Crypto disputes: choose your own adventure

The Dispute

Hypernet, a cryptocurrency company, was incorporated in the Cook Islands, an island country in the South Pacific. However, it maintained its principal place of business in Palo Alto. In 2018, the company entered into Future Token Interest Subscription Agreements (“TSAs”) with an investor named Romein Rostami, a U.S. citizen residing in Puerto Rico. Rostami paid over $300,000 for cryptocurrency tokens that Hypernet was developing known as Hyper Tokens.

Rostami’s Hyper Tokens never materialized. Four years later, he brought suit in the Northern District of California, because of Hypernet’s office in Palo Alto and its officers’ residence in California. Hypernet pointed to the TSAs’ forum selection clause, which read:

"All rights and obligations hereunder will be governed by the laws of the Cook Islands…. The Purchaser hereby irrevocably agrees that all actions arising directly or indirectly as a result or in consequence of this TSA of the Tokens shall be instituted and litigated only in courts having situs in the Cook Islands and the Purchaser hereby consents to the exclusive jurisdiction and venue of any court of competent jurisdiction in the Cook Islands. The Purchaser hereby waives any objection based on forum non conveniens, and the Purchaser hereby waives personal service of any and all process."

The choice of the Cook Islands was no accident. The country is a leading offshore banking destination and asset protection venue. Rostami argued that the forum selection clause was unreasonable because it was meant to deter litigation, was the product of Hypernet’s unequal bargaining power, and was not reasonably communicated to Rostami.

The Judgment

Hypernet moved to dismiss the action through the doctrine of forum non conveniens for improper venue in light of the mandatory forum selection clause selecting Cook Islands courts. The California court’s analysis proceeded under the test articulated by the U.S. Supreme Court in Atlantic Marine Construction Company, Inc. v. U.S. District Court for Western District of Texas, 571 U.S. 49 (2013). Under the Atlantic Marine test, a court first examines the validity of a forum selection clause. Such a clause is “presumptively valid” and a plaintiff bears a “heavy burden” to show that it is invalid due to fraud or overreach.

If a forum selection clause is deemed valid, the court then considers whether it should be enforced by evaluating several factors:

1. whether it would contravene “strong public policy” against unconscionable contract terms;
2. whether it would deprive the plaintiff of his or her day in court;
3. whether it would cause congestion in either court;
4. whether the local court has an interest in the litigation; and
5. whether the courts selected by the forum clause would be comfortable with the governing law. 

The court upheld the TSAs’ exclusive jurisdiction clause and dismissed the case. Most notably, the court highlighted that the clause was neither procedurally nor substantively unconscionable under California law. The court also considered public interest factors, finding that California lacked a meaningful interest in the dispute given the choice of Cook Islands substantive law, the defendant’s incorporation in the Cook Islands, and the plaintiff’s residence in Puerto Rico.

On the other hand, Hypernet’s “founders, principals, employees, offices, and contractors” were located within California. The court found that California had some interest in the action, but not a “special interest” in the non-Californian plaintiff that would increase the weight of that factor.

Also significant for the court was the investor’s level of sophistication and resources, and the fact that the clause was reasonably communicated within the contract. Despite the potential logistical challenges in litigating in the selected forum, the court declined to overturn the bargained-for agreement between the parties that chose it.

Drafting Suggestions

The decision provides a good reminder to review dispute resolution clauses carefully. The cryptocurrency industry prides itself on taking a decentralized and global approach to operations. Clauses like the one at issue here are not rare. Courts will enforce exclusive jurisdiction clauses favoring distant venues, even if they seem onerous in hindsight, unless they are unconscionable.

However, if far-off courts are not suitable for resolving crypto or fintech disputes, what are the alternatives? An international arbitration seated in the Cook Islands could have been more favorable to the investor. An arbitration’s situs refers to its legal seat, not its physical location. Therefore, an arbitration seated in the Cook Islands could hold all of its proceedings elsewhere. In Palo Alto, for instance.

The Cook Islands is among the 172 parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, so an ensuing arbitral award would be enforceable in all of the major commercial jurisdictions around the world. On the other hand, it is not clear whether that country’s recent arbitration law, the Arbitration Act 2009, has been tested rigorously in practice. Cook Islands courts would still have to play a role as the supervisory court over an arbitration seated there.

A better approach would be to opt for a jurisdiction with a robust arbitration law and practice. For U.S.-based multinational companies, this means New York. Other parties might prefer Singapore, Switzerland, or England and Wales depending on the circumstances. That would balance convenience to the parties with the assurance that the dispute will be resolved fairly and expeditiously. On the other hand, in Hypernet the TSAs did contain an arbitration clause. Because the court found the Cook Islands forum selection clause valid and enforceable, the court did not compel the parties to arbitrate their dispute. This serves as a reminder that special care should be taken in drafting multifaceted disputes resolution clauses to ensure they operate as the parties intended.

California is also increasingly viewed as a favorable seat of arbitration. By that same token, if parties are more comfortable with litigation, they might opt to shift their exclusive jurisdiction clauses to California’s courts. The temptation to move dispute resolution far away from assets is understandable. However, California’s financial clout ought to spur more interest in developing the state as the preferred destination for arbitration or litigation of crypto and fintech disputes as well.

Footnotes

_{1 Rostami v. Hypernet Inc., No. 22-CV-01813-EJD, 2023 WL 2717262 (N.D. Cal. Mar. 29, 2023) (Davila, J.).}