Shin v. ICON Foundation

Background

Mark Shin alleged that he acquired approximately 14 million newly created ICX tokens after repeatedly initiating a redelegation process on the ICON Network. He alleged that an unintended error in a software update caused the network to award him 25,000 additional tokens each time he initiated the process. Shin transferred a significant portion of the tokens to Binance and Kraken.

Shin alleged that ICON later implemented another software update, called the Revision 10 Proposal, that froze the tokens in his ICON wallet. He also alleged that ICON contacted Binance and Kraken, described him as a malicious attacker who had acquired stolen funds, and directed the exchanges to freeze his accounts. His Second Amended Complaint asserted three property-based claims: conversion involving the tokens in his ICON wallet, trespass to chattel involving those tokens, and trespass to chattel involving crypto-assets in his Binance and Kraken accounts. He also sought punitive damages.

Legal standard

The court applied Federal Rule of Civil Procedure 12(b)(6), which requires dismissal when a complaint does not state a legally sufficient claim. At this stage, the court accepts well-pleaded allegations as true and asks whether they plausibly support relief. The court does not decide whether the allegations will ultimately be proven.

Conversion

Conversion is wrongful control over another person’s property. The court held that Shin plausibly alleged a possessory interest in the ICX tokens because he minted, created, and claimed them on the blockchain, had previously controlled them, and had transferred some to exchanges. The court stated that whether his claimed ownership was ultimately legitimate could not be resolved on a motion to dismiss.

The court also held that Shin plausibly alleged wrongful conduct by ICON. Shin alleged that the Revision 10 update locked him out of his wallet and restricted access to all of his ICX tokens, including tokens he had purchased before the alleged minting event. The court rejected ICON’s arguments that the network’s policies authorized the restriction or that ICON was not responsible because the network’s Public Representatives approved the update. The court found that Shin’s allegations of ICON’s de facto control over the update-approval process remained sufficient at this stage.

The court further held that Shin plausibly alleged harm because the restriction prevented him from using the tokens and exercising the rights associated with them. ICON’s motion to dismiss the conversion claim was therefore denied.

Trespass to chattel

Trespass to chattel involves intentional, unauthorized interference with someone’s possession of personal property that causes damage. For the tokens frozen through Revision 10, the court found that Shin plausibly alleged a possessory interest and unauthorized interference. ICON had not identified a binding agreement or terms of service that authorized the restriction, and Shin had adequately alleged ICON’s role in implementing the update. The motion to dismiss this trespass-to-chattel claim was denied.

For the crypto-assets held in the Binance and Kraken accounts, ICON argued that it was not the party that prevented Shin from accessing the assets. The court rejected dismissal because Shin alleged that ICON told the exchanges to freeze his accounts, supplied public-key information that allowed the exchanges to identify them, and falsely described him and the tokens. The court held that Shin plausibly alleged that ICON’s communications proximately caused the account freezes. The motion to dismiss this trespass-to-chattel claim was also denied.

Punitive damages

Punitive damages require plausible allegations of oppression, fraud, or malice. Shin alleged that ICON changed its code to target him and froze his wallet while other users and affiliates also benefited from the protocol error. The court found these allegations conclusory and insufficient to plausibly show the required misconduct. It also noted that Shin did not identify an ICON officer, director, or managing agent who committed such an act.

The court granted ICON’s motion to dismiss the punitive-damages claim. It stated that Shin may move to amend to add a punitive-damages claim if discovery on the surviving claims shows a basis for doing so.

Disposition

The court denied ICON’s motion to dismiss the conversion and trespass-to-chattel claims and granted ICON’s motion to dismiss the punitive-damages claim. It also moved the case-management conference from October 12, 2021, to September 7, 2021, and required a joint statement by August 31, 2021.