Pearl v. Coinbase Global, Inc.

Background

Coinbase operates online marketplaces for digital assets, including TerraUSD, an algorithmic stablecoin issued by Terraform. The opinion describes a stablecoin as a cryptocurrency designed to maintain a value tied to another currency, commodity, or financial instrument. Coinbase operated an educational webpage that described stablecoins as tied to stable reserve assets, less volatile than other cryptocurrencies, and intended to provide more predictable value.

Pearl alleged that he bought TerraUSD in May 2022 in reliance on Coinbase’s statements. TerraUSD fell from its intended one-dollar value to 35 cents by May 9, 2022, and Pearl alleged that his investment lost more than 90 percent of its value. He asserted nine claims against Coinbase, Inc. and Coinbase Global, Inc.: negligence, negligence per se, negligent misrepresentation, violations of California’s Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act, two California securities-law claims, and unjust enrichment. He brought the claims for himself and a proposed class.

Defendants moved to dismiss all claims for failure to state a claim, meaning that the complaint did not allege enough facts to support a legally recognized and plausible claim. They also moved to strike the class allegations, which would have removed the proposed class claims at the pleading stage.

Reasons for Dismissing the Claims

For the California consumer-protection claims, Pearl argued that Coinbase misrepresented TerraUSD as a collateralized and stable asset. The court found that the source Pearl relied on did not establish that reasonable consumers understand every stablecoin to be backed by tangible assets; it recognized that some stablecoins maintain their value through algorithms. The court also noted that a Coinbase webpage specific to TerraUSD disclosed that it was not backed by U.S. dollars in a bank account and explained its algorithm. The court therefore found no actionable affirmative misrepresentation.

The court also rejected Pearl’s omission theory. Pearl alleged that Coinbase failed to disclose that TerraUSD lacked tangible reserves, that its algorithm was untested and uncertain, and that Coinbase had invested millions in Terraform. The court found that Pearl had not shown either that Coinbase made a contrary partial representation or that it had a legal duty to disclose the information. Pearl alleged superior knowledge but did not allege that he could not reasonably discover the information elsewhere.

The court dismissed the Unfair Competition Law claim to the extent it relied on the unfairness theory because that theory depended on the unsuccessful deception allegations. The court also deemed Pearl’s unchallenged unlawful-theory allegations abandoned. The False Advertising Law and Consumer Legal Remedies Act claims were subject to dismissal. In addition, the court held that the Consumer Legal Remedies Act does not apply to digital assets such as cryptocurrency; Coinbase’s role in facilitating the sale did not turn the transaction into one involving covered goods or services.

The negligence and negligence-per-se claims were subject to dismissal under California’s economic-loss rule, which generally prevents recovery in tort for financial losses not connected to conventional injury to a person or property. Pearl’s allegations of stress, anxiety, outrage, and lost time did not establish the type of physical or other non-economic injury that would avoid the rule. The court also rejected Pearl’s argument that the parties had a special relationship, noting the User Agreement and California’s reluctance to impose a tort duty on a contracting party to avoid causing another party monetary harm. The court further noted that negligence per se was not a recognized standalone claim under California law.

The negligent-misrepresentation claim was dismissed because Pearl had not adequately alleged a misrepresentation. The court did not decide whether the economic-loss rule independently applied to that claim.

The California securities claims under Corporations Code sections 25110, 25503, and 25401 were subject to dismissal because those provisions apply to an entity that offers or sells a security. Pearl alleged that Coinbase faced both the buyer and seller but did not allege that either defendant itself sold TerraUSD to him. The court treated Coinbase as a facilitator rather than the seller for purposes of these claims.

The unjust-enrichment claim was subject to dismissal because the court took judicial notice of the existence of the User Agreement, and a separate unjust-enrichment claim generally cannot proceed where the parties have a contract. The claims against Coinbase Global were also subject to dismissal for the additional reason that Pearl alleged only conclusory facts suggesting that Coinbase Global and Coinbase, Inc. operated as one company. The court stated that a parent corporation is generally not liable for its subsidiary’s acts and that the allegations did not justify disregarding the companies’ separate corporate forms.

Class Allegations and Disposition

Because Pearl’s individual claims were subject to dismissal, the court denied defendants’ motion to strike the class allegations without prejudice to refiling. This means the court did not permanently reject that motion at this stage.

The court granted defendants’ motion to dismiss. Because Pearl might be able to correct the identified deficiencies, the court gave him leave to amend. Any Third Amended Complaint had to be filed by August 9, 2024. The opinion does not state that the dismissal was with or without prejudice.