NFT lawsuits are here! NFT lawsuits are here! Thank God almighty, NFT lawsuits are here! As a litigator, it is great to see the NFT wild wild west come to the courts. First came the Quentin Tarantino and Birkin Bag lawsuits on intellectual property issues. Now it is a Bored Ape owner (or, more aptly, ex-owner) suing OpenSea over an alleged unauthorized sale of his Ape. The more these issues work their way through the court system, the more clarity attorneys will have when advising their clients on current state of the law. Lawsuits (and the resulting legal clarity) will be a net positive for the average NFT investor.
This article will give non-lawyers a little background on how federal lawsuits work generally, what is alleged against OpenSea in this specific lawsuit, and my commentary on the OpenSea lawsuit as an experienced litigator who happens to also be an NFT collecting degen.
General Background on Federal Lawsuit Pleading
I have seen many people say the OpenSea lawsuit is too simple and doesn’t get into the technical weeds of how this alleged unauthorized sale took place. There is a reason for this. Federal courts use what is referred to as a “notice pleading” standard. Plaintiffs are only required to plead the minimal sufficient facts to support a potential legal claim. It is called “notice pleading” because if there are enough facts to put the defendant(s) on notice to what the lawsuit is about, and so long as the facts (if true) support a potentially legitimate legal claim, then it should survive a motion to dismiss (called a “12(b)(6) motion”, from the Federal Rules of Civil Procedure which govern motions to dismiss for failure to state a claim).
The length and detail a lawsuit goes into is a strategic decision made by plaintiffs’ counsel. Sometimes, when a case seems rock solid, aggressive attorneys will throw the kitchen sink and lay out, in detail, all the ways in which the defendant(s) wronged the plaintiff(s). This is done to both educate the judge (that defendants are assholes who the court should rule against) and try to spur early settlement (as a “we know everything, you all are screwed, pay us now or spend a bunch on attorneys’ fees only to pay us later” type of threat). When I see a well drafted 25+ page complaint which goes into specific details on the who/what/when/where/how, I know plaintiffs’ counsel means business.
However, this strategy also has downsides. A complaint is considered a sworn statement by the plaintiff(s). If some details in that statement end up being incorrect, it makes the plaintiff look like either a liar or untrustworthy idiot. In cases where the plaintiff doesn’t necessarily know all the facts with 100% certainty yet, the advisable route would be to simply allege the bare minimum facts required to survive a 12(b)(6) motion, and figure out additional facts through discovery and hiring expert witnesses. Also, sometimes a plaintiff wants to save their best facts for later in litigation. Think of it like saving your best plays for the playoffs in football.
I have seen exceedingly well-drafted lawsuits that are 5 pages long and terribly written lawsuits that are 100 pages. And vice-versa. I suspect in the OpenSea lawsuit, there are many more facts that could have been included, but were consciously excluded by the drafting attorneys for some strategic purpose.
What The OpenSea Lawsuit Alleges
I linked the lawsuit above, so you can read all seven pages of what it says yourself. But to summarize it, Tim McKimmy (Plaintiff) claims that a nefarious individual used some exploit in the OpenSea marketplace to list his Bored Ape for .01 ETH, at which point the Ape was immediately sold, and sold again by the .01 ETH buyer for a 98.99 ETH profit. The current owner (who purchased the ape for 99 ETH) has refused to return the Ape to Plaintiff.
Plaintiff claims that, because Justin Bieber bought a significantly less rare Bored Ape for for $1.3 million, Plaintiff’s damages from this theft are in the millions (plural) of dollars and growing every day.
Plaintiff brings two legal claims. The first is a negligence claim. To state a claim for negligence, all Plaintiff needs to show is (1) OpenSea owed him a duty of some sort; (2) OpenSea breached that duty; and (3) OpenSea’s breach caused Plaintiff damages. Here, Plaintiff claims OpenSea had a duty as an NFT marketplace to protect users from the type of theft that occurred here, OpenSea failed to do so, and because of that Plaintiff lost his Bored Ape.
Plaintiff’s second claim appears to be a combination of claims for breach of fiduciary duty/breach of express contract/breach of implied contract. A claim for breach of fiduciary duty is similar to a negligence claim, except that fiduciaries are held to a higher standard on what duties they owe to the person who entrusted them. The breach of contract claims simply state that participating on the OpenSea marketplace is a contract (express and/or implied). Users agree to use the marketplace as a safe place to sell their goods in exchange for OpenSea taking a cut of those sales. Here, Plaintiff is claiming OpenSea didn’t provide the safety OpenSea promised in exchange for the royalties OpenSea receives.
My Thoughts on The OpenSea Lawsuit
First, it is important to note that OpenSea’s Terms of Service includes an arbitration provision, which requires any dispute be settled in binding arbitration. So as much as I would love to see this dispute settled in open court, I suspect OpenSea will file a Motion to Compel Arbitration, which I also suspect the court will approve. Meaning this dispute will very likely be settled confidentially through arbitration.
Second, it does not appear the person drafting this Complaint is familiar with NFTs. Looking at the Bored Ape in question, the thief did not put the Ape for sale for .01ETH (as allgedged in the Complaint), but instead accepted an offer of .01WETH which had been pending for approximately 15 days before the sale took place. This means this does not appear (at first glance) to be a part of the exploit in which outdated/forgotten Bored Ape listings were being re-activated when the Ape was transferred to the original listing wallet.
Either way, Plaintiff’s wallet the Ape was stolen from appears to be active (0xeb75155f8aacaea7e3674e2aab39a8232af6c55c) which I think any attorney who knows NFTs would advise against. If Plaintiff’s wallet was compromised (which is more likely than an OpenSea exploit which targeted only his Bored Ape and not the countless other Bored Apes) he shouldn’t be using the same wallet to buy Sandbox land days later. Additionally, everybody in the NFT industry knows the Bieber purchase was an aberration, and that not every Bored Ape has a current FMV in the millions of dollars.
Third, the choice of claims alleged seems odd to me. The negligence claim is a no-brainer. But I am confused as to why they didn’t split the Breach of Fiduciary Duty/Breach of Express Contract/Breach of Implied Contracts into separate claims. I am also confused as to why they did not include any consumer protection claims (which I previously predicted will be the types of claims where most NFT legal battles will be fought) or any Texas law specific claims which can be brought against escrow agents/auction houses when the items those entities are expected to protect are stolen or damaged.
I can think of two possible explanations for these questionable pleading choices. (1) This was just a quick initial lawsuit they wanted to get on file, fully expecting there to be an amended complaint later. Usually this is only done when there is a statute of limitations issue, but maybe Mr. McKimmy was pushing to get something (anything) on file so his attorneys obliged. It could also be he didn’t want to spend a ton on legal fees, and this lawsuit is only intended to get OpenSea off their ass and actually negotiate.
Or (2) OpenSea is not the real target, and instead Plaintiff merely wants discovery from OpenSea to try to identify the thief and/or current owner of the stolen Ape. OpenSea likely has IP addresses and/or other information on both the thief and current Ape owner that OpenSean is unlikely to produce absent a subpoena. I have previously written about the consequences for buying an NFT that was stolen, which potentially includes being force to return that NFT for free to the rightful owner. It could be that Plaintiff is hoping OpenSea will play nice and help identify the thief/current owner in exchange for dismissal of the lawsuit against them.
There are countless other reasons for what appear to be questionable claim choices to me, including individual preferences of attorneys. Every litigator has their own particular style when drafting and responding to lawsuits. The drafting here may all come down to stylistic choice rather than some larger legal strategy. While I certainly would have drafted the lawsuit differently, there is nothing to say there is anything particularly wrong with the lawsuit as drafted (except the factual error re: listing vs. accepting pending offer I state above). These are just my personal opinions from reading this lawsuit.
Here is what I really think is going on: I think Mr. McKimmy accidently accepted the .01 WETH bullshit offer, either because an an unfortunate pocket dial situation or he fat fingered it while trying to accept a different offer. When the .01 offer was accepted, there was also a pending offer of 84.15 that he may have been trying to accept. Or he left his computer open and somebody else messing around on it inadvertently accepted the offer. In the end, I think this is far more likely to be a case of user error than some complex OpenSea exploit.
If the wallet was compromised, more items would have been stolen, and I wouldn’t expect it to be buying Sandbox land days later. If it was some OpenSea exploit, he wouldn’t have been the only user hit. Either way, I think Mr. McKimmy was likely at fault in some way and is trying to get OpenSea to pay for his (costly) mistake. While I wish I could see my thesis proven right or wrong in open court, this dispute will likely head to arbitration and settle quietly, nobody the wiser to what happened except the individuals involved. If for some reason this does stay in court, I look forward to follow along!
If you have any questions or would like me to write about anything else law and NFT related, let me know on either of my twitter pages! As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.