IP Law Daily Lawsuit over ownership of over $11B in Bitcoin and Bitcoin IP will proceed to trial
Tuesday, September 22, 2020

Lawsuit over ownership of over $11B in Bitcoin and Bitcoin IP will proceed to trial

By Cheryl Beise, J.D.

Jury could find that David Kleiman, who died in 2013, along with Craig Wright, was the co-creator of Bitcoin and co-owner of Bitcoin source code and other IP.

A lawsuit filed by the Estate of David Kleiman and Florida-based W&K Info Defense Research, LLC, over ownership of bitcoins and Bitcoin-related intellectual property will proceed to trial, the federal district court in Miami has decided, in rejecting a motion for summary judgment filed by Craig Wright—the self-proclaimed sole creator the Bitcoin cryptocurrency under the pseudonym Satoshi Nakamoto. There was sufficient record evidence for a jury to find that David Kleiman was the co-creator of Bitcoin and co-owner of Bitcoin intellectual property, that Kleiman and Wright were partners in a Florida LLC, and that after David Kleinman’s death, Wright concocted a scheme to falsely claim sole ownership of all bitcoins owned by Kleiman, to steal Kleiman’s share of IP assets that belonged to Kleiman and Wight jointly through the LLC. The jury will also decide whether the plaintiffs waited too long to file suit and if so, whether the delay was excused due to Wright’s fraud and misrepresentation (Kleiman v. Wright, September 21, 2020, Bloom, B.).

In 2018, Ira Kleiman, as the personal representative of the Estate of David Kleiman, and W&K Info Defense Research, LLC (collectively, "Plaintiffs") filed suit against Craig Wright, alleging that David Kleiman was a co-creator of the Bitcoin cryptocurrency and that they are entitled to more 11 million bitcoins, worth more than $11 billion (half of Wright’s interest), well as half interest in the intellectual property associated with Bitcoin cryptocurrency. Plaintiffs alleged that from 2008 to David Kleiman’s death in 2013, Wright, an Australian computer scientist currently living in London, England, and Kleinman, a paralyzed IT security expert in Palm Beach, Florida, were best friends and business partners who secretly created Bitcoin under the pseudonym Satoshi Nakamoto. Beginning in February 2011, Wright and Kleiman allegedly conducted their work through W&K Info Defense Research LLC ("W&K"), a Florida limited liability company.

Plaintiffs claimed that after David Kleinman’s death, Wright concocted a scheme to claim sole ownership of all Bitcoins owned by Kleiman, to steal Kleiman’s share of IP assets that belonged to Kleiman and Wight jointly through W&K. To accomplish this scheme, Wright allegedly drafted and backdated at least three contracts to create a paper trail purporting to document that many of Kleiman’s bitcoins and IP rights were to be transferred, sold, and/or returned to himself. In July and August 2013, Wright filed two claims in the Supreme Court of New South Wales, Australia, against W&K for $28 million each. Consent judgments were entered in both lawsuits in November 2013. W&K contended it was never properly served with either of the complaints or the judgments and that Wright obtained the judgments through fraud on the court.

Plaintiffs asserted causes of action for conversion, unjust enrichment, misappropriation, violation of the Defend Trade Secrets Act, breach of fiduciary duty, breach of partnership duties of loyalty and care, fraud, constructive fraud, permanent injunction, and civil theft. Plaintiffs contended that the Estate and/or W&K have an ownership interest in source code, compiler code, Machine Language (MASM/NASM), algorithms, manuals, trademarks, pending patents, granted patents, and other external filings associated with the following IP items: (1) a metered payments system; (2) software derivative markets & information security risk systems; (3) software assurance marketplace; (4) software assurance through economic measures and anti-fraud system; (5) risk quantification system (for financial modeling in Bitcoin); (6) Supervisory Control and Data Acquisition (SCADA) measurement suite of software; and (7) scriptable money.

For his part, Wright asserted 14 affirmative defenses: accord and satisfaction, release, waiver, payment, set-off, failure to mitigate damages, estoppel, res judicata and collateral estoppel, statute of limitations, laches, good faith, unclean hands, statute of frauds, and lack of personal jurisdiction. Before the court were the parties’ cross motions for summary judgment.

Wright primarily argued: (1) Plaintiffs’ claims were time-barred, and the statute of limitations accrued no later than November 6, 2013, when the consent judgments were entered in the Australian lawsuits; (2) Plaintiffs cannot establish that an oral partnership existed between Wright and Kleiman, but even if there was such a partnership, it would be void for vagueness and claims based on it would be barred by the statute of frauds; (3) Plaintiffs’ common law claims were preempted and displaced by the Florida Uniform Trade Secrets Act (FLUTSA), Fla. Stat. § 688.008; (4) the court lacked subject matter jurisdiction based on evidence of lack of complete diversity of W&K’s membership; (5) Ira Kleiman, David Kleiman’s brother and the Estate’s personal representative, lacked authority to file this action on behalf of W&K; and (6) Plaintiffs’ fraud and constructive fraud claims cannot be established based on the record. Plaintiffs sought summary judgment on each of Wright’s 14 affirmative defenses.

Jurisdiction and party. The court first rejected Wright’s objection to subject matter jurisdiction and his argument that Ira Kleiman lacked authority to file an action on behalf of W&K. Both arguments were based on Wright’s assertion that his ex-wife, Lynn Wright, is a member of W&K. The court found that Wright failed to offer any credible evidence that Lynn Wright is or was a member of W&K. Although Lynn Wright testified that she was a shareholder in W&K, that testimony was primarily based on her divorce settlement with Wright. When Lynn Wright subsequently filed for bankruptcy she did not list an interest in W&K as an asset. Wright offered no documentary evidence to show that his ex-wife was a member of W&K.

Statute of limitations. The court next declined to grant summary judgment on Wright’s claim that Plaintiffs’ claims were time-barred barred by a statute of limitations that expired in 2015. Wright argued that the alleged partnership between Defendant and Mr. Kleiman terminated in February 2011, but Plaintiffs produced evidence that the partnership continued beyond 2011. The court also found that the judgment date of the Australian lawsuits did not trigger the statute of limitations. The court was not persuaded that the Plaintiffs were actually served with the lawsuits, and Wright failed to offer sufficient evidence to support proper service, under Australian law or the Hague Convention. However, even assuming the statute of limitations had passed, the court agreed with Plaintiffs that the record reflected a genuine dispute as to whether the statute of limitations in any case could be tolled by the doctrines of fraudulent concealment or equitable estoppel under Florida law.

Statue of frauds. The court declined to rule on Wright’s statute of frauds argument, finding that a genuine dispute of material fact existed whether Kleiman and Wright entered into an oral partnership under Florida law. Wright also failed to present evidence to establish that the statute of frauds applied to the partnership as there was no evidence that the parties intended the partnership to last longer than one year from the time of entering into the agreement.

FUTSA preemption. In a December 2018 order, the court dismissed with prejudice Plaintiffs’ claim for misappropriation of trade secrets under FUTSA because of a time bar. In his motion for summary judgment, Wright contended that pursuant to Fla. Stat. § 688.008, all state-law claims arising out of alleged misappropriation of trade secrets were displaced or preempted by FUTSA. The court disagreed. First, the preemption defense was waived because it was untimely and prejudicial—asserted after two years of extensive discovery. Even if it had been timely, the defense failed because Plaintiffs’ misappropriation and other tort claims were distinct from trade secret misappropriation because they also were based on allegedly stolen bitcoins.

Fraud and constructive fraud. The court found that there was sufficient evidence in the record for a jury to find that Wright was liable for fraud and constructive fraud. Plaintiffs alleged that after Kleiman died, Wright enacted a "scheme to take sole ownership/control of all bitcoins and intellectual property owned by Dave and/or W&K," which involved fabricated documents, false statements, fake emails, half-truths, and non- disclosures of material information. Plaintiffs asserted that Wright and Kleiman/W&K mined approximately 1.1 million bitcoins together, and that Wright admitted as much. The also alleged that the "W&K Source" "software package" is valued between $126 million and approximately $304 million AUD.

Under Florida law, constructive fraud occurs when a duty under a confidential or fiduciary relationship has been abused or where an unconscionable advantage has been taken. The record reflected evidence for a jury to find that Wright and Kleiman entered into a partnership. Partners and joint venturers owe fiduciary duties to each other and when a partner dies, the surviving partners are treated in equity as trustees of the decedent’s representatives, the court noted.

Affirmative defenses. The court granted Plaintiffs’ motion for summary judgment on Wright’s defenses for accord and satisfaction, release, waiver, payment, set-off, and failure to mitigate damages. Wright alleged that after Kleiman’s death, he provided Ira Kleiman with shares of a start-up company called Coin-Exch, since liquidated, in exchange for release of all claims. However, the underlying "Transfer of Shares" document signed by Ira Kleiman and Wright did not include a statement that the shares were provided as part of an agreement, that they would constitute accord and satisfaction, or release claims that Plaintiffs asserted in this case.

The court next granted summary judgment to Plaintiffs on Wright’s estoppel-related defenses arising out of the Australian lawsuits and on Wright’s defenses of good faith, unclean hands, statue of frauds, and lack of personal jurisdiction. Only Wright’s statute of limitations and laches defenses survived the motion.

The case is No. 9:18-cv-80176-BB.

Attorneys: Joseph M. Delich (Roche Cyrulnik Freedman LLP) for Ira Kleiman and W&K Info Defense Research LLC. Andres Rivero (Rivero Mestre LLP) for Craig Wright.

Companies: W&K Info Defense Research LLC

MainStory: TopStory TechnologyInternet TradeSecrets Blockchain GCNNews FloridaNews

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