Free Holdings Inc. v. McCoy

Background

Free Holdings, Inc. sued artist Kevin McCoy and Sotheby’s, Inc. over promotional statements concerning Quantum, a digital artwork and what the opinion describes as the first non-fungible token (NFT). Free Holdings alleged that it controlled the Namecoin record associated with Quantum and that defendants falsely stated or implied that the record had been “burned” or removed from the Namecoin blockchain. It also challenged descriptions of the NFT sold through Sotheby’s as the first NFT ever created.

The amended complaint asserted claims for unjust enrichment, slander of title, deceptive and unlawful trade practices under New York General Business Law § 349, commercial disparagement, and false or misleading representations under § 43(a) of the Lanham Act. Free Holdings also sought a declaration that it owned the Namecoin-based Quantum, that the Namecoin record remained active, and that defendants’ statements were false and misleading.

Standing and jurisdiction

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(1) for lack of subject-matter jurisdiction and under Rule 12(b)(6) for failure to state a claim. The court first considered standing, which is the requirement that a plaintiff show a concrete, personal injury that a court can remedy.

The court concluded that Free Holdings plausibly alleged a proprietary interest in the Namecoin entry known as “-709a,” based on title assertions displayed on the record and by the Twitter account @EarlyNFT. But it did not allege facts showing that control of that entry gave it a legally protected ownership interest in Quantum itself. Free Holdings did not claim to own the separate Ethereum NFT sold by McCoy and Sotheby’s.

The court also rejected Free Holdings’ three alleged theories of injury: lost participation in or profits from the Sotheby’s sale, a reduction in the value of its claimed Namecoin property, and $5,311.49 spent seeking corrective public statements. The first theory lacked facts showing that defendants had to include Free Holdings in the sale or that it had a right to share in the proceeds. The second was speculative because Free Holdings did not allege an actual or attempted sale of its claimed NFT. The third could not create standing because a plaintiff cannot create standing by voluntarily spending money to respond to a hypothetical future harm.

Failure to state claims

Although the court held that it lacked jurisdiction, it also analyzed the claims in the alternative.

For unjust enrichment, the court held that Free Holdings did not allege that defendants’ sale of the Ethereum NFT was at Free Holdings’ expense or that Free Holdings had a proprietary interest in the asset sold. The alleged Twitter messages and an unanswered communication with Sotheby’s were also too weak a connection to support the claim.

For slander of title and commercial disparagement, the court held that Free Holdings had not adequately alleged falsity, malice, or special damages. The opinion treated the meaning of an expired and re-registered Namecoin entry as a subject of debate, and it found that the challenged statements were not shown to be substantially false. Free Holdings also did not plead facts suggesting that McCoy or Sotheby’s knew their statements were false or acted with reckless disregard for the truth. Finally, it did not identify specific lost sales, customers, or amounts of lost value.

The court rejected the claim under New York General Business Law § 349 because the alleged transaction was a single, specialized art sale rather than the type of consumer-oriented conduct affecting the public interest covered by that statute. It also found that the amended complaint focused on harm to Free Holdings rather than harm to consumers generally.

The court rejected the Lanham Act claim because Free Holdings did not adequately allege a literally false or misleading statement, diversion of business, or loss of goodwill. The court noted that the statements could reasonably be understood in light of the competing interpretations of the Namecoin record and that Free Holdings did not allege that it had an existing business or goodwill in Quantum.

Finally, the court declined to issue the requested declaratory judgment. It found no actual controversy because Free Holdings had not alleged a concrete or particularized injury, and it had not established an independent legal claim supporting declaratory relief.

Disposition

Judge James L. Cott granted the motions to dismiss the amended complaint. The Clerk was directed to mark docket entries 54 and 59 as “granted” and enter judgment for defendants. The opinion itself did not state that the dismissal was with or without prejudice.