Ripple Didn’t Win, But It Definitely Didn’t Lose: Where the Lawsuit Goes Next

A U.S. federal district judge granted a partial summary judgment in favor of Ripple in the SEC vs Ripple lawsuit, but the case is not over yet.

The court ruled that while Ripple’s institutional sales of XRP constituted an unregistered securities offering, programmatic sales through exchanges did not, giving the company a partial victory.

But the judge did not resolve several other issues in the case, and the ruling was not final.

Judge Analisa Torres wrote in Thursday's filing that the court will schedule the next trial to deal with the unanswered questions in the summary judgment.

What will be determined at the trial stage?

Essentially, Torres’ ruling sets the stage for whether Ripple’s case will be controversial if it goes to trial.

In summary judgment, the court ruled that “programmed sales” (defined as sales by Ripple Labs to buyers on exchanges) are not securities. “Secondary sales” include sales by non-Ripple Labs or executives to buyers, whether on exchanges or not, however, Torres’ summary judgment did not account for all secondary sales.

Since no sellers other than Ripple Labs and its employees were named as defendants, that particular issue will not proceed to trial. During the buying and selling process on the trading platform, buyers do not know whether the crypto assets purchased are from holders other than the company or executives.

The ruling did not determine whether a written contract is required as part of the Howey test. Ripple argued that because it did not have a written contract, it did not qualify as a security.

Whether XRP adheres to strict vertical commonality, meaning whether investors and promoters are mutually dependent on each other for financial success, must also be determined at trial.

The trial will also focus on the first and second prongs of the Howey test. The first prong concerns whether "the 'investment of money' is part of a relevant transaction," while the second prong focuses on whether "a 'common enterprise' exists," the filing states. Torres did not determine whether either prong was met in his summary judgment.

The fate of Ripple founder and former CEO Christian Larsen and former COO and current CEO Brad Garlinghouse will also be decided in the upcoming trial. In its initial complaint in December 2020, the SEC charged the two with aiding and abetting securities law violations. The summary judgment did not rule on the matter.

“Whether the common enterprise extends to include ‘other XRP holders,’ defendants Garlinghouse and Larsen, the ‘XRP ecosystem,’ or any other entity” must also be determined at trial, Torres wrote.

What are the chances of the SEC appealing?

It’s also unclear whether this particular legal battle is over.

The SEC said in a statement Thursday that it was “satisfied” with the court’s finding that Ripple had violated securities laws “in certain circumstances” by selling XRP tokens as investment contracts.

But the SFC added it would "continue to weigh the decision" and did not immediately comment on whether it was considering an appeal.

Hashflow general counsel Rashan Boykin said the SEC is expected to appeal the ruling that programmatic sales are not securities, as the agency has used that argument in other crypto cases, including the ongoing case against Binance .

Stephen Palley, litigation partner and co-chair of Brown Rudnick’s digital commerce group, warned Thursday that Ripple’s ruling was “a partial summary judgment by a district court judge.”

“While persuasive, it is not binding on other courts, may be appealed and potentially overturned,” he wrote on Twitter.

Brown Rudnick partner Preston Byrne wrote in a blog post that parts of the ruling, such as the section dealing with “programmatic selling,” could be subject to potential appeal.

For example, the main promoter of XRP has been Ripple Labs, whether or not buyers realize they are purchasing tokens from that entity. Preston mentioned that the SEC won a battle against Telegram and its blockchain development subsidiary in 2020.

“The court held that it was ‘Telegram’s efforts to develop the project,’ not the resale efforts of the intermediary sellers, that constituted ‘the essential efforts of others.’ Therefore, I expect Ripple will lose on appeal,” Preston Byrne wrote.

Patrick Daugherty, a partner at Foley & Lardner and an adjunct professor of digital assets at Cornell Law School, said that if the SEC happens to win its appeal in the Second Circuit, Ripple will continue to file a complaint with the Supreme Court.

How it affects the industry

Judging from the crypto market’s reaction, the industry already considers Thursday’s summary judgment a major victory.

XRP surged more than 73% in the hours following the filing. Bitcoin (BTC) and Ethereum (ETH) rose 5% and 7%, respectively, after exchanges including Coinbase and Kraken said they would be back online.

“This is just the first step, appeals will almost certainly follow, and even this ruling does not resolve many other important issues,” Horizons Law founding partner Ryón Nixon told Blockworks. “This ruling underscores that regulators are not judge, jury, and executioner when it comes to digital assets.”

Other legal experts expressed doubts that Thursday's ruling would have a significant impact on the SEC's "enforcement regulation" strategy.

“This is one of the few challenges the SEC has faced in this area, and the decision provides a window into other structural possibilities for token insurance and secondary market trading,” said Joe Castelluccio, partner at Mayer Brown and head of the firm’s fintech and digital assets, blockchain and cryptocurrency teams. “However, I do not think this decision will stop the SEC or cause it to change its attitude toward the industry.”