- Ripple has been the subject of many lawsuits through the last few years.
- Multiple lawyers believe that the only minor victory for Ripple would be if the case were to be dismissed, though it will likely face other lawsuits.
Today, on November 4th, the next stage of the long-running Ripple lawsuit will be taking place, though that stage has seemingly yet to be decided. Bradley Sostack, the plaintiff, can file a response to a motion to dismiss by the end of the day, which was originally initiated on September 20th. If it isn’t fully dismissed, then the case might move into discovery, as it would be newly categorized as a class action lawsuit.
The big question that seems to be on the table during this case is if XRP should be registered as a security under US law, which is what Sostack is claiming. If so, then the Ripple-based token might end up being at risk of enforcement action by the regulators in the US. However, regardless of the ending of this case, legal experts don’t believe that there will be a resolve on the matter.
Rebecca Rettig, a partner with FisherBroyles, commented,
“No one’s finding out whether XRP is a security anytime soon, if ever, at least through this proceeding.”
There are plenty of reasons that this type of decision won’t be made. For instance, the last motion made by Ripple argued that the complaint by Sostack took too long to file, and that the case doesn’t actually show that the plaintiff had purchased XRP from Ripple or even the initial sale. To win the case, Ripple probably won’t even need to address the question.
A partner with Anderson Kill, Stephen Palley, pointed out that “a solid motion” was created by the defense team.
“The defense lawyers have done a good job so far. They’ve shown some good tactical skills, they could win but even if they do there are a lot of other things that could happen.”
According to CoinDesk, there’s been no response from the general counsel of Ripple.
Rather than being initiated as an argument, the motion from Ripple to dismiss was more about the question being posed in the first place. Paul Godfrey, an attorney that is based in Florida, stated that the platform created “both a statement and a legal conclusion in its introduction.” He added that the introduction pointed out that “the crux of [plaintiffs’] claims is the false assertion that XRP is not a currency, but rather a security.”
Godfrey, who doesn’t practice securities law and has never litigated in the federal courts, believes that the discussion over XRP’s status (or lack thereof) as a security is more of a legal conclusion, which Ripple makes but doesn’t argue.
“Ripple does not advance any argument to prove such a denial… Accordingly, it is addressed, but not argued.”
Rettig believes that pushing back against the idea of XRP is a security could be considered “too risky,” and a major analysis of the facts would be essential to making the argument in court. Ripple avoided this type of fight with “straightforward legal defenses,” as Rettig sees it.
“If you have independent grounds or a dismissal, [and] you don’t have to get into a fact-intensive analysis, why do it?”
Furthermore, in claiming that XRP is not a security, adding that it is instead a currency, Ripple could face holes in the argument.
Palley points out an interesting conundrum, stating that securities law may still allow something to be considered a security or investment contract, as well as a currency, simultaneously.
“Basically, just because it’s one thing doesn’t mean it can’t be another. It can be a security for one purpose, and currency for another. The application of one framework doesn’t exclude another.”
He brought up the current legal battle involving Kik Interactive and the SEC, during which time that the former stated that their kin cryptocurrency cannot be a security because it is a currency. The SEC has since disagreed.
The “statute of repose” argument used by Ripple is interesting to Rettig, who noted that the argument has been brought up in other cases. This period of time covers the period after a sale that allows parties to file a lawsuit in response to an alleged wrongdoing. The “statute of limitations” is different, as it starts upon learning of the misconduct, according to law professor Peter Henning that wrote about these circumstances in the New York Times.
Rettig elaborated, stating,
“The statute of repose argument … was used successfully a number of times in cases bringing Securities Act claims relating to mortgage-backed securities six or seven years ago, which provides precedent the defendants could rely on.”
Rettig explained that the first filing of the amended complaint by the plaintiff involved,
“a lot of discussion about how novel and interesting it was that plaintiff cited extensively to websites, to social media and the like.”
He added that the “interesting” approach made the complained “robust.”
Ripple used this maneuver to their its advantage, bringing in their own facts.
However, Rettig commented,
“Usually defendants can only use the facts alleged in the complaint itself or the facts incorporated by reference in a complaint in defending against claims on a motion to dismiss. Here, however, defendants were able to use all of the facts in the documents, websites and social media posts to which the complaint cites in rebutting plaintiff’s claims.”
Ripple brought in information sourced from a wiki page to support their argument, though Rettig commented that other details on that same page were used by the plaintiff to support his argument.
“By showing no relief was available for count 1, Ripple was able to demonstrate there was a failure to state a cause of action for count 2.”
Now, in the filing expected to be today, the plaintiff has a few ways available that could ultimately push the case along. Rettig believes that the plaintiff may try to “relate back” to the first case that was filed, which stated that Ripple was in violation of securities laws. This wouldn’t be a new accusation, considering that Ripple has been facing lawsuits since May last year that alleged that XRP was being sold as an unregistered security. However, it still may not be enough to win, since Ripple already argued against it.
“Plaintiff also relies on a ‘continuing sale’ theory and they may apply that argument to the statutory requirement that the statute of repose runs from the date the security was ‘first bona fide offered to the public.”
Godfrey remarked that the discovery process that eventually is implemented could help with the verification of the XRP purchase from Ripple by the plaintiffs.
“If I were Plaintiff’s attorneys … I would focus on the fact that while the inference could not be maintained in the past, with present technology and some well-aimed discovery, it would be quite easy to determine whether or not XRP was purchased by Plaintiffs from Defendants.”
Even if Ripple manages to come out victorious, Palley believes that the platform will continue to be faced with new lawsuits.While other cryptocurrency companies tend to be difficult to sue with their lack of liquidity, Ripple doesn’t have the same problem.
Palley pointed out,
“[With] ICO class action litigation from an economics perspective, you have to ask … how much money can you recover? Ripple, you have a solid [chance] of money.”
Palley added that winning now isn’t a win overall, and that the case being dismissed would mean more of a victory for the platform.
Tobacco companies often face a similar problem, as they would have to win every single case. The loss of just one case opens the door for other parties to use it towards their own victorious lawsuits.
“It’s not like winning this case means that nobody else can sue them for securities violations.”
At the same time, it doesn’t mean that Ripple can be faced exclusively with losses; it only means that parties have the ability to file lawsuits.
Until the case has some level of movement today, blockchain industry lawyers await the outcome of the Sostack versus Ripple case. Rettig remarked, “It’s not going to end for a long time.”
Author: Krystle M