Abuda v. Strongblock

Background

Donald Abuda and 217 other individually named plaintiffs brought two related actions against Strongblock, David Moss, Brian Abramson, Corey Lederer, Konstantin Shkut, and unknown defendants. The plaintiffs asserted claims under Sections 5 and 12(a)(1) of the Securities Act of 1933, along with claims based on breach of contract, fraud, unjust enrichment, negligence, and related theories. They alleged that Strongblock marketed S1 Nodes with promises of continuing daily token rewards, then capped the rewards in April 2022.

The defendants moved to dismiss or stay the cases and to require arbitration under the Federal Arbitration Act, the federal statute governing many arbitration agreements. To create a Node, each plaintiff had to use Strongblock’s website, connect a cryptocurrency wallet, choose “Create Node,” and check a box referring to hyperlinked Terms of Service. Those Terms included an agreement requiring individual, binding arbitration and stated that the seat and venue of arbitration was the Cayman Islands. The Terms also contained a Cayman Islands choice-of-law provision.

Binding Arbitration Agreement

The court held that the plaintiffs entered into binding agreements to arbitrate their claims individually. It found that the sign-up page gave sufficiently clear notice of the Terms because the page was relatively short and uncluttered, the Terms were set apart by a hyperlink and different color, and the page expressly referred users to reading or agreeing to the Terms. The court rejected arguments that the customers had to scroll through the Terms or use a separate checkbox specifically for the Terms.

The court also held that the version of the sign-up page that asked users to confirm that they had “read” the Terms, rather than that they “agreed” to them, still created a binding contract. The Terms stated that users who did not agree could not use the site or products, and the plaintiffs used the Node service. The court further held that the arbitration agreement protected the individual defendants because they were alleged to have acted as agents or, under the plaintiffs’ theory, as general partners of the Strongblock business. The plaintiffs did not dispute that the agreement covered their claims.

Effective Vindication Argument

The plaintiffs argued that the arbitration agreement was unenforceable because requiring arbitration in the Cayman Islands, together with the Cayman Islands choice-of-law provision, would prevent effective pursuit of their Securities Act claims. The court rejected that argument. It found that the agreement did not clearly require the arbitrator to apply only Cayman Islands law to the substance of every dispute. The court also relied on the defendants’ Cayman Islands legal opinion that Cayman law could require application of U.S. securities law when appropriate. The plaintiffs did not provide a contrary analysis from a Cayman Islands lawyer and therefore did not show that their Securities Act claims could not be effectively pursued in arbitration.

Disposition

The court concluded that it lacked authority under the federal arbitration statute to order arbitration in the Cayman Islands. It therefore denied the defendants’ motions to compel arbitration. The court granted the defendants’ alternative motions for dismissal without prejudice to litigation of the plaintiffs’ claims in the arbitral forum. The Clerk was directed to enter judgment and close both cases.