True Return Systems, LLC v. Compound Protocol

Background

True Return Systems LLC brought a patent-infringement action against Compound Protocol concerning U.S. Patent No. 10,025,797. The patent concerns systems and methods intended to improve distributed-ledger technology by addressing computation time, storage, and security constraints.

Compound Labs, Inc. moved to intervene under Federal Rule of Civil Procedure 24(a) and (b). Compound Labs developed the Protocol and implemented it on the Ethereum blockchain. It launched the Protocol in September 2018 and initially administered it, but relinquished administrative control in June 2020 to holders of COMP tokens. Those token holders have voting and governance rights over the Protocol and collectively form a decentralized autonomous organization.

The parties disagreed about the legal status of Compound Protocol. True Return described it as a decentralized autonomous organization operating a cryptocurrency lending business and marketplace. Compound Labs argued that the Protocol was software without legal existence or the capacity to sue or be sued. For purposes of deciding intervention, the court assumed that True Return intended to sue a decentralized autonomous organization, as alleged in the complaint.

Compound Protocol had been served but did not appear or respond. Before Compound Labs filed its intervention motion, the court had directed True Return to seek a default judgment against Compound Protocol or explain why the case should not be dismissed for failure to prosecute.

Legal standard

Rule 24 allows a third party to join an ongoing lawsuit either as of right or with the court’s permission. The court explained that permissive intervention under Rule 24(b)(1)(B) may be allowed when the proposed intervenor has a claim or defense sharing a common question of law or fact with the main action. The court also considers whether intervention would unduly delay or prejudice the original parties, the intervenor’s interests, whether those interests are adequately represented, and whether the intervenor would help develop the facts and resolve the legal issues fairly.

Court’s analysis

The court held that Compound Labs satisfied the standard for permissive intervention. As the Protocol’s creator and a COMP token holder, Compound Labs shared the defense’s objective of obtaining a ruling that the Protocol technology did not infringe the patent. Compound Labs also had an interest in defending the action because it created the software and retained an interest, though not a controlling one, in the decentralized autonomous organization.

The court further found that Compound Labs was in a unique position to explain the functioning and mechanics of the technology at issue. That assistance was particularly important because Compound Protocol had not appeared or responded to the complaint.

True Return argued that the motion was untimely. The court assumed, for purposes of its analysis, that Compound Labs had known about the action for more than a year. Even so, the court found no prejudice to True Return because the motion was filed early, before substantive motions or active discovery, and there were no pending deadlines. The court also rejected True Return’s concern that intervention might undermine settlement discussions as speculative because Compound Protocol had not appeared and True Return had not shown that settlement discussions had occurred or were imminent.

By contrast, the court found that denying intervention could prejudice Compound Labs by exposing its software to a possible finding of patent infringement without giving Compound Labs an opportunity to defend against the allegations.

Disposition

The court granted Compound Labs’ motion to intervene. The opinion did not decide whether the Protocol infringed True Return’s patent, whether Compound Protocol had legal capacity to be sued, or whether True Return was entitled to a default judgment. The Clerk was directed to terminate the intervention motion, ECF No. 40.