Cryptocurrency and Trademarks – A Lesson in Jurisdiction

Originally published by Susan Ross (US).

On October 22, 2018, a federal trial court in Manhattan granted web services conglomerate Alibaba Group Holding Limited’s request for a preliminary injunction against several defendants that were offering cryptocurrency for sale, under the name “AlibabaCoin.” (Alibaba Group Holding Ltd. v. Alibabacoin Foundation, No. 18-CV-2897 (JPO) (S.D.N.Y. Oct. 22, 2018) Although neither Alibaba nor any of the defendants had a base of operations in the United States, Alibaba’s lawsuit was based upon a claim of infringement of its U.S.-registered trademarks.

Alibaba complained that defendants were impermissibly using Alibaba’s trademarks in marketing and promotional materials in order to cause internet users to associate the defendant’s cryptocurrency with Alibaba. Alibaba sought to have the court order the defendants to halt their use of Alibaba’s trademarks in April of 2018. The court at that time ruled that Alibaba had not proven that the court had personal jurisdiction over the defendants. The court granted Alibaba’s request for discovery on the topic of jurisdiction, which led to Alibaba’s current request for an injunction until trial (a “preliminary injunction”).

Jurisdiction

s a result of that discovery, Alibaba found proof that at least one e-mail address, connected to three transactions of Alibabacoin, “belongs to an individual who overwhelmingly appears to be a New York resident.” Therefore, Alibaba argued, New York had jurisdiction over the defendants who were doing business in New York.

The defendants raised three arguments, all of which the court found unpersuasive:

1. Sales of the cryptocurrency did not occur in the United States because the blockchain data was on a server in Belarus. As our readers may be aware, cryptocurrencies (sometimes called digital currencies or virtual currencies) do not exist in tangible form, but rather are purely digital. Users transfer them from an encrypted computer file known as a “wallet” either directly to merchants and other third parties, or by way of third party exchanges. Virtual currencies are not issued or backed by any government. Their value is determined on online exchanges, so the value can fluctuate significantly. Each transaction is public in that the transaction—but not the identity (name, IP address or country) of the actors—is added to a public ledger of the transactions made, which is known as a “block chain.” The best known example of a cryptocurrency is called a Bitcoin, which was created in 2009, but more than 2,000 different cryptocurrencies have been created as of the date of this post.

The court rejected defendants’ argument as “counterintuitive,” stating:

When an individual uses her debit card to make an online purchase from an out-of-state vendor, for example, it would strain common usage to say that the transaction occurs at the potentially remote location of the servers that process the buyer’s banking activities and not at the location where the buyer clicks the button that commits her to the terms of the sale.

2.  The defendants’ role in the New York transactions was not “purposeful.” The court found this argument “runs contrary to precedent,” citing cases from the early days of the Internet when courts were determining whether a website was simply a “passive” provider of information or a “transactional” site where users could interact and thus the court where the user was located had jurisdiction. Here, the court stated: “Defendants’ argument appears to boil down to the questionable claim that an out-of-state vendor selling intangible goods and service online has not acted intentionally with respect to an in-state buyer’s subsequent purchase decision.” In other words, interactive websites transact business in New York for jurisdictional purposes.

3.  The trademark and false advertising claims did not have a “substantial relationship” with the New York transactions. The court pointed out that the relevant standard was that the cause of action “relate to” the defendants’ contacts with New York. The court focused on the evidence offered by Alibaba:

Given Alibaba’s evidence that over one thousand New York users had visited Defendants’ website by mid-June 2018, Alibaba has established a reasonably probability that the transactions at issue here are not isolated instances, but “rather a part of a larger business plan” that involves the purposeful marketing and sale of AlibabaCoin to, among others, New York consumers.

(Citations omitted)

With respect to trademarks, the court pointed out that “New York has a clear interest in protecting in-state consumers from ‘confusion resulting from the misappropriation of trademarks or trade dress.’” (Citation omitted). The court acknowledged that the parties were also involved in a trademark dispute in the United Arab Emirates, but “there is nothing unreasonable about Alibaba’s turning to a court in the United States to protect its United States trademarks, to enjoin Defendants from committing infringing acts in the United States, and otherwise to seek relief under United States (and New York) law.” (Emphasis in original)

For purposes of establishing personal jurisdiction in New York, the court concluded, “by adducing evidence that a New York resident has purchased AlibabaCoin through Defendants’ website, Alibaba has demonstrated a reasonable probability that Defendants have transacted business in New York within the meaning of New York’s long-arm [jurisdiction] statute.”

Likelihood of Success

An important element of the test to obtain a preliminary injunction is the demonstration that the plaintiff is likely to succeed on the merits of one of its causes of action. Alibaba had proven that it had a registered U.S. trademark in “Alibaba” in connection with “computer software for use in exchanging information via global computer networks and online from a computer database and the internet.” The court found that Alibaba had provided “ample evidence” that defendants had used the mark in a way “that is likely to cause confusion.”

Nevertheless, the defendants argued that Alibaba had repeatedly stated that it was not interested in expanding into the cryptocurrency space and therefore Alibaba had abandoned its trademark in the area of cryptocurrency. The court rejected this argument:

Defendants point to no authority supporting the proposition that a trademark-holder that has made consistent use of its protected mark in a given commercial context, as Alibaba has done in the internet-services context, has somehow acquiesced in infringing uses of that mark in all other commercial contexts, no matter how nearly those other contexts verge on the trademark-holder’s own sphere of operations. Accepting this view of abandonment would render American trademark law largely ineffectual.

With respect to the standard of showing a likelihood of confusion, the court found that Alibaba had met that requirement through promotional materials that “explicitly equivocated on the cryptocurrency’s relationship to Alibaba,” as well as use of imagery related to Alibaba, and “Defendants’ plans to expand into e-commerce, Alibaba’s ‘core business.’” The court continued: “Alibaba’s further demonstration the Defendants’ likely misleading marketing tactics have had the predictable effect of generating actual consumer confusion, then, is merely icing on the cake.”

The court added in a footnote: “After all, even if AlibabaCoin is not sold to United States consumer—a proposition that in any event contradicts the present record—those consumers’ exposure to online advertising likely to create brand confusion could affect their willingness to purchase from or invest in Alibaba, the party that claims injury.” (emphasis in original)

As a result, the court granted preliminary injunction prohibiting defendants from using the Alibaba marks anywhere in the United States “including in connection with provision of products or services to internet users located in the United States” and from making false or misleading statements concerning the Alibaba marks in the sale, advertising, or promotion of defendants’ goods or service to anyone located in the United States”.

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