Last month a New York court found in favor of Ripple that XRP distributions through crypto exchanges were not sales of securities. Now the SEC wants an interlocutory appeal of the decision, and yesterday Ripple filed a letter arguing that it doesn’t satisfy the grounds for an appeal at this stage. Ripple’s lawyers split their arguments into three sections and our analysis is that Ripple might possibly have a point on one of the arguments, which could be sufficient to block an appeal.
So the first question is, what is an interlocutory appeal? It’s an appeal of a non-final order during the course of litigation. And it’s pretty rare, so there are special grounds outlined in 28 U.S. Code Section 1292(b) and the Bar Association also wrote on the topic.
Here’s the relevant legislation wording:
“When a district judge, in making in a civil action an order not otherwise appealable under this section, shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing in such order.”
Ripple’s lawyers honed in on whether:
- There’s a controlling question of law
- There’s substantial ground for a difference of opinion
- An immediate Appeal will advance the termination of this Litigation.
A controlling question of law?
The lawyers cite legal precedent that an appeal now “requires a pure question of law that the reviewing court could decide quickly and cleanly without having to study the record.”
The Ripple legal team assert that you’d have to look at the facts of this case. We’re not so sure about that one. The initial ruling said the same fungible XRP tokens were sometimes securities – when sold to professional investors – and sometimes not when sold to retail investors via crypto exchanges or other distributions such as giveaways.
Isn’t there a question of law about whether Howey is meant to give a definitive opinion on the particular token rather than the method it was sold?
In fact, Judge Rakoff in the Terraform Labs case in the same district makes this precise point. He wrote, “That a purchaser bought the coins directly from the defendants or, instead, in a secondary resale transaction has no impact on whether a reasonable individual would objectively view the defendants’ actions and statements as evincing a promise of profits based on their efforts.”
We’d side with granting an appeal on this point.
Is there a difference of opinion?
Ripple’s lawyers cite a precedent on the difference of opinion argument sayin there must be a “clear conflict with one another on the subject and that the ‘issue is particularly difficult and of first impression.'”
They note that the Terraform judge said that sales of digital assets are not inherently securities offerings. Yes he did. The question was whether this particular digital asset XRP is a security.
However, we believe there is a difference of opinion on another point, precisely the one in Judge Rakoff’s quote above.
Hence, we’d side with with granting an appeal on this point as well.
Would an appeal help end the litigation faster?
The judge in the Ripple case did not rule on every point, so there’s still a need for a trial. The question is whether there’s an appeal now, then a trial and potentially another appeal.
There will still be legal arguments either side for the remediation phase to assess Ripple’s damages relating to the institutional sales considered to be securities. Plus there’s the issue of the institutional sales after the complaint was filed – Ripple might be liable for $3 billion of sales, not just $1.3 billion. Ripple’s lawyers say the facts from this remedies phase could be used in a future appeal, so the appeal should be later.
The SEC argues that if the two judgements in favor of Ripple were overturned, then Ripple might cave, so there would be a single remedies phase and no trial. They also note if they win a future appeal, that could result in a second trial and second set of arguments over the amount that Ripple has to pay.
Of course the SEC also wants a favourable ruling as precedent for its other cases against Coinbase and Binance. However, that is not a relevant argument here, nor did they raise it.
We think there are valid points both sides for this timing issue.
So on balance, it’s more likely that an interlocutory appeal would be granted. But given the unusual summary judgement, who knows.
Update: On August 17, the Judge allowed the SEC to file a motion requesting an appeal. That’s not the same as approving it. Ripple has to respond to the motion by September 1 and the SEC can reply by September 8. In the meantime both parties have to prepare for trial.