JONESBOROUGH, Tenn. (WJHL) – A Bitcoin mine operator can’t countersue Washington County for $41 million in damages if the county wins a pending lawsuit to shut it down, a judge ruled Tuesday.

Red Dog Technologies had countersued, claiming that if the county won its suit to shut down the cryptocurrency operation for violating zoning rules, the county should be held liable for Red Dog’s investment in the mine and its lost profits.

Washington County, Tenn. Chancellor John Rambo ruled Feb. 22 that cryptocurrency miner Red Dog Technologies cannot countersue Washington County for damages in the county’s suit seeking to shut down Red Dog’s operation. (WJHL Photo)

Chancellor John Rambo upheld the county’s claim that as a governmental entity it is immune from any monetary damages in this case.

Red Dog, which operates a Bitcoin mine in rural Limestone, is not the original defendant but is at the center of a lawsuit Rambo will hear in mid-March. The original defendant is power provider BrightRidge, on whose property Red Dog operates and from whose Bailey Bridge Road substation it buys the massive amounts of electricity needed for its operation.

The county sued BrightRidge in November 2021 after failed efforts to get it to shut down the mine. In May 2021, the mine became the subject of neighbors’ complaints about the noise it produced, including in the middle of the night.

BrightRidge was sued rather than Red Dog because it was BrightRidge that sought and received a rezoning to the A-3 (agricultural business) designation in February 2020 for a blockchain data center. While a public utility’s operations are an approved use in the A-3 district, the county claims that a private cryptocurrency mining operation is not and thus violates the zoning ordinance.

Tuesday’s hearing was about a more specific matter — whether the county didn’t qualify for standard governmental immunity. The county claims it does, and that its rezoning approval and subsequent interactions with BrightRidge were based on its assumption that BrightRidge would run the data center.

Christopher Owens, Red Dog’s attorney, argued the county should be considered to have entered a “quasi-contractual” arrangement with Red Dog due to the granting of the zoning and what he said was its participation all the way through the process.

“What the county did is actively participate in giving this rezoning for this as a permitted use, they were an active participant for 19 months, and now after the expenditure of millions of dollars by Red Dog they’ve decided to change their mind and now assert for the first time it’s not a permitted use,” Owens said.

Red Dog attorney Christopher Owens (foreground) and BrightRidge attorney Steve Darden at Tuesday’s motion hearing.

Owens said even though the parties didn’t have a contract, Red Dog’s damage claim should be allowed under a doctrine he called “detrimental reliance.” That occurs when a party — in this case Red Dog — had sufficient reason to rely on some type of promise. In this case, it would be the promise of the ability to operate on the rezoned land.

Owens relied on a 1997 case Engenius Entertainment filed against Memphis and Shelby County. A judge found those governments had essentially made a promise to the company regarding a huge theme park Engenius won the right to build in the Pyramid Center.

Like Engenius, Owens claimed, Red Dog had come to rely on a local government and now that implied promise could be broken.

“They did exactly what they intended to do, and now they’ve changed their minds,” Owens said of the county.

In its countersuit, Red Dog claims those profits average $2 million a month and that it anticipates 18 months to find a new site and relocate the computer servers and other equipment that “mine” the Bitcoin. That accounts for $36 million of the $41 million claim, with $5 million of investment accounting for the rest.

But Jeff Ward, arguing for the county, said there wasn’t “a single case that stands with the proposition you can pursue a detrimental reliance claim against a governmental entity,” Ward said. “It flies in the face of the governmental tort liability act” (an act that gives governments some immunity from lawsuits).

Attorney Jeff Ward talks with Washington County attorney Allyson Wilkinson.

Ward also noted that the county “can’t revoke a permit because a permit was never given.” The Red Dog operation started up without having first obtained a permit from the county’s zoning office.

“They’ve operated this whole time without a permit and Mr. Owens has talked and talked and talked about the millions of dollars they’ve put into this facility,” Ward said. “He hasn’t said a word about the millions of dollars they’ve made operating this for the period of time without a permit to operate it.

“Some of those things are going to be the issues that the court’s going to hear at the trial of this matter, but for today’s purposes we’re focused on ‘can they pursue a damage claim.'”

After a recess, Rambo came down on the side of the county and he differentiated between the Memphis case and this one.

“There’s no allegations that there were promises by the county to entice them to engage in a business activity as was in the case Engenius Entertainment, where the governmental entities solicited proposals through a request for proposal process, made a selection for Engenius to do business with them with a promise to contract, all as part of their request for proposal process,” Rambo said.

Because of that, he said, “immunity for monetary damages has not been removed for the claims asserted by defendants and therefore the counterclaim for damages, monetary damages, is dismissed.”

What comes next?

The actual trial will begin with one specific question for Rambo to decide: Does Red Dog’s operation violate the county’s zoning resolution. BrightRidge and Red Dog both have argued that it doesn’t and Rambo’s agreement with that would likely make any further lawyering moot.

Likely to that end, Washington County has asked for a “partial summary judgment” on that matter, which will be heard on March 14. If Rambo agrees with the county on that point, a jury trial will follow starting March 15.

A Red Dog Technologies Bitcoin “mine” at a Brightridge substation in rural New Salem community, Washington County, Tennessee is the subject of a lawsuit.

At that point, BrightRidge and Red Dog’s written argument suggest they’ll attack the county based on a claim that county officials knew even before the Feb. 2020 rezoning approval that a private company, not BrightRidge, would operate the blockchain data center.

“Whether it is an illegal use the court must decide,” Rambo said. “And if the court was to determine that it is a use contrary to the zoning classification for the property on which it is located, whether there are exceptional circumstances that exist to invoke the doctrine of equitable estoppel against the county to allow the use to continue.”

In other words, a judge could still determine that despite a violation, the most “equitable” solution due to other circumstances proven at trial would be to “estop” (prevent) Washington County from enforcing the resolution and shutting down the Bitcoin mine.

The county, BrightRidge, Red Dog and the neighbors who say the mine continues to be a nuisance in their quiet country setting should know the answer to these questions before Easter.