Do DAOs Need to Worry About Infringing Patents? MakerDAO and Compound Protocol Serve as Test Cases

Certain decentralized autonomous organizations (DAOs) are currently named as defendants in different court cases. However, the patent infringement cases in which True Return asserts that MakerDAO and Compound Protocol infringe its patent have not received much media attention, despite the fact that they may have a large impact on blockchain technology adoption and participation in DAOs. While no substantive patent law issues have been reached in either case, both have already grappled with issues important to the wider blockchain and DAO community and could be applicable to litigation with DAOs beyond the patent context.

As background, DAOs are an increasingly popular way to organize technical projects. Typically, they have governance tokens that allow anyone who purchases them to participate in the DAO. MakerDAO manages the protocol that issues Dai, an over-collateralized algorithmic stablecoin. Dai is the third-largest stablecoin, with more than $7 billion in total value locked (TVL). Compound Protocol, while not explicitly naming itself as a DAO, has a protocol that allows the lending and borrowing of crypto assets. Compound Protocol has more than $1 billion in TVL and manages a protocol that allows users to lock crypto tokens in smart contracts as collateral to earn yield when they are lent out. Despite the size of both, MakerDAO and Compound Protocol have not been incorporated anywhere in the United States under a specific corporate form (LLC, C corporation, etc.).

High-Level Summary of the Cases

A few notable issues have been raised in the cases so far. First, there has been discussion of how a plaintiff can even serve a decentralized organization like MakerDAO and Compound Protocol, a necessary first step to begin the cases.[1] In both, the court was receptive to alternative means of service that deviated from the normal service requirements. For MakerDAO, True Return asked to serve the complaint through MakerDAO’s Twitter account, its official forum, and by email to its published support contact. The court granted the request with one addition, that True Return also send the complaint by hard copy to the last address of the Maker Foundation. The court did not give its reasoning for allowing service in this manner.

In the Compound Protocol case, which is tracking behind the MakerDAO case, the court required some additional briefing on the issue of service. There, the court requested that True Return explain whether Compound Protocol is a “general partnership” or an “unincorporated association.” The distinction between the two is important because it changed the service requirements and who needed to be named in the complaint under New York law. True Return asserted that Compound Protocol is a general partnership, and also argued that its proposed service was proper regardless of what form Compound Protocol was determined to be and that the court did not need to reach this issue yet. The court granted True Return’s motion for alternative service and allowed service through electronic means by posting on Compound’s Twitter account and forum and by emailing Compound Protocol’s security contact and address listed in its terms of service. Again, the court did not discuss its reasoning and did not state what form it believed Compound Protocol to be.

Both cases continue a wider trend in the courts of allowing plaintiffs flexibility in how they serve DAOs. It appears to be increasingly unlikely that courts will allow DAOs to avoid lawsuits only because it is difficult to identify a specific person to be served with the complaint on behalf of the DAO.

Another notable fact is that True Return alleged in its complaints that “[h]olders of governance tokens thus may participate in the governance of a protocol, have a potential claim on its profits, and they share responsibilities for its liabilities.” As MakerDAO and Compound Protocol have no corporate form that can shield their token holders, the issue of shared liability (known as joint and severable liability) is important because their holders could have complete liability for any damages. It also appears that True Return will argue that anyone who holds the token is liable, regardless of whether they have participated in governance or voted using their governance tokens. This type of potential liability could have a material impact on the decision of whether to hold governance tokens in decentralized organizations. While the court has not weighed in on what it believes Compound Protocol to be under New York law, it has indicated that it believes Compound Protocol is either a general partnership or an unincorporated association, both of which, in theory at least, could open up holders of the governance tokens to liability.

The MakerDAO case is also notable for its messiness. Several entities have filed letters with the court, including the plaintiff, the third-party Crypto Council for Innovation (CCI) and an anonymous sender signing letters as “@makerDAOdai.” Most of the letters have been about whether CCI will be allowed to participate in the case as an amicus curiae (a friend of the court). So far, CCI has requested permission to file a motion to participate after True Return filed a motion for a default judgment against MakerDAO. True Return did not oppose participation by CCI so long as it disclosed the holdings of its members in MakerDAO tokens, information that True Return claimed to need to gauge whether CCI was biased. The court agreed and stated that CCI would need to provide this information on its members if it wanted to participate. Despite this, CCI filed a motion to participate but did not include this information, stating it did not know this information beyond what was already public. The court has not yet ruled on CCI’s motion, and it remains to be seen whether this defect is fatal to its request to participate. It is notable that this information will also provide True Return with the names of holders of the MakerDAO governance token, which would allow it to seek damages from them if liability is found.

Another interesting point is that in the MakerDAO case, CCI refers to MakerDAO as a “protocol” and not a DAO, likely in an attempt to frame the lawsuit as against technology, not an organization. It will be interesting to see whether CCI develops this argument — if given the opportunity to do so. This argument may touch on the argument made by some in crypto that DAOs are not bound by the laws of the United States because they are stateless and autonomous. This rationale may receive a critical eye from the courts, which tend not to look favorably on arguments asserting that a party is beyond the law.

As a final twist, True Return has also offered the patent in the case for sale as a non-fungible token (NFT). At the time this article was written, the patent could be purchased for 1,250 WETH. The strategy behind listing the patent is unknown, but it could be True Return’s attempt to provide a mechanism to settle the case in a way that could be done through the treasury of the DAO or that allows the purchaser to remain anonymous.

We will continue to watch these cases and provide updates, as they are likely to shed light on how the courts will handle blockchain patent litigation generally. For those who are interested in the details of the cases, we have a summary of the different filings in the cases below.

Detailed Summary of the MakerDAO Case

On Oct. 5, 2022, True Return filed complaints alleging that MakerDAO and Compound Protocol infringed its patent on improving a computerized ledger’s functionality.

To effect service against MakerDAO, True Return asked the court to allow it to serve through the communication channels it alleged that MakerDAO created for communication with the public. True Return sought for electronic service by “(1) direct message to the @MakerDAO Twitter account; (2) posting to the official MakerDAO Forum at forum.makerdao.com; and (3) e-mail message to support@makerdao.com.” True Return argued that this alternative form of service was necessary because MakerDAO “maintains no known physical office, has no known officers or directors, has no known mailing address, and has no other identifiable means of receiving mail or service.” On Nov. 23, 2022, the court agreed with True Return and ordered that service through these means was appropriate, but also added that True Return needed to serve a hard copy of the complaint on Maker Foundation, located in San Jose, CA. On Nov. 30, 2022, True Return filed a certificate of service stating it had completed service.

The Letters Begin

On Dec. 9, 2022, a letter signed by “@makerDAOdai” was filed with the court. The letter stated that MakerDAO does not have centralized management or location and accused True Return of “misleading the court with respect to the limitations which arise from MakerDAO’s carefully protected organisational form” (bolding and underlining in the original). The letter went on to claim that its “cryptocurrency activities are outside the reach of regulators” and requested the assistance of the court in “vacating this matter quickly and quietly.”

On Dec. 16, 2022, CCI filed a letter with the court requesting that it be allowed to represent MakerDAO in the case. CCI argued that it should be allowed to represent MakerDAO because its investor group “has been at the forefront of most of MakerDAO’s largest and most important transactions” and indicated that its members were active in the governance of MakerDAO. Next, the letter named the individuals and entities it stated were its members and involved in MakerDAO. Soon thereafter, several attorneys made appearances in the case on behalf of CCI.

Counsel for CCI filed a letter with the court on Dec. 22, 2022, requesting that CCI be allowed to submit its own brief as amicus curiae if True Return sought a default judgment. The letter described what a DAO was and likened it to a tool using software on a blockchain that allows unrelated parties to take actions without the need for a centralized authority. They further noted that True Return sought to hold MakerDAO liable as a general partnership, potentially opening up MakerDAO token holders to liability regardless of whether they were involved with, or even knew of, any allegedly infringing activities. The letter went on to state that novel and important legal issues that may have industrywide implications should not be decided based on default judgment and that CCI should be able to seek leave to submit its own briefing to address these issues.

True Return responded to CCI’s letter the next day, on Dec. 23, 2022. In its response, it stated that it did not oppose the submission of an amicus briefing generally but that CCI should be required to identify its membership list and whether any of its members own cryptocurrency assets related to MakerDAO. True Return argued that this was necessary so that CCI could not hide the identity of those behind it.

True Return Seeks Default Judgment

On Feb. 14, 2023, after no further response from CCI, True Return filed a motion for a default judgment against MakerDAO and sought more than $17 million in damages just for MakerDAO’s actions as of Feb. 6, 2023. On Feb. 15, 2023, CCI filed a letter asking that the judge not rule on the default motion, again asking to submit briefing as amicus curiae and alleging that True Return’s motion violated the rules of the court. That day, the judge ordered that he would consider CCI’s request if it were to “disclose whether any of its members own, hold, or owe cryptocurrency assets of MakerDAO.”

On Feb. 16, 2023, another letter signed by “@makerDAOdai” was filed, this time requesting the court withdraw any requirement for CCI to disclose holdings in MakerDAO because “the Council’s members are merely investors and not parties to this matter.” The letter stated that its “evolving Endgame restructuring will mostly eliminate our legal attack surfaces and should preclude future legal engagement with and regulatory enforcement on the DAO.”

CCI Moves to Participate

On Feb. 20, 2023, CCI filed its brief supporting leave to participate, arguing there were important public policy issues at play that extend generally to the cryptocurrency field. CCI alleged that True Return was going after “defenseless protocols” that it knew could not defend themselves in court to gain default judgments. CCI argued that MakerDAO needed an advocate because the asserted patent was facially invalid and that the requested remedies of more than $14 million and potentially shutting down the protocol were unsupported. CCI also noted that True Return had for two years offered to sell the patent as an NFT with a price of only about $2 million. Regarding the requirement that CCI disclose the tokens its members held for MakerDAO, CCI also argued that it did not know what holdings its members had beyond what was publicly known but that it should still be allowed to participate, given the important issue presented.

On March 8, 2023, another letter was filed by “@makerDAOdai,” asking that if CCI is not permitted to defend the case, the court delay its decision so that the council can revise its strategy. It further claimed that counsel for CCI had stated that it represented MakerDAO. Interestingly, the letter stated that “the Dai Foundation assiduously protects MakerDAO’s trademarks, software and websites, but our belief is and remains that IP claims against us can be dismissed in consideration of Maker’s stateless organization and autonomous operations.”

CCI responded to this letter the next day to distance itself from the statements in the anonymous letters. CCI noted that these letters were received via email at the pro se office and that CCI had never communicated with the sender. It also stated in the letter that counsel for CCI had never said it represented MakerDAO. True Return also filed a letter with the court that day, arguing that CCI’s request to particulate was improper and that it should be required to identify the MakerDAO holdings of its members because to allow CCI to proceed otherwise would allow parties to shield their liability and litigate through proxies.

On March 14, 2023, “@makerDAOdai” made another submission, stating that “MakerDAO governance asks the Court if it may submit CCI members’ holdings data in response to the Judge’s Order.” The submission indicated that this anonymous party was going to disclose the holdings of the CCI members to the court, apparently without the permission of the CCI members. The writer claimed that CCI’s membership owned the majority of blockchain patents and that it was in the industry’s interest to consolidate blockchain intellectual property with those members as industry champions.

CCI responded again on March 15, 2023, again clarifying that it did not know who made the submission and that “there is zero basis to believe that the anonymous individual or entity has the authority to speak for the decentralized protocol called MakerDAO” and “it is entirely possible that the anonymous individual or entity has interests adverse to MakerDAO.”

No further filings have been made as of the date of this article.

Detailed Summary of the Compound Protocol Case

True Return also filed its complaint against Compound Protocol on Oct. 5, 2022. True Return took no actions in the case and did not immediately seek leave for alternative service. On Jan. 18, 2023, the court ordered True Return to file a status letter and state whether it has served Compound Protocol, or to explain why it had not served Compound Protocol by the court’s 90-day deadline.

On Jan. 24, 2023, True Return filed a letter motion to extend the time to serve the complaint on Compound Protocol. The court gave True Return until Feb. 1, 2023. On that date, True Return filed a motion seeking to serve Compound Protocol by electronic means. On Feb. 27, 2023, the court requested additional briefing on three issues: how an unincorporated association may be served, whether Compound Protocol is properly treated as an unincorporated association or a partnership, and whether the court needs to decide that issue at this stage. True Return filed its response on Feb. 27, 2023, asserting that Compound Protocol was a general partnership but that, in either case, its proposed method of service was proper and that the court did not need to determine what form Compound Protocol was at this point. On March 6, 2023, the court granted True Return’s motion without elaboration. On March 22, 2023, True Return filed a certificate of service stating it has completed service of the complaint in the manner set by the court.

No further filings have been made as of the date of this article.

^[1] _{Alternative service on a DAO was also addressed in the much higher-profile case of Commodity Futures Trading Commission (CFTC) v. Ooki DAO, where the CFTC is seeking a default judgment against the DAO.}