Sandoval v. Uphold HQ Inc.

Background

Addison Sandoval, Lionel Ducote, Nicholas King, and Richard Neal brought a proposed consumer class action against Uphold HQ Inc. They alleged that Uphold marketed its Earn product as an Uphold product and encouraged customers to invest cryptocurrency through Cred Inc. The plaintiffs alleged that Cred later failed, filed for Chapter 11 bankruptcy, and left their investments inaccessible or without value.

The plaintiffs asserted claims under New York General Business Law § 349, which prohibits deceptive practices directed at consumers; fraud and fraudulent concealment; unjust enrichment; and consumer-protection laws of other states. Uphold moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally sufficient claim.

Choice of Law and Judicial Notice

The court held that Uphold’s terms contained a New York choice-of-law provision covering claims and disputes between Uphold and its customers. The plaintiffs did not dispute that provision prevented them from asserting claims under consumer-protection laws of states other than New York. The court therefore granted Uphold’s motion to dismiss the plaintiffs’ second claim for relief, which relied on those other states’ laws.

The court also granted the plaintiffs’ unopposed motion for judicial notice of filings from a related California action. In addition, it ruled that documents attached to Uphold’s motion could be considered because the amended complaint referred to or quoted them.

New York Consumer-Protection Claim

The court concluded that the plaintiffs adequately alleged that Uphold’s marketing of Earn was consumer-oriented. The alleged marketing appeared on Uphold’s platform and was directed to customers generally, rather than involving only a private transaction with the named plaintiffs.

The court nevertheless held that the plaintiffs failed to plausibly allege a deceptive practice. Their main theory was that Uphold’s marketing and website interface created the impression that Earn was an Uphold product and made customers believe their investments were safer than they were. But before customers were redirected to Cred’s website, Uphold displayed a disclaimer stating that customers were leaving Uphold for a third-party website, that Cred—not Uphold—offered the program, and that Uphold would not be responsible for transactions initiated with or through Cred. Customers had to click a button to continue.

The court found that this disclaimer addressed the alleged deception directly. In the court’s view, a reasonable consumer would not have believed that the customer was dealing only with Uphold despite the prominent disclosure that Earn involved a third party. The plaintiffs also did not adequately allege that the advertised interest rates were unavailable or that the statement that Earn functioned like a traditional banking product falsely assured customers that the investment was safe.

The court separately rejected the argument that Uphold had concealed superior knowledge about Cred’s financial condition. The plaintiffs alleged that Uphold assisted with Cred’s operations, acted as its customer wallet, and had a Cred executive on its board, but the court found no specific facts showing that Uphold had access to contradictory financial information when it promoted Earn.

Fraud and Unjust Enrichment

Because the plaintiffs did not adequately plead a materially misleading representation for their consumer-protection claim, the court held that their fraud and fraudulent-concealment claim also failed. Uphold’s motion to dismiss the plaintiffs’ third claim for relief was therefore granted, and that claim was dismissed.

The court also dismissed the unjust-enrichment claim. The plaintiffs used that claim to seek the money they invested in Earn and the interest they said Uphold promised. The court held that the claim duplicated the consumer-protection claim rather than asserting a distinct basis for recovery.

Disposition

The court granted Uphold’s motion to dismiss the amended complaint. It also granted the plaintiffs’ request for leave to amend, but barred them from repleading claims under other states’ consumer-protection laws. The plaintiffs were required to file a second amended complaint within 28 days of entry of the opinion and order. The court did not state that the dismissals were with or without prejudice.