In re Ripple Labs Inc. Litigation

Background

Bradley Sostack sought to pursue securities claims against Ripple Labs, Inc., XRP II, and Bradley Garlinghouse. The case concerns whether XRP, a cryptocurrency issued by Ripple, is a security that should have been registered under federal and California law.

The claims remaining in the case included: (1) an alleged violation of Section 12(a)(1) of the Securities Act based on the unregistered offer and sale of securities; (2) control-person liability under Section 15 of the Securities Act against Ripple and Garlinghouse; (3) an alleged violation of California Corporations Code § 25503 based on the offer or sale of unregistered securities; (4) a California claim concerning misleading statements, for which Sostack did not seek class treatment; and (5) control-person liability under California law. The class-certification motion concerned the federal and California unregistered-securities claims and the related federal and state control-person claims.

Sostack proposed a federal class covering people or entities who purchased XRP from May 3, 2017, through the present and retained XRP or sold it at a loss. He also proposed a California-law class covering people or entities who purchased XRP from defendants or from someone selling XRP on defendants’ behalf during the same period and retained it or sold it at a loss.

Class-certification standard

Under Federal Rule of Civil Procedure 23, the party seeking certification must show that the proposed class meets four requirements: enough members that individual joinder is impractical, common legal or factual questions, claims typical of the class, and adequate representation. The proposed class must also satisfy Rule 23(b)(3), including that common questions predominate over individual ones and that a class action is superior to other ways of resolving the dispute.

The court emphasized that class certification does not involve a preliminary decision on the merits. Although the required review may overlap with merits issues, the court was deciding whether the claims could be handled on a classwide basis, not whether XRP is ultimately a security or whether defendants are liable.

Analysis

The court found that numerosity was satisfied because the potential class included at least tens of thousands of members. It also found commonality because whether XRP is a security could be resolved through a common inquiry.

The court rejected defendants’ adequacy arguments. Defendants argued that some XRP purchasers disagreed with the lawsuit’s position that XRP is a security and that Sostack’s primarily indirect purchases made him inadequate to represent people who purchased directly from Ripple. The court concluded that the legal test for determining whether something is a security is objective, so purchasers’ differing personal expectations did not create a conflict that defeated certification. It also found that defendants had not shown that indirect purchases made Sostack’s claims weaker than those of other class members.

The court rejected defendants’ typicality challenge based on Sostack’s alleged lack of credibility and his status as a day trader. The court stated that the objective legal test would not be affected by his status as a day trader and concluded that he had shown typicality.

The court also found predominance. Defendants argued that determining standing and damages would require individualized information about each purchaser’s transactions. The court considered defendants’ examples of potentially unusual transactions largely speculative or isolated and found that they did not defeat predominance. It also concluded that a common damages method could use the quantity of XRP bought and sold, purchase and sale prices, and any needed currency exchange rates. The court accepted that damages for people who sold XRP could be calculated by comparing purchase and sale prices, while damages for people who retained XRP could be calculated by comparing the purchase price with the current value.

The court rejected defendants’ argument that the proposed classes were improper “fail-safe” classes. It explained that class membership did not depend on first deciding whether defendants were liable; class members would remain bound by the judgment even if XRP were ultimately found not to be a security.

The court found superiority satisfied. It rejected the argument that XRP holders had a strong interest in controlling their own cases individually, concluded that class-member identification was not a basis for denying certification under controlling Ninth Circuit authority, and declined to deny certification because of a parallel Securities and Exchange Commission case. The court noted that it might later consider staying a decision on the merits while that case continued.

Geographic and time limits

Applying the Ninth Circuit’s framework for deciding whether California law may apply to claims involving people in other jurisdictions, the court found that California had significant contacts with the nationwide class members’ claims and that defendants had not shown that other states’ laws should apply. It therefore found no obstacle to a nationwide California-law class.

The court reached a different conclusion regarding purchasers outside the United States. It stated that other countries should have the opportunity to regulate cryptocurrency as they see fit and declined to apply either California law or federal securities law to a worldwide class. It therefore limited both proposed classes to people and entities who purchased XRP within the United States.

The court also rejected the proposed May 3, 2017, start date and selected July 3, 2017, as the beginning of the class period. It set June 30, 2023—the date of the order—as the end date.

Disposition

The court granted Sostack’s motion for class certification as to both proposed classes, subject to the limitation that class members must have purchased XRP within the United States during the class period from July 3, 2017, through June 30, 2023. The court denied defendants’ motion to strike the damages expert’s reply report as moot. It denied a motion by six individuals and one corporate entity for leave to file an outside-party brief because the proposed brief repeated arguments already made by defendants. The court stated that it would resolve the parties’ motions to seal in a separate order.