Johnson v. Maker Ecosystem Growth Holdings Inc. et al

CASE NAME: Johnson v. Maker Ecosystem Growth Holdings Inc. et al.

TYPE OF CASE: Negligence, intentional misrepresentation, negligent misrepresentation

COURT: Northern District of California

JUDGE(S): Senior U.S. District Judge Maxine M. Chesney

DEFENSE LAWYERS: Skadden, Arps, Slate, Meagher & Flom and Affiliates, Peter B. Morrison, Alexander C. Drylewski, Michael W. Restey Jr., Danielle M. Dankner, Mackenzie Newman

PLAINTIFF LAWYERS: JurisLaw LLP, Adam S. Heder

To many, the world of cryptocurrency and blockchain is opaque and its terminology obscure. Plaintiffs suing over losses they alleged they suffered when the price of the crypto token known as Ether collapsed on March 12, 2020 -- an event they called "Black Thursday" -- sought to use the conventional civil justice system to litigate events in the decentralized financial space.

Their claims were no mystery to lawyers in the Web3 and Digital Assets Group at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. The group's co-head, Alexander C. Drylewski, plus Peter B. Morrison, co-head of the firm's West Coast litigation practice, acting as co-lead counsel, won dismissal of the plaintiffs' class action complaint. Johnson v. Maker Ecosystem Growth Holdings Inc. et al., 3:20-cv-02569 (N.D. Cal., filed April 4, 2020).

Though the court granted the plaintiffs leave to amend their complaint, the matter then settled for $1.16 million.

"The plaintiffs tried to impose traditional legal principles on a completely novel technology and set of facts," Drylewski said. "Our key to getting a dismissal was to distill down to simple terms what the plaintiffs tried to characterize as a complex technology."

The Skadden lawyers said the plaintiffs faced stiff obstacles in the attempt to map the characteristics of a decentralized financial system onto classic tort claims. The complexity of the defendant's MakerDAO system, a finance protocol built on the Ethereum blockchain, and the events of Black Thursday had the potential to obscure strong arguments for dismissal.

"We made it a simplified story for the court," Morrison said. "To our knowledge, it is one of the first applications of state tort law principles to blockchain-based decentralized finance systems."

In granting the dismissal motion, Senior U.S. District Judge Maxine M. Chesney of San Francisco agreed with Skadden that the plaintiffs' generic misrepresentations allegations were insufficient and that the complaint engaged in impermissible group pleading by attributing the alleged misrepresentations to the defendants as a collective whole.

In addition, Chesney held that the complaint failed to allege the source of any duty of care defendants owed the plaintiff and that the negligence claims, seeking to recover economic losses, were barred by California's economic loss rule, which excludes recovery for financial harm unaccompanied by physical or property damages.

"The court applied the doctrine dispassionately, regardless of the subject matter," Morrison said.

Said Drylewski, "The court simply found their pleading insufficient." He added that his group is litigating crypto cases around the U.S. "We don't expect them to go away."

The plaintiff's lawyer, Adam S. Heder of JurisLaw LLP, emailed, "The case was dismissed without prejudice. Plaintiff filed an amended complaint. Before Defendants filed a motion to dismiss, the parties settled the matter."

--John Roemer