The US District Court for the Northern District of California ruled on December 20, 2022, that the Commodity Futures Trading Commission (CFTC) properly served the defendant, Ooki DAO, by posting summons documents in Ooki DAO’s online discussion forum and in its help chat box. Commodity Futures Trading Comm'n v. Ooki DAO, No. 3:22-cv-05416-WHO, 2022 BL 454541, 2022 U.S. Dist. Lexis 228820 (N.D. Cal. Dec. 20, 2022), Court Opinion (the Order).
The Order reaffirmed an earlier decision granting the CFTC’s motion for alternative service on a decentralized autonomous organization (DAO). A DAO is a structure without a centralized governing body with decision-making power distributed across all token holders.
In the most recent decision, Judge William Orrick addressed the arguments of several amici briefs filed by decentralized finance advocacy groups that challenged the CFTC’s service as improper and unconstitutional. The Order evaluates how new and evolving technologies may fit within existing legal frameworks and indicates a willingness by courts to accept alternative means of service that reflect society’s technological advances.
While novel in the DAO context, courts have been willing to permit unique service of process in other scenarios, including permitting service via airdropped non-fungible tokens. Please see our past analysis on these cases.
Background
The Ooki DAO action follows the CFTC’s action against bZeroX LLC and its founders. The CFTC brought an action against bZeroX for allegedly engaging in activities that only registered futures commission merchants are permitted to perform by operating a blockchain-based digital asset trading platform. After agreeing to a $250,000 civil penalty to settle the CFTC’s charges, the owners of bZeroX transferred control of the trading platform to Ooki DAO.
The CFTC alleged that the owners transferred control in an attempt to evade regulatory oversight in an action against Ooki DAO for violations of the Commodity Exchange Act (CEA). The court approved the CFTC’s motion to serve Ooki DAO “via the online mechanisms the Ooki DAO has created to allow itself to be contacted by the public.”
Order Affirming Alternative Service
Judge Orrick first addressed whether Ooki DAO is an entity capable of being sued or if it is merely a technology. Judge Orrick determined that “at least in this specific case [ . . . ] the history of the development and control of the Protocol” shows that suing Ooki DAO is not akin to suing the internet or any other technology.
Ooki DAO token holders control the administrative keys for changing and governing the trading platform software and, as a result, the court found that the token holders could be held liable for their use of those keys in the same way that bZeroX LLC could be held liable for its use of administrative keys. Judge Orrick further explained, “That the CFTC is choosing to sue the organization rather than the Token Holders individually is a litigation strategy the CFTC is permitted to make.”
Next, Judge Orrick addressed whether Ooki DAO could be sued and served as an unincorporated association, and concluded that it could be under Rule 4 of the Federal Rules of Civil Procedure through the application of state law governing service of process. Judge Orrick, however, reserved judgment on whether the CEA applies to Ooki DAO as an unincorporated association.
Finally, Judge Orrick considered perhaps the most important aspect of the Order: whether service to Ooki DAO, an unincorporated association under California law, via its online forum and help chat box provided the constitutionally required notice of the action. Judge Orrick determined that Section 413.30 of the California Code of Civil Procedure, which permits service that is reasonably calculated to give actual notice, applies to this case, rather than Section 18220 of the California Corporations Code, as the amici argued. Section 18220 of the California Corporations Code requires service on one or more members of an unincorporated association.
In ruling that the alternative service is constitutional, Judge Orrick noted that posting on the chat box and online forum was “reasonably calculated to apprise Ooki DAO of this litigation” because (1) the forum was dedicated to conversation about Ooki DAO’s business and was reasonably likely to apprise Ooki DAO of the ongoing litigation; (2) service notifying token holders reasonably notified the DAO itself; (3) notice through the forum to notify at least some token holders as opposed to all token holders is all that is required because the CFTC is suing the DAO and not each individual token holder; and (4) it is clear that Ooki DAO received actual notice. Judge Orrick went on to explain that by requiring the CFTC to serve individual token holders after the DAO received actual notice is “a belt-and-suspenders” approach.
Implications
Although the question of whether service by chat box or discussion forum would be permissible in other states or under other circumstances remains unclear even in light of the Order, DAOs should be aware of the possibility. Despite the Order’s narrowly tailored conclusions to the facts of this enforcement action and of this DAO, it indicates that exchanges and other market participants may not evade US financial regulation through decentralized technologies. We will monitor the proceedings closely as the court considers if and how a DAO can be held liable under the CEA.
Law clerk Erin Engelmann contributed to this LawFlash.