Tag: business law

Categories
Carriers Transportation Law

Are False Online Reviews of Trucking Companies Protected by the First Amendment?

a woman in white long sleeves using a laptop
Photo by Yan Krukau on Pexels.com

In today’s digital age, online reviews can make or break a trucking company. Unfortunately, some brokers and other parties resort to posting false and defamatory reviews on platforms like Carrier411 and GoHighway as leverage to resolve run-of-the-mill business disputes or to “punish” perceived bad behavior. When confronted about the damage the false statements are doing to a carrier’s business, the posting broker will often hide behind a claim of First Amendment protection.

So how does the fundamental freedom of speech intersect with online postings? Many falsely believe that any statement made online is shielded by the First Amendment’s guarantee of free speech. This is simply not true. While the First Amendment does protect a wide range of expression, it does not provide blanket protection for false and defamatory statements of fact.

One Crucial Distinction: Fact vs. Opinion

One key distinction lies between statements of fact and statements of opinion. While opinions are generally protected, even if they are negative, false statements of fact are not. For example, saying “I didn’t like their service” is an opinion. Saying “They were two hours late for the delivery” is a statement of fact (that can be proven or disproven with objective evidence, like GPS records).

Defamation and the First Amendment

Business defamation occurs when someone makes a false statement of fact that harms the reputation of a company. To prove defamation, a trucking company generally must show:

  • Falsity: The statement made was demonstrably false.
  • Identification: The statement clearly identified the trucking company.
  • Publication: The statement was communicated to a third party (e.g., posted online).
  • Damages: The false statement caused harm to the company’s reputation or business. Actual money damages are always helpful (such as documented loss of loads), but most states also recognize the intangible value of business reputation.
  • Fault: The person making the statement knew it was false or acted with reckless disregard for the truth.

False Reviews: Not Protected Speech

False reviews that make objectively untrue claims about a trucking company’s performance, safety record, or business practices can constitute defamation. These statements are not protected by the First Amendment simply because they are published online. If a review makes a factual assertion that can be proven true or false with evidence (e.g., “The company’s trucks are unsafe” or “They consistently fail to deliver on time”), and that assertion is false, it can form the basis of a defamation claim.

Over 100 years ago, in Schenk v. United States, Justice Holmes explained the limit of the First Amendment: “[t]he most stringent protection of free speech would not protect a man in falsely shouting fire in a theatre and causing a panic.” In other words, the First Amendment does not protect speech that is deliberately false and harmful to others. Whether shouting “fire” in a theater in the early 20th century or falsely accusing someone of “double brokering” in 2025, the outcome is the same.

Additionally, some savvy posters (or their lawyers) raise the stakes by referencing something called anti-SLAPP laws when confronted about their false review. State anti-SLAPP laws allow a court to dismiss a defamation case when it is brought for an improper purpose (such as extortion or to suppress speech). A court can also impose sanctions. However, anti-SLAPP does not apply to factually supported, valid business defamation cases that become necessary to protect a business’s reputation.

What Can Trucking Companies Do?

If your trucking company is the target of false online reviews, it’s essential to take action. Here are some steps you can consider:

  • Document Everything: Keep records of the false reviews, including screenshots and timestamps. Gather all of the related documents, such as driver records, proofs of delivery, and bills of lading. This is especially critical if you end up in litigation.
  • Contact the Posting Individual or Entity: Reach out to the posting broker or other individual and attempt to secure a removal of the review through an informal business negotiation.
  • Contact a reputation management specialist: Our law firm has partnered with Carrier Defender to support an informal, expedited dispute resolution process for carriers facing false reviews. The Carrier Defender process is administered by experienced industry professionals and backstopped by our legal expertise.
  • Consult with an Attorney: If all else fails, an experienced attorney can help you assess your legal options and take appropriate action to protect your company’s reputation. This might involve sending a formal demand letter to the person who posted the review or, in some cases, filing a lawsuit for defamation. However, be mindful of the fact that litigation is slow, expensive, and no outcome can be guaranteed. Also, note that due to law licensing restrictions, you should contact an attorney licensed in state where the posting broker is located or where your own company is based.

Have more questions? Contact our firm by email or call us today.

© 2025 Artaev at Law PLLC. All rights reserved.

Categories
Carriers Transportation Law

Blackmail, Civil Extortion, and Economic Duress in the Trucking Industry: Legal Remedies for Unlawful Threats

Photo by Kevin Bidwell on Pexels.com

In the highly competitive and fast-paced trucking industry, maintaining a solid reputation is crucial. Brokers and trucking companies alike rely heavily on positive reviews and industry reputation to secure business and ensure steady operations. Previously, I have written about when such negative reviews rise to the levels of defamation and potential legal remedies available to protect a business’s good will.

Unfortunately, some unscrupulous persons or companies may exploit this vulnerability by threatening to post false negative reviews online to coerce carriers into unfair agreements or payments. Some carriers even report being openly extorted – with brokers demanding cash payments in exchange for removing a false FreightGuard report. At Artaev at Law PLLC, we understand the devastating impact such threats can have on your business and we stand by to help protect your company’s rights. This article explores the legal remedies available, including the differences between blackmail, civil extortion, and economic duress.

Blackmail

Blackmail, also known as extortion in certain contexts, is a crime both under state and federal law. The federal Hobbs Act prohibits extortion affecting interstate or foreign commerce – a designation especially applicable in the cross-border trucking industry.

The crime involves coercing someone to take action or refrain from action by threatening to reveal damaging or incriminating information. In the trucking industry, a broker may threaten to post false negative reviews unless a trucking company complies with unreasonable demands.

Key Elements of Blackmail:

  1. Threat: The broker makes a threat to post false negative reviews.
  2. Demand: The broker demands money, services, or other benefits from the trucking company.
  3. Intent: The broker’s intent is to coerce the trucking company into compliance.

While blackmail is primarily addressed under criminal statutes, it may also intersect with civil remedies, particularly when economic harm is involved.

Legal Recourse:

If you suspect you are a victim of blackmail or extortion, you should consider filing a police report with your local police department. Your state attorney general’s office may also have resources and direct you to the appropriate agency to lodge your complaint. Be ready to provide evidence of your claims, including any correspondence such as emails or text messages that show the illegal conduct.

Civil Extortion

Civil extortion is a tort that provides a legal remedy for victims of coercive threats used to obtain money, property, or other benefits. In the context of the trucking industry, a broker’s threat to post false negative reviews to extract financial or other concessions from a trucking company can be actionable as civil extortion.

Key Elements of Civil Extortion:

  1. Threat or Coercion: The broker threatens to post false negative reviews.
  2. Intent to Obtain Benefits: The broker aims to obtain money, services, or other benefits through the threat.
  3. Lack of Consent: The trucking company complies with the broker’s demands due to the threat.
  4. Damages: The trucking company suffers actual harm, such as financial losses or damage to reputation from compliance with the illegal demand.

Legal Recourse:

Victims of civil extortion can file a lawsuit seeking compensatory damages for financial losses and emotional distress, punitive damages to punish the broker’s egregious conduct, and injunctive relief to prevent further threats or actions. Evidence showing the threat – like emails or text messages – are critical in the civil context as well. Additionally, actual damages from compliance must be shown – a mere threat of harm is not sufficient to sustain a civil action for extortion.

Economic Duress

Economic duress occurs when one party uses wrongful threats or pressure to force another party into a contractual agreement. In the trucking industry, a broker’s threat to post false negative reviews to coerce a trucking company into accepting unfavorable contract terms can constitute economic duress. For example, if broker threatens to “FreightGuard” a carrier unless the carrier agrees to a rate reduction, additional routing, or other costly or unfavorable modifications, economic duress may have occurred.

A party seeking to void a contract may affirmatively claim economic duress, but it is more likely to show up as a defense. Where a party seeks to enforce a contract with terms obtained by duress, the defending party can assert economic duress as an affirmative defense.

Key Elements of Economic Duress:

  1. Wrongful Threat: The broker threatens to post false negative reviews.
  2. Lack of Reasonable Alternatives: The trucking company has no reasonable alternative but to comply with the broker’s demands.
  3. Induced Agreement: The threat induces the trucking company to enter into a contract or agreement.
  4. Resulting Harm: The trucking company suffers harm as a result of the coerced agreement.

Legal Recourse:

Trucking companies can seek to void contracts entered into under economic duress, as these agreements are not considered the result of free and voluntary consent. Additionally, they may pursue damages for any financial losses incurred due to the coerced agreement.

Conclusion

Threats to post false negative reviews can severely impact a trucking company’s reputation and business operations. Understanding the legal remedies available—blackmail, civil extortion, and economic duress—empowers trucking companies to take action against unscrupulous brokers. At Artaev at Law PLLC, we are committed to protecting your business interests and ensuring that you are not victimized by unlawful threats. If you find yourself facing such a situation, we are here to help you navigate the legal landscape and protect your rights.


Have more questions? Contact our firm by email or call us today to set up your free initial consultation.

© 2024 Artaev at Law PLLC. All rights reserved.

Categories
Uncategorized

Is a Bad Review Defamation? Protecting Your Business Reputation Online.

Following my previous article about online defamation, business owners frequently ask me whether they can “sue” Facebook or Yelp or Google, etc., to get a negative review removed. Or whether they can “sue” the poster for “reputation damages.” This is especially common in the trucking industry, where Carrier411 hosts a platform that allows brokers and customers to review carriers. Often times, a dispute or a misunderstanding between a carrier and a customer leads to a “report” or a bad review on Carrier411 that causes frustration and may even result in lost business.

A negative review by itself is not always defamation. To win on a defamation claim in court, you need to prove: (1) a false and defamatory statement about the plaintiff; (2) unprivileged publication to a third party; (3) fault amounting to at least negligence; and (4) actionability per se or the existence of special harm.

What does this all mean for the business owner faced with a negative review?

  • First, a successful defamation claim requires a false and defamatory statement. This is the most commonly misunderstood element, but it is absolutely critical. A negative review – even if the business owner has a different side of the story, or does not agree with it – is not actionable unless it is actually false. A statement of opinion – even if negative – is not a false statement of fact because there is no such thing as a false opinion. That is an important difference, especially in the age of social media. A person may go on your restaurant website and freely post something like “I hate the atmosphere and I did not like the food here at all.” That is not defamation, even though it is a negative review. Rather, it is a statement of opinion. A good test is to ask: how am I going to prove that the statement is false? What types of evidence will I introduce to refute the “facts” that were posted? There is no evidence that you can introduce to refute a statement of opinion – in other words, the customer’s perception of atmosphere and the food is their own. If they did not like it, then it is their opinion, and they are entitled to it. Also, the statement must be defamatory, that is injurious to your business reputation. A statement that is false, but is not negative or otherwise critical of your business is not actionable. For example, if a review says “This restaurant is located in midtown Detroit,” when in fact the restaurant is downtown, the statement is false, but not defamatory.
  • Second, there must be unprivileged publication. “Publication” just means dissemination to others – meaning third parties. Of course, if something is posted online, it is published. “Unprivileged” means that the statement is not made in the context of a protected communication, such as a legal filing with the court, a police report, or some other type of special protected communication.
  • Third, the false statement must be made with at least negligence. That simply means that the person making the statement either knows that it is false or does not bother to try to find out before publishing. Even if a person publishes a false statement about your business, they may not be liable if they consider it true based on a reasonable inquiry.
  • Fourth, there must be an element of damages. In business cases, this element is usually satisfied automatically, as damages to business reputation are considered actionable per se. However, actual damages are still critical and must be proven – otherwise you may end up recovering only nominal damages. While punitive and exemplary damages, as well as attorney fees, are available under MCL 600.2911, there are no guarantees that they will be awarded. A case is always more persuasive if there are actual damages that are proximately caused by the negative post, review, or other published statement.

Even if you can prove the four elements, there are practical factors to consider before filing a lawsuit. Are you prepared to bear significant litigation costs – thousands or even tens of thousands of dollars? Are you prepared to invest time away from your business to prove your case? Never treat litigation as an investment opportunity because no business owner makes money paying their attorney and spending time in court.

The good news is that there are other options besides litigation that you can discuss with your attorney. Often times, an informal discussion with a dissatisfied customer can solve the issue. A cease-and-desist letter can be effective as well. If the potential damages are significant, pre-suit mediation may be the most cost effective option to resolve the dispute.

One final note – in Michigan, defamation claims must be brought within a year of the event. Other states may have different deadlines, but if you think you may have a claim, talk to an attorney sooner rather than later.

Dan Artaev is an experienced business attorney who advises a number of domestic and international businesses on various topics, including defamation. Email us or call us to set up your free initial consultation.

© 2024 Artaev at Law PLLC. All rights reserved.-

Categories
Uncategorized

But Your Honor, He Said a Bad Thing About Me on Facebook: Business Defamation Claims in the Age of Social Media

Photo by Pixabay on Pexels.com

It is 2024 and every business has an online presence – whether through a website, on Google, or on social media. It is more important than ever for business owners to know what can and cannot be said (i.e. posted) regarding their business online. In other words, can you sue to get that negative review off of Google? Or what about that irate ex-employee that keeps posting false information to your Glassdoor page? Can an overzealous freight broker’s post against a trucker on Carrier411.com lead to a lawsuit?

In a recent Michigan case that involved Carrier411, Penguin Trucking Inc. and E.L. Hollingsworth & Co., faced off in a business defamation case. The two companies were contracted for the same job at different rates by an outside third party. However, by the time the two companies found out about the scam, Penguin Trucking had already had the freight in its possession and was unable to make a deal with E.L. Hollingsworth for them to reconcile and both deliver the freight.

Since Penguin Trucking already held the freight, they decided to enter into a deal directly with the end customer for the delivery. Shortly thereafter, an E.L Hollingsworth employee posted a scathing report on Carrier411.com, a trucking monitoring service website. The employee wrote that Penguin Trucking “held [the] load hostage,” attempted “in-transit agreement modification,” and accused them of “unethical or deceptive business practices.” In any industry, potential customers are reluctant to do business with companies that have negative reports written about them, like those written on Carrier411.com. In the trucking business, Carrier411 reviews are especially crippling and can even destroy a smaller or startup business. Penguin Trucking experienced these adverse effects first-hand when it lost out on a contract with a shipper based on the FreightGuard. In litigation, Penguin Trucking proved not only that the online statements were false, but that the loss of the shipper contract was directly linked to the Carrier411.com review. Penguin Trucking was awarded $612,400 in damages for this lawsuit.

Michigan’s laws are clear about what constitutes defamation and what does not. Most other states have similar laws that protect against false statements that damage a business’s reputation. There are four elements to a defamation claim in Michigan:

  1. A false and defamatory statement concerning the plaintiff;
  2. An unprivileged publication to a third party;
  3. Fault amounting at least to negligence on the part of the publisher; and
  4. Either special per se harm or actual damages proximately caused by the statement.

For a more in-depth look at what each element means and requires, check out my latest article about protecting your online reputation.

If someone is posting intentionally false information about your company on the Internet (including a false FreightGuard report on Carrier411) you have a right to defend your company. An experienced attorney can help with various options short of litigation, such as sending a cease-and-desist letter and negotiating a resolution on your behalf. If litigation does become necessary, we can also provide the necessary support and consultation to take your case before the proper court.

Have more questions? Contact our firm by email or call us today to set up your free initial consultation.

© 2024 Artaev at Law PLLC. All rights reserved.

Categories
Uncategorized

Skill-Based Gaming 2024: Demand For Innovation Amid Regulatory Uncertainty.

Photo by Oleksandr P on Pexels.com

Since the firm’s inception in 2020, Artaev at Law has worked extensively with companies offering real-money skill-based gaming in the U.S. and internationally. In 2024, the market continues to grow, transform, and gain both appeal and legitimacy as an entertainment alternative. Recently, FanDuel joined the competition with its FanDuel Faceoff app. Its entry into the space is notable because it is marks a gambling industry heavyweight’s entry into the niche space of skill-based real money gaming. FanDuel’s roots are in fantasy sports and the brand is currently well-positioned in the online gambling market, along with DraftKings and well-known casino brands like Caesars and MGM. In contrast, the skill-based real-money gaming market has historically been dominated by specialized developers like AviaGames (Pocket7), Papaya Games, and Game Taco (formerly known as Worldwinner). Many independent studios also used Skillz branding and platform for their own take on the “casual” and “social” gaming categories.

4 Takeaways for the Industry

So why do FanDuel and its Faceoff app matter to skill-based real-money gaming? A major gaming market player’s entry into the skill-based sector is a bellwether and indicative of broader market trends:

  1. Skill-based real-money gaming is alive and well. The market is far from saturated and is still ripe for innovative offerings that may appeal to different demographics. For example, sports-based and party-style games may draw younger male customers, as opposed to the traditional solitaire/bingo offerings that have historically targeted older, female players.
  2. Skill gaming may expand an existing entertainment brand. FanDuel is already associated with gambling and sports, but not necessarily skill-based word games or Wheel of Fortune. FanDuel Faceoff is another vertical to expand crossover appeal to existing customers, as well as to reach new demographics.
  3. Online gambling markets may be becoming stale and driving demand for alternative gaming entertainment. As more states legalize sports betting and casinos (including the ability to wager online), consumer resources are being spread thin across identical gambling products. Entertainment consumers may be looking for innovation instead of yet another sports book or slot machine. The recent uptick in Pick’em Style fantasy sports (and scrutiny of) offerings by companies like Underdog Sports and Prize Picks shows that consumers are interested in something different. Accordingly, skill-based gaming is an exciting opportunity for gaming (and entertainment) companies to differentiate themselves and cater to demand.
  4. Skill games can compliment and enhance your existing gaming or non-gaming product. Faceoff complements but does not replace FanDuel’s existing fantasy sports, sports betting, and casino gambling products, which are in different apps. Yet the login info is the same across the FanDuel universe. This strategy shows how existing entertainment brands can gamify (or further gamify) their products to expand their verticals. The interest in play-to-earn video games is just one example of the tremendous appeal and potential of game monetization.

Demand for Innovation Runs Into Regulatory Uncertainty

With Super Bowl LVIII and the interest in “novelty prop bets” on everything related to Taylor Swift, it is clear that there is consumer appetite for something new. Some companies, like the aforementioned PrizePicks and Underdog Sports, are offering their own spin on the existing DFS or fantasy sports models. Peer-to-peer marketplaces combine social elements with a decentralized “no-sports-book” mechanism. Even full-scale prediction markets that offer bets on world events and scientific achievement have manifested themselves as lucrative economic opportunities.

What is also clear is that state and federal regulators are still playing catch-up to market-driven innovation. Most gaming models are unlicensed, and rely on either the skill-based or fantasy sports exceptions to anti-gambling laws. Certain states have passed legislation targeting skill-based machines – for example, a few years ago Utah banned so-called “fringe gaming,” – but it is still uncertain whether the ban applies to software downloaded to a smartphone or only stand-alone machines. More recently, states like Michigan and New York have enacted new fantasy sports rules that prohibit player vs. house pick’em bets popularized by Underdog and PrizePicks. Adding to the confusion, each state defines and regulates gambling differently.

Accordingly, the experienced and knowledgable attorneys at Artaev at Law are here to help your skill game venture. Need a legal opinion to get your app approved? Onboarding with a payment processor? Need help navigating terms and conditions or a privacy policy? Contact Artaev at Law PLLC today for your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2024 Artaev at Law PLLC. All rights reserved.

Categories
Uncategorized

DePIN Networks and Utility Tokens: Legal Considerations for the Physical Applications of Blockchain Technology.

Photo by Sparsh Karki on Pexels.com

Imagine creating a product that sells data, such as a mapping or telecommunications service. These are capital-intensive businesses with immense startup costs. Barriers to entry may seem insurmountable – after all, if you wanted to compete with Verizon or AT&T, the cost and availability of cell phone towers alone would be cost-prohibitive. Same with competing against Google Maps or Apple. It is essentially impossible for a startup to compete with companies that are effectively public utilities.

How is DePIN useful and what are some examples?

Enter decentralization. While currently associated with largely speculative financial transactions and niche non-fungible token (NFT) projects, decentralized/permissionless networks have great potential to expand beyond the merely virtual and into the physical space. The Helium communications network and Hivemapper’s mapping data services are just two great examples. Helium crowdsources its network by leasing physical space to install its smaller, lower-powered antennae. Instead of 400-foot massive, high-watt cell towers, the network runs on hundreds or even thousands of densely distributed smaller transmitters. Helium’s own cryptocurrency (HNT) comes in as a rewards system – for installing an antenna, passing proof of service tests, and increased use of the particular location, the landlord earns Helium tokens (HNT) (or associated IOT or MOBILE tokens), which can then be sold or exchanged on the open market. Locations that are used more frequently earn more tokens, incentivizing the optimal location and operation through economics principles.

Hivemapper works in a similar manner, but with road mapping. Hivemapper sells its proprietary dashcams, which users can buy, install, and use to collect data from their vehicles, which is then uploaded in exchange for HONEY tokens. Like HNT, HONEY can be sold or traded on an exchange. The benefit to Hivemapper is that it essentially collects data in exchange for self-created tokens and sells dashcamps on top. Hivemapper does not invest in significant infrastructure, like Google’s mapping cars or their specialized cameras. Hivemapper instead recruits – and decentralizes – the process for collecting road data that would otherwise be cost prohibitive. As an additional efficiency, this results in more up-to-date road data, as it is collected from more sources than a single Google Maps car that drives through a particular route on an infrequent basis.

This application (and benefits) of decentralization and crowdsourcing to data collection and aggregation, as well as other physical applications are significant. For example, a company could use a decentralized token incentive structure to collect environmental or weather data, which then could be sold to private parties for development purposes, aid in agriculture, and otherwise create significant inexpensive, up-to-date data aggregation. Social science applications abound, as a company could incentivize information gathering and consensus-based verification with a properly-designed token system.

DePIN must still comply with existing physical and financial regulations.

While novel, DePINs must still fit into the existing physical and financial regulatory schemes. For example, Helium’s network must comport with FCC standards on communications devices, radio frequencies, transmission power, and other administrative matters. Further, the fact that companies like Hivemapper and Helium essentially create their own currency, must also fit into existing securities and money transmission laws, both on a federal and state-by-state level. Companies cannot simply raise funds through initial coin offerings and bypass normal securities regulations. If selling tokens, companies must engage in Security Token Offerings (or STOs), which are conducted similar to private placements and disclosed on Form D with the Securities and Exchange Commission. Otherwise, companies may structure their tokens as “utility” tokens, which means that consumption (and not investment or speculation) must be the primary motivation for the purchase. For instance, if users who earned the HONEY token could consume that token and use it to pay for a Hivemapper premium subscription (giving themselves access to premium map and road condition content for example), the HONEY token would likely be classified as a “utility” token and not fall into the “investment contract” designation under the Howey test.

How do utility tokens fit into the DePIN economy?

A “utility” token with non-investment or consumptive utility is essential to a DePIN ecosystem. However, this is also problematic, as essentially the company must not only pay out a token like HNT in exchange for data and bandwidth, but also accept HNT as payment for tangible services. From a company perspective, the tangible services cost fiat dollars – capital and labor cannot be purchased for a manufactured token. Further, the price of a token like HNT is hardly stable. HNT currently trades at about $6.60 to HNT. In November 2021, HNT traded for over $50 per HNT. Unstable token prices limit the consumptive use of cryptocurrencies and tokens, making them more suitable for long-term holding or short-term speculation. Further, it is tempting for a startup to simply issue tokens to raise capital – under the guise of a future consumptive use or simply the “this will go up in value as we expand” argument. This reality defeats the non-investment utility argument and renders tokens susceptible to classification as unregistered securities.

Companies have attempted to address these issues through use of associated tokens (IOT and MOBILE are directly earned by Helium network or hotspot hosts, the burn-and-mint protocol, use of “data credits” or “map credits,” and various fees. For example, Filecoin, a decentralized file handling platform, collects base fees for storage deals, batch fees for adding storage capacity, overestimation fees that related to optimized gas usage (gas being the cost of transacting the cryptocurrency), and penalty fees collected from those who do not provide storage as promised. Those who want to store data using Filecoin pay fees in FIL. FIL is also the reward paid out to those who provide storage or retrieval services on the Filecoin network.

What are specific legal challenges facing DePIN projects?

While innovative, DePIN businesses face an uncertain regulatory landscape, particularly in the United States. At a minimum, a business considering DePIN should consider the following:

  1. Physical regulatory considerations – are there zoning laws, telecommunications regulations, licensing requirements, or other physical considerations that affect my business?
  2. Legal liability – what are my obligations to the persons who contribute to my network or project? Are they contractors or employees? Are there any insurance or liability risks that I need to cover through contracts or terms of use?
  3. Financial legality – is my token really a “utility” token for consumptive non-investment use? How is my token created? How is it used? Is that use supportable under the current regulatory framework and the Howey test?

Some commentators predict that DePIN will be the next big thing in crypto and lead to mass adoption of decentralized blockchains in day-to-day business and life. The benefits are easy to see: lower costs, greater accessibility, crowdsourced reliability, security. However, there are also many complex legal regulatory considerations. Contact the experienced attorneys at Artaev at Law PLLC for a consultation about your next big project.

Disclaimer: This article is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2024 Artaev at Law PLLC. All rights reserved.

Are Cryptocurrency Games of Skill Legal in the United States?

Photo by Pixabay on Pexels.com

Real-money games of skill are unregulated and thus legal in the majority of the United States. While there are specific best practices for launching your project, games where skill is the predominant or material factor in deciding the winner are generally not considered prohibited gambling. With the rebound of cryptocurrency markets in 2024 and a renewed interest in NFTs, is it possible to launch a skill-based game that uses cryptocurrency as opposed to fiat?

The answer is yes, but there are several caveats, warnings, and areas to be aware of. Cryptocurrency is subject to a patchwork of state-by-state regulations, as well as overlapping oversight from federal regulatory bodies including the Securities and Exchange Commission (“SEC”) and the Commodities Futures Trading Commission (“CFTC”). However, the first consideration is whether the game is regulated as “gambling” under any state or federal laws.

Games of skill vs. games of chance

First, in any real-money game of skill, the initial and primary consideration is the effect of skill vs. chance. It does not matter whether the players are competing for fiat dollars, cryptocurrency, or gold bars. State anti-gambling laws generally require the wager and receipt of “something of value” – the definition is purposefully broad to ensure anti-gambling regulations cannot simply be evaded by substituting cash for gold, tokens, or something else of value. Clearly, cryptocurrency is something of value and therefore falls within the same regulatory framework as cash games.

In-game currencies and securities regulation

Second, cryptocurrency-based games are subject to some unique considerations and developing laws.

The Securities and Exchange Commission has taken a particular interest in cryptocurrency-based projects in the United States. Initial coin offerings (or ICOs) have been on the SEC’s radar since at least 2017. ICOs were essentially a way for companies to raise funds by selling self-created crypto tokens without complying with securities registration requirements. The SEC took (and continues to take) the position that where a crypto asset (whether it is token or an NFT) meets the definition of “investment contract,” the asset is a security and is subject to the regulatory and registration requirements of the Securities Act of 1933. Companies that sell unregistered securities face stiff penalties and injunctions from the government, as well as “disgorgement,” which is just another way of returning funds to the buyers.

If your cryptocurrency skill-based game uses a widely circulating coin like BTC or ETH or SOL, then you are in a better position because the SEC generally targets the issuers (not the users) of a particular crypto asset. However, if you are planning to launch your own in-game token for players to use as an entry fee and to receive as a prize, you need to ensure that the token has sufficient non-investment utility. In other words, a company may use its own in-game currency if the in-game currency is considered a “utility token” – meaning there must be a use outside speculation and expectation to profit from the efforts of others. If there is true “utility,” the token will not be considered a “security” under the Howey test. Such an analysis is complex, multi-faceted, and requires a legal opinion from qualified counsel.

Patchwork of state-level regulations

Certain states have also enacted various laws targeting the sale and exchange of virtual assets. Some have taken a light approach – for example, Michigan has updated its criminal code to include the definitions of cryptocurrency and Distributed Ledger Technology to ensure that the criminal statutes applicable to fraud, theft, and forgery include the new technological representations of value. See MCL 750.157m(c), (f). Other states, like New York, Florida, and Minnesota, have enacted licensing schemes with respect to virtual currency business activities and updated their money transmission laws.

Moreover, states have their own sets of securities laws. Those are not necessarily preempted or superseded by federal law. In other words, even if a crypto asset is a utility token under the Howey test and is not considered a security under federal law, a state regulator may come in and enforce state-level “blue sky” laws. As just one example, the state attorneys general of Alabama, Kentucky, New Jersey, and Texas recently coordinated an unregistered sale of securities enforcement action against Slotie.com, which was selling gamified NFTs that represented virtual plots of land in a Las Vegas-style gambling metaverse.

Gaming in 2024 is full of innovative possibilities, especially as the crypto markets rebound, government regulation across the world matures, and public interest in alternative assets increases. However, there are many legal considerations to evaluate. The qualified and specialized attorneys of Artaev at Law stand ready to help with your next project.

Disclaimer: This article is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2024 Artaev at Law PLLC. All rights reserved.

How to Advertise Real-Money Gaming on Meta in 2023: A Legal Opinion is Still Required.

Meta (formerly known as Facebook) remains an attractive forum for real-money gaming companies looking to advertise their skill-based gaming apps, esports, and fantasy sports offerings. However, Meta has a strict policy that requires an application and approval before any “online gaming” ads can run. The application form is convoluted and complex, and unless you have a gambling license from a state regulator, you will need to obtain a legal opinion from an experienced gaming attorney.

Artaev at Law PLLC has provided consulting, review, and legal opinions to gaming companies since 2020. We also have experience with the Meta/Facebook onboarding and application process. Before Meta’s overhaul of the process in August 2022, the application was much simpler than it is today. The advertiser disclosed their geographic target, acknowledged the requirement for geofencing and age compliance, and submitted a legal opinion that qualified their offering as a game of skill or other type of competition that does not require a gambling license. Now, the application process requires not only a selection of the proper jurisdictions from a drop down menu, it also requires the advertiser to choose which “category” is most appropriate for their game.

For example, when choosing the United States, Meta prompts the applicant to choose the states where the game will be offered. Clicking on a state gives a choice of the types of games that Meta considers available or “allows” in that state. This sublist is inconsistent and does not provide any context as to what types of games fall into each category. For example, selecting Texas gives the advertiser a single option to choose “sweepstakes.” But Texas courts have applied the “predominant factor test” to permit real-money games where skill predominates over chance in deciding the winner. The Texas legislature’s definition of “gambling” also contains an express exemption for “bona fide contest[s] for the determination of skill.” TX Penal Code 47.01. So, while Texas state law permits skill-based games that pass the predominant factor test, Meta’s drop down menu only allows “sweepstakes.”

Gaming companies must also select the protective measures that they implement to ensure compliance with their territorial restrictions and 18+ age policies. KYC checks may also be appropriate depending on the jurisdiction, but again, this is a requirement that varies by country and region. Smaller or startup companies often struggle with navigating the various requirements, but there are qualified third party administrator solutions that offer the necessary services for gaming industry participants.

Finally, unless your company has a gambling license from a state regulator, Meta requires a legal opinion from an experienced and qualified attorney regarding the legality of the game under a particular jurisdiction’s laws. For example, if a company is offering a mobile app game of skill in the United States, the legal opinion will need to address not only the application of federal anti-gambling laws (such as the Unlawful Internet Gambling Enforcement Act and the Wire Act), but also the individual states. Each state has its own definition of “gambling,” various exceptions, and judicially-crafted test (such as the predominance or the material element test) that must be applied to the game in question. Also, the laws can change from time to time and must be addressed, such as when Virginia adopted specific legislation regarding certain physical games of skill in 2022.

Once the application and the opinion are submitted, Meta’s initial process is to check the submission for completeness (do not forget screenshots of your landing page!) and send it off for outside counsel review. The review can take as little as 2 weeks or as long as 3 months, depending on the game and the volume of submissions. Before the August 2022 reforms, if the application was rejected, there would be a specific reason and explanation. This allowed advertisers to go back to fix and resubmit their application. Currently, Meta does not give a reason for rejecting a submission. The default message is that advertising of the particular game or app is “not supported.” This is particularly frustrating when an advertiser has waited for weeks or months, just to find out their game is “not supported.” There is no clear appeal process either, and the advertiser is left to guess at how to best resubmit their application – or whether to simply try running ads without prior authorization (which risks Meta disabling the ad account and page).

Advertising on Meta can be a powerful boost to your game’s audience, but it is also a complex process that requires a legal opinion from an experienced attorney. There are many aspects to navigating the various laws in play, as well as KYC, age-gating, and geolocation requirements that are more and more prevalent across the industry. Contact Artaev at Law PLLC today to set up your initial consultation.

The qualified and specialized attorneys at Artaev at Law PLLC know gaming law – email or call us to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2023 Artaev at Law PLLC. All rights reserved.

Categories
Uncategorized

Are NFT Collectible Card Games Legal in the United States?

NFT collectible card games are generally legal within the United States, provided that developers and players comply with several key laws. Specifically, these games implicate securities regulations, anti-gambling laws, and tax issues. NFT collectible card games are a natural Web 3.0 extension of over-the-board card games like Magic: The Gathering and have drawn a lot of attention, including from Reddit co-founder Alex Ohanian. These games leverage Non-Fungible Tokens (NFTs) to create scarce and valuable digital cards that players can collect, trade, and use in gameplay. The idea is similar to play-to-earn games that attach real-world value to in-game digital assets. While lucrative from a business standpoint and fun to play, these games create potential legal issues for both players and developers alike.

Gameplay

Before analyzing where NFT collectible card games fit within a legal framework, one must first understand the games themselves. The basic concept is that players purchase or otherwise acquire packs of random cards (with preset rarity distributions) that can be used to play a board/table-top game and also have collector and secondary market value. NFT or “digital” collectible card games are based on the same concept – players purchase or “mint” a pack of cards that they can use to play a game, collect for their own enjoyment, or trade or sell on the secondary market. Of course, the NFT cards do not have a physical component and exist only on the particular blockchain. Integrating NFTs ensures immutable value to these assets, same as physical cards in the old-school table-top games.

Here is a brief overview of a few of the most popular NFT collectible card games:

  1. Gods Unchained

Theme: Gods Unchained is a strategic card game set in a mythological universe. Players become powerful gods battling for supremacy.

Rules: Players start by choosing a god, each with its unique powers and abilities. Next, they build a deck of 30 cards consisting of creatures, spells, and weapons. The game proceeds in turn-based rounds. Each player uses their cards to attack the opponent’s god, defend their own god, or manipulate the game board. The objective is to reduce the opponent’s god’s life points to zero. Gods Unchained utilizes the Ethereum blockchain to mint its cards as NFTs. Players can then trade or sell in various marketplaces.

  1. Splinterlands

Theme: Splinterlands is a fantasy-themed card game. Players summon creatures and cast spells to outwit their opponents in fast-paced battles.

Rules: First, players build a deck by choosing a Summoner and selecting a set of monsters from their card collection. Each card has unique abilities, attack and health points, and mana cost. During a match, players have a limited amount of mana, which they use to summon monsters and cast spells. Players compete in automated combat rounds, trying to defeat the opponent’s team of monsters. As with other NFT collectible card games, players can trade, rent, or sell the various NFT cards to other players.

  1. Skyweaver

Theme: Skyweaver is set in a rich, cosmic universe. Players engage in strategic battles using cards representing creatures, spells, and enchantments.

Rules: In Skyweaver, players initially assemble a deck of 20 cards from a diverse pool of over 500 unique cards. The game categorizes cards into various prisms, each with its unique playstyle and strategy. Players take turns playing cards from their hand. They use their hero’s mana to cast spells, summon creatures, and attach enchantments to other cards. The objective is to reduce the opponent’s hero’s life points to zero. Skyweaver mints cards as NFTs on the Ethereum blockchain, and players can buy, sell, or trade the NFTs on various platforms.

Other popular NFT Collectible card games include:

  • CryptoSpells
  • Dark Country
  • ChainGuardians
  • Sorare
  • Axie Infinity (Card-Battler)
  • Relentless (formerly known as Zombie Battleground)
  • War Riders
  • CryptoAssault
  • Ether Legends
  • Force of Will (FoW) NFT

Legality of NFT Collectible Card Games

Are these games are legal? NFTs, cryptocurrency, and blockchain technology in general have all attracted significant legal scrutiny. So, are NFT collectible card games legal within the United States? Short answer: it depends.

  1. Are the NFTs used in these collectible card games unregistered securities? I have previously written on the topic of whether play-to-earn games really just sell unregistered securities and it is certainly possible depending on how the particular game is structured. The Securities and Exchange Commission applies the 4-prong Howey investment contract test to any novel NFT/cryptocurrency offering, which is a balancing analysis that asks whether a particular scheme is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profit, and (4) with the profits derived from the efforts of others. Generally, NFTs that represent digital assets like art, collectible cards, or virtual real estate do not qualify as securities under U.S. law, but this very question is currently being decided in private litigation between the holders of NBA Top Shots digital trading cards and their creator, Dapper Labs. Recently, a federal court denied Dapper Labs’s motion to dismiss, setting the stage for an in-depth court battle to determine the status of the NFTs under federal securities laws.
  2. Is an NFT collectible card game gambling? The question of whether trading cards and collectible cards are “gambling for kids” has been litigated since at least the 1980s when baseball card manufacturers had to defend against allegations of their purported use of gambling mechanics to sell their products. Courts have consistently held that plaintiffs get what they paid for – baseball cards – and suffer no damages from their “disappointment” in failing to get an ultra-rare chase card. More recent cases involving video game loot boxes suggest that the answer may depend on whether the NFTs are considered “things of value” under state gambling laws. In general, gambling is defined as risking something of value on an uncertain outcome to win a prize. A game where players wager real money or valuable NFTs on game outcomes could be subject to state and federal gambling regulations. To avoid a gambling classification, game developers should ensure that their games focus on strategy and skill-based gaming, and that players earn value through skill, rather than chance.
  3. Additionally, what are the tax implications of purchasing and selling NFT collectible card game assets? The IRS has indicated that it will apply a “look-through analysis” in determining how an NFT will be treated for tax purposes. In essence, the IRS is looking beyond the non-fungible token itself and considering the nature of the digital asset it represents. Consequently, the IRS may classify NFT cards as collectibles, which are subject to a higher capital gains tax rate than other property types. Aside from these tax implications for the players themselves, investors and NFT creators must also consider other tax implications of minting and obtaining NFTs.

Securities laws, anti-gambling regulations, and tax issues are all implicated in the rapidly evolving market of NFT collectible card games and digital gaming in general. Legal compliance is critical to not only avoid regulatory actions or tax penalties, but to also secure credible investors, banking, payment, and other technological partnerships.

The qualified and specialized attorneys at Artaev at Law PLLC know gaming and blockchain law – email or call us to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2023 Artaev at Law PLLC. All rights reserved.

Categories
Uncategorized

Are Play-to-Earn Video Games Legal in the United States?

Are play-to-earn games legal? The answer depends on the specifics of the game. For many gaming developers, play-to-earn is a lucrative business model in 2023 and beyond. These games let players compete against other players (PvP) or against the the game itself (PvE) to earn rewards that have real-world value. For example, players may pay real money to buy in-game currency to purchase virtual gear or real estate, but players also have the option to redeem the in-game currency for real-world money. Players can trade resources or earn the in-game currency through gathering, completing tasks or quests, or other gameplay. However, any company looking at play-to-earn should retain an experienced gaming attorney to consult on their game. It may be an attractive business model, but any real-money gaming implicates multiple legal areas, including taxes, securities law, and both state and federal-level anti-gambling prohibitions.

Earning real-world cash for virtual goods or gameplay is not a new concept. In fact, the first generation of massively-multiplayer online roleplaying games (MMOs or MMORPGs) like Ultima Online, Runescape, and Everquest had robust real-money economies for in-game items. Resource “farming” – where one would gather virtual resources and then transfer them to another player for a real-world money payment – became even more popular with World of Warcraft and the next generation of the MMOs like EVE Online. However, the developers did not officially sanction these in-game economies. Anti-RMT (real-money trading) provisions are prevalent in most end-user license agreements. Real money components in video games may be too close to gambling, which is obviously problematic. Developers are generally reluctant to assume additional liability and risk associated with any real-money economic component.

Play-to-Earn is Hot, But Rife With Legal Pitfalls.

However, it is the end of 2022, and making money playing video games is a real and viable career choice. Esports and video game tournaments are mainstream events, with their own ESPN page, multi-million dollar teams, and celebrity-status professionals. Many colleges offer esports scholarships. Casual video game tournaments (Call of Duty, FIFA, Gran Tursimo) are also a thing. For the more casual gamer, there are also real-money skill-based games (timed solitaire, bingo, etc.) available on the web or from the App Store. Daily Fantasy Sports giants like DraftKings and FanDuel also offer skilled players an opportunity to win real money by drafting the best fantasy sports teams.

There are also a number of NFT-based collectible card games, horse racing simulators (like Zed.Run), and countless other permutations of games where players are able to own in-game assets that they can sell and trade like their real-world counterparts. This sector of the gaming economy continues to grow, as the relatively low cost of cryptocurrency makes entry a lot more accessible. Many players also see the current “bear” market as a prime opportunity to enter some of these projects at low cost and potentially see significant growth in their in-game assets as the economy rebounds.

Modern play-to-earn games are simply another variation of the real-money gaming business model. Developers in this space fully embrace the concept of a virtual economy and the ability to earn real-world compensation for game play. The most prominent example is Axie Infinity (a Pokemon-type trading, collecting, and battling game), which has integrated blockchain technology (crypto and NFTs). Investors around the world, including Mark Cuban, quickly embraced the play-to-earn gaming model. Even in the times of the “crypto winter,” Axie is still worth many millions of dollars.

Advertising and Onboarding May Require a Legal Opinion.

Any real-money gaming business (including play-to-earn) needs experienced gaming counsel to guide them through various compliance issues. Advertising a real-money game on social media and getting through Apple’s approval process on the App Store requires a legal opinion that the game is truly skill-based and not illegal gambling. Is your game structured so that they are providing a service to you in exchange for compensation? Depending on the nature of your game, you may have unintended labor law obligations and even tax filing (W-2 or 1099) obligations to the IRS and state tax authorities.

Make Sure Your Game is Not Selling Securities.

Another potential pitfall is with the Securities and Exchange Commission (“SEC”). When designing your game and reward system, you must make sure that you are not inadvertently marketing a security and violating federal law. Securities are not just traditional stocks and bonds. An “investment contract” is also a regulated security and broadly includes any scheme where individuals pay money with the expectation that their money will be invested and they will earn a return. In the cryptocurrency world, initial coin offerings (“ICOs”) face heavy SEC scrutiny, especially after several high-profile cryptocurrencies turned out to be pyramid schemes.

The “investment contract” analysis is highly specialized and requires a thorough legal opinion. Each game is different, the laws are quickly changing in this area, and regulatory agencies are especially sensitive to crypto-related businesses in light of the numerous 2022 failings, bankruptcies, and rug pulls – with FTX being only the most recent example.

Beware Tax and Other Regulations If Your Game Uses Cryptocurrency or Other Blockchain Tech.

Speaking of crypto, if you are utilizing cryptocurrencies, tokens, NFTs, or other blockchain technologies as part of your game, there are more legal issues in play. Tax reporting and tracking are essential because the IRS considers cryptocurrencies to be property subject to capital gains tax. Does the game involve any crypto staking? If so, is your company now considered a bank subject to the FDIC’s jurisdiction? Are you involved in the business of money transmission and required to be licensed in each state where you do business?

Despite the slow regulatory change in this area and continued lack of centralized regulation, this area remains in the public eye and something of continued interest to regulators.

The bottom line is whatever your game and whether you are a veteran or just starting out, an experienced gaming attorney is a necessary asset to your business team.

Contact Artaev at Law PLLC to set up your initial consultation. We are Michigan’s gaming law firm and we specialize in the unique concerns that you may encounter as a game developer.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, tax, or investment advice. Every situation is different and has its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2021 Artaev at Law PLLC. All rights reserved.

How to Advertise Real-Money Skill Games on Facebook in 2022: A Legal Opinion is Necessary.

Photo by Pixabay on Pexels.com

In August 2022, Facebook updated its real-money gaming and gambling advertising application process. The updated form streamlined some of the required information and still requires a legal opinion from a law firm. Additionally, Facebook requires details about protective measures like geo-location and KYC and detailed geographic targeting information, including states or territories being targeted. Skill-based gaming that awards real-money prizes is not considered gambling in a majority of the United States – but that conclusion requires a state-by-state legal analysis, as each state’s anti-gambling laws are different. Further, the laws change frequently in response to innovations like fantasy sports, legalization of online gambling, and the latest skill-based gaming tables.

Facebook considers all types of real-money gaming “restricted” content, meaning that Facebook must expressly approve your ad before it runs. Whether it is full-scale online casino gambling, poker, fantasy sports, or pure skill prize contests, the requirements are the same:

  • Ads that promote online gambling, and gaming where anything of monetary value (including cash or digital/virtual currencies, e.g. bitcoin) is required to play and anything of monetary value forms part of the prize, are only allowed with our prior written permission. This includes games where purchases are required to continue game play and/or provide advantage in winning prizes, in cases where the prize is of monetary value. Authorized advertisers must follow all applicable laws, including targeting their ads in accordance with legal requirements. At a minimum, ads may not be targeted to people under 18 years of age.

Clicking on “Apply for Permission” takes you to the recently updated Online Real Money Gaming Onboarding Application Form. Advertisers are asked to submit their ID numbers, ad account numbers, the name of their business, and to select whether they are an “operator,” “aggregator/affiliate,” or an “agent/intermediary.”

Facebook then asks the applicant to submit the URLs they are seeking to advertise. This is a particularly important part of the review process, as the review team and Facebook’s lawyers will closely look at the website to ensure legal compliance.

Next, the applicant must select the specific “protective measures” that they implement to gate access to their product:

  • Geo-blocking (gating) of the URL
  • Age-gating of the URL
  • Address verification software or process
  • KYC checks
  • Local cell phone number
  • National tax ID number
  • Any other measures, which must be specified

Applicants are then asked to select the country or countries that they targeting. Note that Facebook’s new rules allow only the following 36 countries to be targeted:

  • Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Columbia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, India, Ireland, Italy, Japan, Kenya, Mexico, Netherlands, Nigeria, Norway, Peru, Poland, Portugal, Romania, Serbia, Slovakia, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States.

Selecting a country is not enough. Applicants must then select the specific states or territories they are targeting. For example, selecting the United States requires the applicant to select the states in which they plan to advertise. Selecting some of the European or South American countries requires information about the specific type of gaming or gambling to be promoted.

The next question is “Do you require a gambling license?” If no, the advertiser is required to submit “a reasoned legal memo by a law firm attesting to the legality of the advertised gambling/gaming without a need for a license.” If you need such a legal opinion, contact Artaev at Law, as we have analyzed a number of skill-based games and have been providing “where is it legal” opinions to Facebook (and other platforms) since 2020.

What goes into a legal opinion? At a minimum, the legal opinion will set forth a legal analysis of each state’s applicable laws and regulations (including case law) that support skill-based gaming in that state. The legal opinion should also address the applicable federal statutes and explain why they do not prohibit the game in question. Also, the legal opinion needs to explain the particular game’s mechanisms, why the outcome is not determined by chance, and how the various laws apply or not apply to the game in question.

A lot depends on the specifics of your game – for example, is the game more like fantasy sports or a pure skill contest? Also, even the bigger companies in the skill-based gaming industry disagree on the states where their games are permitted. Many states are currently addressing unlicensed skill-based gaming and regulations are constantly changing. For example, Michigan recently passed comprehensive online casino legislation and in the course of enacting the sweeping gambling laws, Michigan also included licensing requirements for skill-based real-money games.

Facebook remains a powerful advertising medium. Access to that medium is not free nor easy, especially if you are advertising a “restricted” product like skill-based real-money gaming. Ultimately, Facebook and its legal teams determine what ads meet its advertising policies. To minimize the review time and increase your chances of an approval, contact the experienced gaming attorneys at Artaev at Law PLLC.

Have more questions? Do you need help getting your app through the Facebook review process? Contact Dan Artaev today by emailing dan@artaevatlaw.com.

Disclaimer: This guide is not intended to be and does not constitute legal advice. It is for informative and promotional purposes only. Do not take any action or refrain from taking any action based on this guide, and always consult with a qualified professional about the circumstances of your particular case. Each set of facts is unique and different circumstances apply to each individual business.

© 2022 Artaev at Law PLLC. All rights reserved.

Categories
arbitration

Does Your NFT or Play-to-Earn Project Need Terms of Service?

Yes. In fact, well-drafted Terms of Service are critical to a successful blockchain business. Terms of Service (also known as terms and conditions, T+C, or TOS) are essentially a contract between you and your users that set out the terms on which they are allowed to use your product, interact with your game, buy your NFTs, or otherwise participate in the community. Importantly, the Terms will contain dispute resolution provisions, including mandatory arbitration and class action waivers. Properly drafted waivers and disclaimers are a business’s strongest defense against so-called “disappointed investors” and overzealous plaintiffs’ lawyers.

As the blockchain industry is currently in a “bear market,” there are a lot “disappointed investors” looking for someone to blame for their losses. Where lots of people lose money, litigation soon follows. For example, high-profile cryptocurrencies have collapsed – LUNA’s value went to zero overnight and its sister “stablecoin” TERRA is trading near zero despite being touted as pegged 1:1 to the U.S. dollar. Voyager Digital filed for Chapter 11 bankruptcy protection in July 2022, tanking its native VGX token. Celsius froze transactions (including withdrawals) in June 2022 and followed up with its own Chapter 11 filing in July 2022. Days before the Celsius bankruptcy filing, a high-profile investor filed a lawsuit against the company (and its affiliates) accusing them of fraud and running a Ponzi scheme. The same law firm is also spearheading a class action lawsuit on behalf of Solana (cryptocurrency) holders against its founder and associated companies, claiming that Solana is in fact an unregistered security and its sale to the public violates Section 12 of the federal Securities Act.

Even though a failed project or business is not enough for a cause of action by itself, the bevy of lawsuits claiming “fraud” are certainly enough for developers to take notice. As any business owner, blockchain developers must weigh risk and potential economic exposure, especially when it comes to launching a product in the largely unregulated blockchain space. Luckily, with the help of an experienced and knowledgable attorney, developers can leverage well-established contract law and “clickwrap/browsewrap” concepts to ensure maximum control and protection.

How can I use an arbitration clause to my advantage?

A mandatory arbitration clause is not a magic shield – it does not eliminate liability for selling unregistered securities for example. It does not eliminate liability for fraud. However, it makes the dispute resolution process more predictable, more efficient, private, and even potentially less expensive than litigation. Arbitration is a dispute resolution process conducted by a third party neutral (or a panel of neutrals) who act as the fact-finders and decision-makers in a dispute, much like a court. Arbitration decisions are binding and enforceable the same as a court order – the Federal Arbitration Act ensures that an arbitration decision can be taken to a court and transformed into a judgment. However, there is no jury, the parties can engage neutrals with specialized knowledge, and cost and outcomes are generally more predicable and manageable.

Back in 1989, the United States Supreme Court confirmed that a contract can compel investors to arbitrate their Section 12 securities claims against the broker or seller. In Rodriguez v. Shearson, 490 U.S. 477 (1989), the Court determined that an arbitration clause was enforceable because federal law generally favored arbitration and an arbitration clause did not limit the rights of injured parties under the Securities Act. Rather, the arbitration clause was construed as a forum or venue selection clause and procedural, rather than a substantive limitation on an injured party’s rights.

Another significant advantage of arbitration is that it eliminates conflicting state laws or decisions. The Federal Arbitration Act preempts state laws and court decisions that disfavor arbitration. Further, the Terms of Service will have a choice of law provision, as well as a choice of forum where disputes are to be resolved. This allows developers to exercise more control over disputes over their services, as well as deprives “disappointed investors” of the opportunity to forum shop and abuse procedural tools to increase cost and pressure on the business.

Do class action waivers really work?

Class actions are another potentially devastating consequence of disappointed investors. Section 12 claims may be brought as class actions and there are many examples. However, provided a class action waiver does impair substantive rights, it will likely be enforceable in the securities context. Section 14 of the Securities Act states that “Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title [15 USCS §§ 77a et seq.] or of the rules and regulations of the Commission shall be void.” In Rodriguez, the Supreme Court interpreted this provision to preclude substantive remedy waivers (such as damage caps), but to permit procedural provisions like arbitration clauses. Arguably, a class action waiver is a procedural mechanism and will be enforced the same as an arbitration clause.

In a more recent case, AT&T Mobility LLC v. Concepcion, 563 US 333 (2011), the Supreme Court confirmed that class action waivers as part of arbitration agreements were enforceable. The Court explained that parties are free to agree to procedures for their dispute resolution processes, including limiting with whom a dispute will be arbitrated. The Court reiterated the goals of efficiency and specialization that arbitration provides, concluding that arbitration promotes those goals, permits for individualized (rather than class basis) dispute resolution, and the Federal Arbitration Act favors such individualized dispute resolution, especially in a highly-technical field.

From a practical perspective, even if a court ultimately rejects arbitration and class action waivers, they raise the bar for a successful lawsuit and provide the developer with an opportunity to file a motion to dismiss. An early motion to dismiss may also dispose of some of the plaintiffs’ substantive arguments. In any case, increased procedural hurdles disincentivize overzealous plaintiffs’ lawyers, increase the opportunities for settlement, increase predictability, and reduce the chances of an outlier jury verdict.

Remember that well-drafted Terms of Service are not a shield for wrongdoers and will not prevent liability where it is warranted. However, they do offer some protection against “disappointed investor” lawsuits and give developers substantial control over disputes that may otherwise result in potentially devastating class actions and jury awards.

Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2022 Artaev at Law PLLC. All rights reserved

Exit mobile version