Federal Trade Commission v. Celsius Network Inc.

Background

The Federal Trade Commission sued Celsius Network Inc., related corporate entities, and three individual defendants over alleged violations of § 5 of the Federal Trade Commission Act and § 521 of the Gramm-Leach-Bliley Act. The FTC alleges that Celsius and its executives misrepresented the benefits and safety of its cryptocurrency lending and custody services and misappropriated customers’ cryptocurrency deposits.

The corporate defendants resolved the action through a stipulated order providing for a permanent injunction, a $4,720,000,000 monetary judgment, and other relief. The individual defendants’ earlier motions to dismiss the FTC’s claims were denied. Discovery was later stayed because of a parallel criminal case involving Alexander Mashinsky and another Celsius employee.

Leon asserted fifteen affirmative defenses, and Goldstein asserted eleven. An affirmative defense is a legal reason why a defendant should not be held liable even if the complaint’s allegations are assumed to be true. The FTC moved to strike every affirmative defense asserted by Leon and Goldstein. Several defenses were voluntarily withdrawn, including Leon’s defenses based on unclean hands, third-party responsibility, and immunity under Section 230(c) of the Communications Decency Act, as well as Goldstein’s defense based on third-party responsibility.

Court’s analysis

Under Federal Rule of Civil Procedure 12(f), a court may strike an insufficient defense. The court explained that striking a defense is generally disfavored unless the defense cannot succeed under any facts that could be proven, and its inclusion would prejudice the opposing party or create unnecessary litigation burdens.

The court addressed five remaining defenses because they could affect discovery and impose unnecessary burdens. Leon’s Defenses 7 and 11 argued that third parties, marketplace forces, customers, or intervening conduct caused the alleged injuries. The court held that these arguments challenged causation—an element the FTC must prove—and therefore were denials of liability rather than affirmative defenses. The court also found that the vague references to unnamed third parties could expand discovery and cause delay and expense. It struck both defenses.

Leon’s Defense 3 asserted that the consumer transactions were authorized. The court held that the FTC did not need to prove that consumers had not authorized the transactions. Authorization obtained through deception would not defeat the FTC’s claims. Authorization to deposit cryptocurrency also would not excuse later misappropriation, and authorization of an allegedly wrongful transfer would simply dispute whether the FTC could prove misappropriation. The court further held that an affirmative defense was not the proper way to identify evidence that might bear on damages. It struck the defense as inadequately pleaded and prejudicial.

Leon’s Defense 8 asserted that he acted reasonably and within applicable industry standards. The court held that the FTC did not need to prove an intent to deceive and that Leon had not explained how industry-standard compliance was a defense to the alleged misrepresentation and misappropriation claims. The court struck the defense.

Goldstein’s Defense 10 asserted that he acted in good faith. The court held that the FTC did not need to prove wrongful intent. Although Goldstein’s state of mind might later be relevant to the scope of an injunction if he were found liable, that potential relevance did not make good faith an affirmative defense. The court struck the defense.

Disposition

The court granted in part the FTC’s February 16, 2024 motion to strike. The conclusion states that Goldstein Defenses 9 and 10 were stricken from his answer and that Leon Defenses 3, 5, 6, 7, 8, 10, and 11 were stricken from his answer. The opinion does not state that the motion was denied in part, and it does not explain in the discussion why Goldstein Defense 9 or Leon Defenses 5, 6, and 10 were included in the final list.