Is Mining Equipment a Security? Bitcoin Mining Case Moved to Arbitration

The court in the Roberts v. Obelisk, Inc. case has granted a motion to compel arbitration, according to a report by The Block Crypto. The ongoing case (Roberts v. Obelisk, Inc., 2019 U.S. Dist. LEXIS 72065 (D.Cal., 18-cv-2898-LAB, April 29, 2019) [SDP]) involves determining whether or not bitcoin mining equipment should be considered securities, which would make the sale of bitcoin mining equipment subject to security laws and unfair marketing laws.

Unfortunately, because the court has compelled arbitration, we are unlikely to ever obtain a firm ruling from the court on the issue. We will not have a ruling on whether or not mining equipment is a security. Instead, that issue will be resolved by an arbitrator.

Obelisk Delivered Miners Late, Failed to Live Up to Hashrate Promises

In recent proceedings, the court explained that:

“Obelisk offered pre-orders for two types of miner, the SC1 and the DCR1. Because the miners boasted high ‘hash rates,’ individuals involved in the cryptocurrency mining industry (including the Plaintiffs) believed these units would be more profitable than existing miners.”

The defendant, Obelisk, had previously moved to dismiss the case for lack of personal jurisdiction. In spite of that attempt, however, the court found sufficient contacts to satisfy the court’s jurisdiction even though the defendants were out of state.

Obelisk is accused of selling crypto miners that failed to meet promised specifications. Obelisk is also accused of shipping the units late.

When customers demanded a refund, Obelisk refused. In January 2019, the customers filed a putative class action lawsuit in state court in California, and that case was moved to federal court. Now, as of May 3, the case is headed to arbitration.

The Case Could Have Established an Important Precedent

The case deals with the issue of whether or not the sale of mining equipment that fails to meet promised specifications is a violation of state securities and unfair marketing laws.

Because the case is headed to arbitration, we will not get a ruling on that matter – or at least a ruling is extremely unlikely. Here’s how the legal experts at The Block Crypto summed it up:

“We may never know what this Court thinks of the subject, because it just granted a motion to compel arbitration. A discussion of the arbitration decision follows, but this ruling makes it sufficiently less likely (though not impossible) that this Court will issue a substantive ruling on the merits of plaintiff’s claims, which will be resolved in the first instance by an arbitrator, whose ruling if challenged will be accorded significant deference.”

However, we did get some useful information from this case, including what makes an arbitration clause in a website’s terms of service enforceable.

Customers Were Required to Check a Box Confirming a Class Action Waiver

Part of the problem with the Obelisk case is that Obelisk made customers check a box indicating they agreed to the terms and conditions.

The terms and conditions contained an arbitration agreement and a class action waiver. By checking the box, the customers were agreeing not to sue Obelisk.

The customers made three arguments why those terms of service should not be enforced. The court rejected each of those three arguments, and that’s why this case is headed towards arbitration:

  • First, the plaintiffs argued that the strange color of the terms and conditions link made it inconspicuous. The court ruled that the terms were sufficiently conspicuous, and that “by clicking a box indicating that they agreed to the terms, a reasonable user be on notice that a hyperlink was likely somewhere in the adjacent text.”
  • Second, plaintiffs argued that they never got an executed copy of the terms and conditions, which means Obelisk could not prove the plaintiffs assented to it; the court disagreed with its claim as well because if they were to rule otherwise, “it would unravel nearly every clickwrap agreement on the internet”.
  • Finally, the plaintiffs argued that it was unreasonable for Obelisk to give themselves the ability to change the terms and conditions at any time. The court ruled this was immaterial because Obelisk never changed the terms at any time.

What Does This Mean for Crypto and the Internet?

Ultimately, this case has given crypto and the internet two important lessons:

Terms and Conditions on a Website Can Be Legally Binding:

There’s a reason why websites make you check a box verifying you’ve read the terms and conditions. By checking that box, you’re signing a legal document. The fact Obelisk’s customers checked that box played an important role in this case.

We Don’t Know If Miners Are Securities:

Because the case is headed to arbitration, we are unlikely to get a decision from the court on whether or not miners are securities and subject to state security rules and unfair marketing laws.

We may get a clearer ruling on whether or not miners are securities in the future. However, it seems unlikely that ruling will come from the Roberts v. Obelisk case now that it’s headed to arbitration.

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