Shin v. ICON Foundation

Background

The ICON Network uses software to operate a blockchain and create ICX cryptocurrency tokens. The Network’s ordinary system generated rewards for users who staked and delegated tokens to participate in Network governance. A 2020 software update, Revision 9, contained an unknown defect that allowed certain accounts to generate tokens when users unstaked tokens.

Shin’s account was affected. On August 22, 2020, he unstaked 25,000 ICX and received 25,000 newly generated ICX. He repeated the process 557 times, generating nearly 14 million ICX and transferring some of it to cryptocurrency exchanges, family members, and friends. ICON and other Network representatives approved Revision 10, which fixed the defect and froze approximately 6.7 million bug-generated ICX in Shin’s wallets. Some other bug-generated ICX and cryptocurrency traceable to it were seized by the Federal Bureau of Investigation.

Shin sued ICON for conversion and trespass to chattels based on the freezing of the ICX in his wallets. ICON asserted a counterclaim for unjust enrichment, arguing that Shin should not retain the benefit of knowingly exploiting the software defect. Both parties moved for summary judgment.

Conversion

Under California law, conversion requires ownership or a right to possess property, wrongful interference with that property right, and damages. For intangible property, a claimant must show an interest capable of precise definition, exclusive possession or control, and a legitimate claim to exclusivity.

The court held that although the bug-generated ICX could be precisely identified and exclusively controlled, Shin lacked a legitimate claim to it. The undisputed facts showed that he did not obtain the tokens through the Network’s intended reward process, did not invest time or money in acquiring them, and understood while generating them that a software flaw was responsible. The court concluded that Shin therefore had no ownership or possessory interest supporting conversion. ICON’s motion for summary judgment on conversion was granted.

Trespass to Chattels

Trespass to chattels is intentional interference with possession of personal property that causes injury, including harm to the property’s condition, quality, or value. The court held that there could be no trespass based on ICON’s interference with ICX over which Shin had no personal right. For the same reasons as the conversion claim, ICON’s motion for summary judgment on trespass to chattels was granted.

Unjust Enrichment

Unjust enrichment is an equitable principle requiring restitution when a person knowingly retains a benefit obtained through inequitable circumstances. Shin argued that ICON’s counterclaim failed because ICON or another ICX holder had not transferred the tokens to him and had not shown a corresponding loss.

The court rejected that argument. It held that ICON did not need to show that it or another Network user previously owned or transferred the bug-generated ICX. The court concluded that Shin received and knowingly retained a benefit by repeatedly exploiting a flaw he understood was not part of the Network’s intended operation. It also found that his conduct increased the supply of ICX and that the price declined after the Network publicly disclosed what happened, although any dispute about how much Shin’s conduct caused the price decline was immaterial because proof of harm was not required for ICON’s counterclaim.

ICON’s motion for summary judgment on its unjust enrichment counterclaim was granted. Shin’s motion for summary judgment on that counterclaim was denied.

Remedy and Disposition

ICON sought an order requiring destruction of the bug-generated ICX and conversion and destruction of cryptocurrency acquired with those tokens. The court said that determining the equitable remedy required further attention and ordered additional written submissions from the parties, with a hearing to be scheduled if necessary.

The court’s final stated dispositions were: ICON’s motion for summary judgment on Shin’s conversion and trespass to chattels claims and on its unjust enrichment counterclaim was granted, and those claims were dismissed with prejudice. Shin’s motion for summary judgment on ICON’s unjust enrichment claim was denied. The order did not yet determine the final equitable remedy.