, unjust enrichment, 15 and restitution, and declaratory relief, are insufficiently pleaded or barred as a matter of law. The 16 motion to dismiss is GRANTED in part and DENIED in part, with leave to amend. ICON has 17 failed to sufficiently plead ownership of the cryptocurrency tokens at issue, as required for its 18 money had and received claim. But the unique circumstances here support unjust enrichment as 19 an appropriate cause of action—as pleaded, Shin knowingly took advantage of a software defect to 20 arrogate to himself over 13 million ICX tokens, to the detriment of others in the ICON 21 Community. ICON’s claim for declaratory relief may also proceed, as it offers a remedy—the 22 destruction of the currency at issue—distinct from the surviving substantive claim. 23 BACKGROUND 24 This appears to be a case of first impression, involving the ownership of cryptocurrency. 25 The parties agree that Shin used a software glitch to create the cryptocurrency at issue. They 26 disagree, however, as to who lawfully possesses it and what legal standards should apply. 27 The ICON Network hosts a “delegated proof of stake” blockchain protocol, which allows 1 17. The ICON Network is decentralized—it is “not controlled or maintained by any single entity, 2 but exists simultaneously on computers all over the world.”1 Id. at ¶ 13. All ICX holders have a 3 say in the ICON Network’s operation and governance, in part by selecting delegates (called 4 “Public Representatives” or “P-Reps”) to “serve in a governance role and to validate Network 5 transactions.” Id. at ¶¶ 17-20. There are currently 143 P-Reps, however only the top 22 “Main P- 6 Reps” validate transactions and govern the ICON Network, including the proposal and approval of 7 any material software updates. Id. at ¶¶ 19-20. The ICON Network also has a publicly available 8 constitution that outlines its guiding and operating principles for “ICONists”—those who 9 participate in the ICON Network. Id. at ¶ 21. 10 In order to select delegates, ICX holders “stake” and “delegate” their tokens as votes. Id. 11 at ¶ 18. To encourage ICX holders to participate in this process, the ICON Network rewards users 12 who stake their tokens. Id. at ¶ 22. ICX holders “receive staking rewards based on the amount of 13 ICX they have staked for as long as it remains staked.” Id. The Network sends the reward scores 14 to the ICX holder’s “wallet,” which the holder can then redeem for ICX. Id. at ¶ 25. A user can 15 redeem a reward score of 1,000 for 1 ICX. Id. However, ICX holders do not earn rewards for 16 unstaking their tokens. Id. at ¶ 22. 17 On August 22, 2020, the Main P-Reps approved a software update (“Revision 9”) to the 18 ICON Network. Id. at ¶ 28. Despite pre-release testing, the update contained a software defect 19 that allowed users to generate and receive an “amount of tokens equal to the number of tokens that 20 the user was attempting to unstake.” Id. at ¶¶ 29-30. 21 The same day that the Revision 9 update was released, Shin attempted to unstake 25,000 of 22 his ICX tokens to redelegate them from one P-Rep to another. Id. at ¶ 31. Because of the glitch, 23 he immediately received 25,000 tokens instead. Id. Shin repeated the process and, “in a matter of 24 hours,” had received almost 14 million new ICX tokens. Id. at ¶¶ 33-34. At the time, each token 25

26 1 The party in this suit, the ICON Foundation, “was formed to develop and support the ICON Network.” Countercl. at ¶ 7. The ICON Foundation is the largest holder of ICX tokens, owning 27 about 10% of the total supply. Id. What ICON refers to as the “ICON Community” is broader, 1 was worth about 65 cents, meaning the total haul was worth nearly $9 million. Id. at ¶ 35. Its 2 value today is more than $21 million. Id. 3 Members of the ICON Community attempted to recover the ICX at issue from Shin, but he 4 refused to return it. See id. at ¶ 47. ICON contends that Shin funneled the ICX tokens to third- 5 party exchanges, relatives, and acquaintances “in an effort to put them beyond the reach of the 6 Network.” Id. at ¶¶ 41-42. 7 Shin filed suit on October 20, 2020, seeking declaratory judgment that he owned the ICX 8 tokens at issue and alleging claims of conversion, trespass to chattel, and prima facie tort against 9 the ICON Foundation. Dkt. No. 1. After two rounds of motions to dismiss, his case has narrowed 10 to claims of conversion and trespass to chattel. See Dkt. No. 68. 11 On August 23, 2021, ICON filed a class action counterclaim against Shin, bringing two 12 causes of action: money had and received, unjust enrichment, and restitution; and declaratory 13 relief. See Dkt. No. 69-1. Shin filed this motion to dismiss on September 20, 2021. 2 Dkt. No. 77. 14 I heard arguments from both parties on December 1, 2021. 15 LEGAL STANDARD 16 Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint 17 if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to 18 dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its 19 face.” See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible 20 when the plaintiff pleads facts that allow the court to “draw the reasonable inference that the 21 defendant is liable for the misconduct alleged.” See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) 22 (citation omitted). There must be “more than a sheer possibility that a defendant has acted 23

24 2 Shin alternatively argued that I should strike the class allegations in ICON’s counterclaim, along with references to an ongoing criminal case related to the events described here. See Mot. to 25 Dismiss (“MTD”) [Dkt. No. 77] 21-24. This motion is DENIED in part and GRANTED in part. Motions to strike are “generally disfavored because they are often used as delaying tactics and 26 because of the limited importance of pleadings in federal practice.” Rosales v. Citibank, 133 F. Supp. 2d 1177, 1180 (N.D. Cal. 2001). Shin’s arguments about whether the proposed class is 27 contrary to ICON’s theory of the case or whether the requisite commonality or typicality exist will 1 unlawfully.” Id. While courts do not require “heightened fact pleading of specifics,” a plaintiff 2 must allege facts sufficient to “raise a right to relief above the speculative level.” See Twombly, 3 550 U.S. at 555, 570. 4 In deciding whether the plaintiff has stated a claim upon which relief can be granted, the 5 court accepts his allegations as true and draws all reasonable inferences in his favor. See Usher v. 6 City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court is not required to 7 accept as true “allegations that are merely conclusory, unwarranted deductions of fact, or 8 unreasonable inferences.” See In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

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