Guest Post: Ripple Appeal?
Analysis of the SEC’s Motion for Interlocutory Appeal in SEC v. Ripple Labs, Inc., No. 20-cv-10832 (AT) (SN) (S.D.N.Y.)
One of the many joys of working in web3 is the enthusiasm of young professionals, looking to learn what they need to learn to dive into this exciting and developing space. In that vein, I have the opportunity this summer to work with Mark August (a current JD candidate at the University of Denver - Sturm College of Law), as an extern with BSL Group, where he is working to support our clients by, among other things, researching emerging regulatory regimes, including the subject of this post - the approch BigTech is taking to broach the ever-shifting regulatory regime surrounding web3 projects and cryptocurrencies.
So, without further ado, I give you Mark:
Analysis of the SEC’s Motion for Interlocutory Appeal in SEC v. Ripple Labs, Inc., No. 20-cv-10832 (AT) (SN) (S.D.N.Y.)
Introduction:
The Securities and Exchange Commission's (SEC) enforcement activities within the rapidly evolving field of cryptocurrency transactions continue to be a critical focal point in the emerging technology sector. One of the most recent and impactful cases to emerge from this arena is SEC v. Ripple Labs, Inc. et al.
In this case, the SEC sought an interlocutory appeal under 28 U.S.C. § 1292(b) pertaining to two adverse liability determinations in the July 13, 2023 order, which granted summary judgment to the Defendants, Ripple Labs Inc., and others involved. Specifically, the SEC challenged the Court's finding that certain transactions by the Defendants did not involve the offer or sale of securities, under the landmark case SEC v. W.J. Howey Co.
The motion put forth by the SEC opens up a variety of complex legal issues and highlights a potential intra-district split, which can have substantial implications on future enforcement activities and securities regulation within the cryptocurrency landscape.
This memo seeks to delve into the specific arguments made by the SEC in its request for an interlocutory appeal, analyze the legal framework and precedent surrounding the motion, and assess the potential implications on both this case and the broader context of securities law as it applies to emerging technologies.
Interlocutory Review Under Section 1292(b)
An "interlocutory review" is a legal procedure that allows a higher court to review a part of a case before the lower court has concluded the entire trial. It's like a "time-out" in a game where you can check a decision before continuing to play. Section 1292(b) outlines specific criteria that must be met for this review to be allowed:
Controlling Question of Law: The issue being reviewed must be central to the case, not a minor or side issue. It's like questioning the main rule in a game, not a small detail.
Substantial Ground for Difference of Opinion: There must be a genuine disagreement among legal experts about the right answer to this question. Imagine two referees in a game having a serious debate about a crucial decision.
Immediate Appeal May Advance Termination of Litigation: If the higher court reviews this issue now, it could help the case reach a conclusion faster. It's like resolving a crucial disagreement in a game that, once settled, allows the game to continue smoothly.
The SEC’s Arguments:
1. The Securities and Exchange Commission (SEC) is arguing that the court's rulings on the defendants' favor involve a "controlling question of law" for several reasons.
The court's rulings in the Ripple case effectively settled (disposed of) the SEC's claims against the defendants regarding offers and sales, striking at a central matter in the case, rather than a peripheral detail. These rulings had a significant impact, leading to the dismissal of claims that encompassed more than half of Ripple's XRP offers and sales, showing that this decision affected a substantial portion of the overall case. Furthermore, the rulings entirely eradicated the primary liability claims under Section 5 against the individual defendants, targeting a crucial element of the case that defined the legal positions of those involved. Importantly, these decisions were made on facts that were not in dispute, meaning the court's rulings hinged solely on legal interpretation and did not involve any factual disagreements. This emphasizes the controlling nature of the legal questions resolved by the court's decision.
In addition, the SEC argues that “rulings are of particular consequence to an issue of programmatic concern to the SEC’s enforcement of the securities laws and potentially to a large number of pending litigations.” The SEC goes on to list several pending litigations. The SEC is emphasizing that the Order's rulings in the Ripple case have implications that extend far beyond this specific dispute, resonating throughout the broader legal and regulatory landscape. First, the rulings have a programmatic concern, affecting the SEC's overall approach to enforcing securities laws. They shape the regulatory framework, transcending this individual case, and influencing how the SEC governs the entire securities industry. Second, the precedential impact of these rulings could influence a vast array of other pending litigations. Other courts may look to this ruling as a guiding precedent in deciding similar cases, creating ripple effects across the legal system (pun not intended). Third, the reference to Programmatic Sales and Other Distributions rulings underscores specific legal issues central to many other cases. These concerns primarily revolve around the ways securities, such as crypto assets, are offered and sold, whether through trading platforms or in exchange for non-cash consideration. Finally, the mention of recent, ongoing cases like those against Coinbase and Binance Holdings demonstrates that these legal questions are not mere academic exercises. They are tangible, active, and significant considerations in the current legal environment, shaping the way courts and regulators approach similar matters.
2. The SEC's argument for the second element centers on the contention that there is a “substantial ground for difference of opinion” regarding the questions under consideration. They point to historical precedent in cases like Glatt v. Fox Searchlight Pictures Inc. and Wang v. Hearst Corp., where the substantial basis for a difference of opinion was recognized. Furthermore, one court explicitly rejected the Order's approach concerning Programmatic Sales, reasoning with the Howey Test that no such distinction should be made between different types of purchasers. This rejection has been cited by at least one other court as persuasive authority, adding to the weight of the argument. Additionally, the SEC highlights the varying decisions in similar cases, such as the securities class action against Ripple, where attempts to differentiate reasonable expectations based on investor status were dismissed. These diverse legal interpretations across different cases emphasize the uncertainty and disagreements in this area of law, underlining the need for Court of Appeals review. In essence, the SEC demonstrates that the legal questions at hand are not isolated differences but rather substantive variations requiring higher court intervention for clarity and uniformity.
In the next part of the SEC's argument for the second element, they emphasize the unsettled nature of the legal question surrounding Other Distributions, specifically focusing on instances where the crypto asset issuer has used the asset for varying purposes like incentivizing users, compensating employees, or involving software developers and testers.
The SEC cites the case SEC v. LBRY, Inc., in which a court ruled that such usages constituted sales of investment contracts. They also reference Uselton v. Commercial Lovelace Motor Freight, Inc., a case that extended the idea of investment contracts to include employee labor as an "investment of money."
However, the key point here is that the Second Circuit, a higher appellate court, has not yet directly addressed this issue. This lack of a definitive ruling by a significant court contributes to the substantial ground for difference of opinion. The SEC draws on the Rio Tinto case to further support this, emphasizing that when an issue has conflicting authority but hasn't been squarely tackled by a higher court like the Second Circuit, it presents a clear need for review and certification.
The underlying argument is that the law remains uncertain in this area, and the contrasting interpretations by different courts create a compelling need for higher court intervention to clarify and unify the legal stance. By doing so, the SEC aims to establish that the second element of the interlocutory review standard is met, making an immediate appeal necessary and proper.
3. The SEC's argument regarding the third element emphasizes the importance of efficiency through interlocutory review. They contend that an interlocutory (mid-case) review would simplify the litigation by enabling a single remedies phase for each Defendant, covering all conduct ("Institutional," "Programmatic," and "Other Distributions"). Furthermore, they argue that if the Second Circuit were to find that the Individual Defendants violated Section 5, it might even eliminate the need for a trial altogether, as a clear finding of direct liability would change the parties' assessments regarding further proceedings. Contrastingly, if certification is denied, and the Second Circuit later reverses even some parts of the order favoring Defendants, the court would face overseeing a second remedies phase for Ripple, and possibly individual defendants, potentially leading to a second trial. The SEC reinforces this perspective by citing the Rio Tinto case, highlighting that resolving all claims in one trial would be more efficient and would remove legal uncertainty. Overall, the SEC's position is that immediate review by the Second Circuit would streamline proceedings, potentially saving time and resources by eliminating complexities, while denying certification could result in protracted, redundant, and uncertain legal processes.
Conclusion:
The motion filed by the SEC seeking an interlocutory appeal in the case of SEC v. Ripple Labs, Inc., presents a rare and complex legal issue that has far-reaching implications on the enforcement of securities laws, especially within the fast-evolving cryptocurrency sector.
Controlling Question of Law: The SEC effectively demonstrated that the court's ruling in favor of the defendants addresses a controlling question of law, as it strikes at the very heart of the case. The decisions made on undisputed facts underline the critical legal interpretation and have impacts that resonate far beyond this specific case, affecting both the SEC's broader enforcement strategy and several ongoing litigations.
Substantial Ground for Difference of Opinion: By citing historical precedents and contrasting interpretations across various cases, the SEC has created a compelling argument that there is a substantial ground for difference of opinion. The unsettled nature of the legal questions surrounding both "Programmatic Sales" and "Other Distributions" emphasizes the need for clarity and uniformity that only a higher court review can provide.
Immediate Appeal May Advance Termination of Litigation: The SEC's contention that an interlocutory review would enhance efficiency by streamlining proceedings and possibly eliminating the need for a trial altogether carries significant weight. It paints a picture of a smoother, more unified legal process, contrasted with a potential scenario of protracted and redundant litigation if certification is denied.
What kind of lawyer would I be without a disclaimer?
Everything I post here constitutes my own thoughts, should only be used for informational purposes, and does not constitute legal advice or establish a client-attorney relationship (though I am happy to discuss if there is something I can help you with). I can be reached via email at dlopezkurtz@crokefairchild.com or david@bsl.group on telegram @davidlopezkurtz on twitter @lopezkurtz and on LinkedIn here.