Securities and Exchange Commission v. Ripple Labs Inc.

Background

The Securities and Exchange Commission (SEC) asked the court to order Ripple Labs to produce communications that constituted, transmitted, or discussed legal advice about whether Ripple’s offers and sales of XRP were, or would be, subject to federal securities laws. Ripple objected that the requested communications were protected by the attorney-client privilege.

Ripple had asserted a fair-notice defense. It alleged that the SEC had not clearly informed market participants that the agency considered XRP to be a security. Ripple pointed to the SEC’s actions and inactions, including the agency’s delay in bringing the enforcement action, the listing of XRP on cryptocurrency exchanges, a prior settlement describing XRP as a convertible virtual currency, and public statements about other digital assets.

Issue

The issue was whether Ripple waived the attorney-client privilege by asserting its fair-notice defense. The SEC argued that the defense was effectively a good-faith defense that placed Ripple’s understanding of the law, subjective state of mind, and legal advice at issue.

Analysis

The court explained that the attorney-client privilege protects confidential communications between a client and lawyer made for the purpose of obtaining legal advice. A party may implicitly waive that privilege when it relies on privileged advice, or on a state of mind that can be examined only by reviewing privileged communications, to support a claim or defense.

The court distinguished Ripple’s fair-notice defense from a good-faith defense. A good-faith defense would focus on Ripple’s subjective belief that its conduct complied with the law and could place its communications with counsel at issue. By contrast, Ripple’s pleaded defense focused on the SEC’s conduct, the agency’s understanding of the law, and whether the SEC gave reasonable notice that it considered XRP to be a security. The court treated that as an objective inquiry into how a reasonable person would have understood the SEC’s conduct.

The court expressly did not decide whether Ripple’s fair-notice defense was legally available or whether it would ultimately succeed. It decided only that Ripple did not place its subjective state of mind or advice from counsel at issue merely by raising that defense.

Disposition

The court denied the SEC’s motion to compel. It stated that the SEC could renew its request later if Ripple raised its good-faith beliefs or relied on privileged communications in support of its fair-notice defense. The court also directed the clerk to deny the motions at docket entries 165 and 166.