Non-fungible tokens (“NFTs”) are at the center of another new lawsuit, this time with an aggrieved NFT buyer claiming that he was duped into “grossly overbidding” for the digital token he acquired for a cool $507,084 last fall. In the complaint that he filed with the U.S. District Court for the Central District of California on March 12, plaintiff Halston Thayer alleges that cryptoartist Matt Furie, Furie’s web-based company Chain/Saw LLC, and a corresponding decentralized autonomous organization, PegzDAO, are on the hook for fraud for allegedly misrepresenting the number of NFTs that would ultimately be offered up in furtherance of a “scheme to artificially inflate the value” of Furie’s FEELSGOODMAN Rare Pepe Card NFT.
According to the newly-filed complaint, Thayer alleges that the Furie, Chain/Saw LLC, and PegzDAO (the “defendants”) “conspired together to facilitate and conduct an auction in October 2021 of a purportedly ‘rare’ and ‘unique’ NFT by using Furie’s name and reputation to widely advertise the auction; by featuring Furie’s artwork in the NFT that was auctioned; by utilizing Pegz to store the NFT being auctioned, as well as 99 other NFTs identical to the auctioned; and by hosting the auction on the Chain/Saw website.”
Ahead of the auction, the defendants allegedly advertised the Pepe the Frog NFT as “a piece of blockchain history, originally minted in 2016,” and explained that while 500 of this Pepe NFT were minted, 400 had been “burned,” “99 [would] remain in the PegzDAO,” a decentralized autonomous organization set up in order to “feature and sell Furie’s cryptoarto,” and thus, only one would actually be auctioned off. The problem, according to Thayer, is that while the defendants advertised that only one of Furie’s Pepe NFTs would be auctioned, they failed to disclose that “they fully intended to distribute 46 identical NFTs for free almost immediately after the close of the October 2021 auction.”
“Relying on the defendants’ representations that only one Pepe NFT would be auctioned and the other existing 99 would remain in the PegzDAO ‘indefinitely,’” Thayer claims that he placed the winning bid for the Pepe NFT for 150 ETH ($537,084) on October 8, 2021. (According to the record of bids on the auction site, Thayer beat out another party that bid 140 ETH.) Less than a month after the auction took place, however, he claims that the defendants released 46 of the 99 remaining Pepe NFTs – for free, thereby, “significantly devaluing [his] Pepe NFT to less than $30,000, [which is] hundreds of thousands of dollars less than what he paid for this purportedly ‘unique asset.’”
On the heels of their distribution of 46 other versions of the same “Rare Pepe” NFT, Thayer claims that he sent a letter to the defendants on February 4, in which he sought to “rescind [their] contract by tendering his Pepe NFT back to [them] and demanding in return the 150 ETH he paid at the October 2021 auction.” (Thayer asserts that he entered into “a valid, enforceable contract” with the defendants when they “agreed to produce a single Pepe NFT (holding the remaining 99 in the PegzDAO indefinitely), and [he] agreed to pay 150 ETH in exchange,” noting that on their websites, the defendants clearly state, “When you purchase an NFT artwork, you are owning a unique contract.”)
The NFT-offering defendants, of course, rejected Thayer’s request in a letter of their own dated March 10, 2022, prompting him to file this lawsuit against them, citing fraudulent inducement, intentional and negligent misrepresentation, unfair competition and unlawful business acts and practices, breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. With the foregoing in mind, Thayer is seeking an order from the court allowing him to get out of the parties’ contract and requiring the defendants to return the $500,000-plus that he paid for the NFT or alternatively, an order requiring the defendants to “collect the 46 freely released Pepe NFTs and withhold them from circulation, as originally represented,” or still yet, an order requiring the defendants to pay him “the difference between what he paid for the Pepe NFT and the actual value of the Pepe NFT once 46 identical Pepe NFTs were released for free.”
The lawsuit is a striking one, as it sheds light on one of the scenarios in which plaintiffs can potentially take issue with NFT sales. But beyond that, it sheds light on an (alleged) instance that could prompt action from regulators, which are starting to pay increased attention to the trade of non-fungible tokens. In addition to the potential for enforcement action from the U.S. Securities and Exchange Commission (“SEC”) stemming from instances in which NFT projects consist of as many as “tens of thousands of NFTs” that are offered up by issuers and that appear to be little more than a pretext for a fungible token project and thus, that amount to unregulated securities (more about that here), Jeremy Goldman, who co-chairs the Blockchain Technology Group at Frankfurt Kurnit Klein & Selz, tells TFL that another potential place whether regulators may see the need to take action in the NFT space comes when a project has the “hallmarks” of fraud.
Addressing the likelihood that the SEC will, in fact, bring an enforcement action against the issuer of an NFT project at some point in the (not-too-distant?) future, Goldman says that he could see the SEC initiating an action in the event that there is an element of fraud at play in connection with an NFT project, namely, “there are promises made about what is going to be delivered and there was never an intention or an ability [on the part of the NFT issuer(s)] to perform the things that they are alleging,” leading to the SEC to pursue such projects on a deception theory of liability. (That is precisely what Thayer is arguing happened here.)
Thayer’s complaint comes as a number of NFT-centric cases are being lodged in federal courts across the U.S., on the basis of negligence, intellectual property infringement, and contract claims. In the wake of Miramax suing director Quentin Tarantino in a copyright and trademark infringement, and breach of contract complaint over Pulp Fiction NFTs, and Hermès filing a trademark lawsuit against the creator behind a collection of MetaBirkins NFTs, OpenSea was named in a complaint, with the former owner of a Bored Ape NFT that was allegedly stolen in a headline-making hack of the NFT platform, accusing OpenSea of “failing to implement policies and procedures to prevent, identify, detect, respond to, mitigate, contain, and/or correct security violations,” among other things. In a separate suit, another Bored Ape owner sued OpenSea, as well as fellow NFT marketplace LooksRare (and Bored Ape Yacht Club owner Yuga Labs) for neglecting to implement “common sense and reasonable security measures” to protect users from fraud and from the sale of stolen NFTs.
All of those cases are currently underway.
The case is Halston Thayer v. Matt Furie, et al., 2:22-cv-01640 (C.D. Cal.)
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