Antitrust Law Daily Bitcoin conspiracy suit fails for lack of direct evidence, plus factors
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Friday, April 2, 2021

Bitcoin conspiracy suit fails for lack of direct evidence, plus factors

By Robert B. Barnett Jr., J.D.

A cryptocurrency mining company’s complaint was dismissed in its entirety because it failed to allege a plausible conspiracy among all defendants, any relevant market, or any harm to competition.

A cryptocurrency mining company’s suit alleging that a collection of Bitcoin Cash miners, developers, and exchange operators conspired in violation of the Sherman Act and the Clayton to manipulate a network upgrade and take control of the Bitcoin Cash blockchain was dismissed with prejudice because the complaint failed to plausibly suggest that the miners, developers, and exchange operators all agreed to, first, hijack the network and, second, centralize the market. In addition to the absence of any plausible conspiracy, the complaint also failed to establish any restraint of trade, in the absence of a relevant product market or any proof of harm to competition (United American Corp. v. Bitmain, Inc., March 31, 2021, McAliley, A.).

Background. United American Corporation (UAC) developed technologies for both the execution of blockchain transactions and mining cryptocurrencies. For example, it developed technology that allows blockchain transactions to be executed between any two telephone numbers, which eliminated the need for cryptocurrency wallets. UAC also invested more than $4 million in technology that allows Bitcoin Cash miners to operate.

UAC sued three groups of defendants for violations of 1 of the Sherman Act and 4 of the Clayton Act. One group is referred to as the Mining Defendants, who mine Bitcoin Cash: Bitmain Technologies, Roger Ver, and Jihan Wu. The second group is referred to as the Exchange Defendants, because they operate the exchanges through which Bitcoin Cash is traded: Payward Ventures, Inc. d/b/a Kraken and Jesse Powell. The third group is referred to the Developer Group because they work on cryptocurrency development: Shammah Chancellor and Jason Cox. The incident giving rise to the lawsuit occurred in November 2018, when Ver and Bitcoin.com allegedly colluded with Wu and Bitmain Technologies to manipulate a network upgrade and take control of the Bitcoin Case blockchain. The various defendant groups filed a motion to dismiss.

Cryptocurrency background. Cryptocurrency is a form of digital currency that trades in currency markets. Bitcoin and Bitcoin Cash are two examples. Cryptocurrencies rely on a permissionless system in decentralized encrypted public ledgers that document all transactions, called blockchains. Mining is the process of competing to solve complex math puzzles that allow the winners to obtain new cryptocurrency. New blockchains can be formed, as forks from existing blockchains, if miners "vote" to fork off. The suit arose when the defendants allegedly manipulated the resourced involved to create a new fork without the miners having any say in the matter. These decisions apparently harmed UAC’s business interests.

Sherman Act. The court examined the complaint to determine if the elements of a Sherman Act 1 claim were met: (1) whether the alleged conspirator’s actions amounted to a conspiracy and (2) whether their actions constituted an unreasonable restraint on trade. The magistrate found that neither element was satisfied.

Conspiracy. According to the court, the complaint failed to allege expressly "that all Defendants entered into an agreement, much less state the terms of that agreement." For example, while the complaint stated that the alleged conspirators entered into a conspiracy, it never stated what they agreed to. The complaint lacked factual assertions that all the alleged conspirators entered into a shared agreement, which the court characterized as "fatal" to the claim. The complaint suggested a two-part scheme. In part one, the alleged conspirators hijacked the network. In part two, they centralized the market. Any factual support for those allegations, however, "is absent and this alone is reason to dismiss the Complaint."

Parallel conduct can be circumstantial evidence of an antitrust agreement. The only truly parallel conduct, however, was entirely within the Mining Defendants group. No parallel conduct was alleged with the Exchange Defendants or the Developer Group. The court also concluded that UAC failed to allege any plus factor that might have led the court to believe that discovery could reveal a two-part agreement. Both the actions-against-self-interest argument and the public-statements arguments were rejected as lacking evidence of a plus factor. None of them could reasonably be read to constitute the existence of a two-part agreement among the three groups of defendants. Because the complaint failed to plead the existence of a conspiracy, the complaint was dismissed for failing to satisfy the first element of a 1 claim.

Restraint of trade. To establish the second element, restraint of trade, UAC would need to allege harm to competition. To establish harm to competition, the first step is to identify the market where the harm occurred.

Relevant market. The geographic market was around the world, which everyone conceded was accurate. The product market, however, proved to be more problematic. Although the complaint never specifically identified a product market, the court interpreted the allegations to say that the product market was the Bitcoin Cash market. The complaint described various characteristics of Bitcoin Cash, but many products competing in a market have distinctive characteristics. Was Bitcoin Cash its own market? The court concluded that the complaint failed to establish that it was. Unaddressed issues included why consumers might prefer Bitcoin Cash over the multitude of other cryptocurrencies or why Bitcoin Cash was not a shared market with similar cryptocurrencies used for transactions. Nothing was offered to show whether cross-elasticity of demand existed between the market for Bitcoin Cash and the market for other cryptocurrencies. Thus, the complaint failed to establish a relevant market.

Harm to competition. Assertions of harm to competition must be made with specific factual allegations. For example, the complaint should assert factors such as reduced output, increased prices, or a deterioration in quality. The party alleged to have harmed competition must have possessed sufficient power in that market to harm competition. In this case, however, all the complaint alleged was that the conduct harmed the "quality" of the Bitcoin Cash market. No changes in price, output, or other conditions were alleged. The court referred to the allegations as "conclusions loaded with assumptions," with no facts supporting them. Allegations that the alleged conspirators could now dictate when and how upgrades are introduced were insufficient to establish harm to competition. The allegations also depended on an assumption that the three groups would continue to act in unison beyond this upgrade, which seemed implausible. As a result, the complaint failed to establish any harm to competition.

Per se violations. While most 1 violations are subject to a rule of reason, some restraints are per se illegal, a category limited to a "very small class" of antitrust practices that are clearly understood as always harmful to competition. The complaint alleged two potential per se violations: bid rigging and group boycott.

Bid rigging. The complaint asserted a violation "in the nature of bid rigging," which involved allegations that the parties conspired to pre-determine the outcome of the system upgrade. Once again, this allegation failed because it did not involve either the Exchange or the Developer defendants. In any event, the "allegations do not plausibly suggest that Defendants committed bid rigging." Two or more competitors would have needed to coordinate their bids to a third party. In this complaint, not all of the parties were competitors, so they could not have rigged bids. Even among those that were competitors, the complaint failed to establish an agreement among them to eliminate competition. As a result, the allegations did not fall within the small class of practices always thought to harm competition.

Group boycott. As with bid rigging, the complaint asserted that the conduct was "in the nature of" a group boycott. The conduct that was alleged, however, differed from a group boycott. The alleged conspirators were not all competitors in mining. No allegations involved those alleged conspirators denying UAC access to goods or services because UAC refused to accede to their terms. Nor did the allegations establish that UAC was pressured into boycotting a competing cryptocurrency. In fact, the allegations fit into no category of a group boycott. Thus, once again, the allegations failed to fall within the small class of practices always thought to be harmful to competition.

Standing. Antitrust standing is determined by a two-prong approach: (1) the plaintiff must allege an antitrust injury and (2) the plaintiff must be an efficient enforcer of the antitrust laws. Many courts that find no harm to competition routinely dismiss the complaint for lack of standing. This court, however, ruled that a conclusion that no antitrust violation occurred meant only that no antitrust violation occurred, not that the plaintiff lacked standing. The complaint in this case failed to plausibly suggest that the alleged conspirators committed an antitrust violation. Therefore, rather than dismiss the case for lack of standing, the court refused to address whether UAC had adequately alleged that it had antitrust standing.

Amendment. The court also refused any further opportunity to amend the complaint. Illustrative of the difficulty in fitting these facts into the antitrust paradigm was the fact that the complaint never established whether this alleged conspiracy was a horizontal, vertical, or hub-and-spokes conspiracy. Any further amendments would be futile.

The motion to dismiss the complaint was granted with prejudice.

The case is No. 1:18-cv-25106-KMW.

Attorneys: Joanne Gelfand (Akerman LLP) for United American Corp. Christopher R.J. Pace (Jones Day) for Bitmain, Inc. and Bitmain Technologies Ltd. Andrew C. Lourie (Kobre & Kim LLP) for Payward Ventures, Inc.

Companies: United American Corp.; Bitmain, Inc.; Bitmain Technologies Ltd.; Payward Ventures, Inc.

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