Ripple and R3 have been in litigation since September last year over a dispute which was worth up to $18.3 billion to R3 at peak cryptocurrency valuations. Yesterday Ripple released a two-sentence statement saying there was a confidential settlement. Below is a summary of the dispute and some thoughts about the possible motivations for the settlement and how hard it’s going to be to keep the settlement completely secret.
In September 2016 Ripple and R3 entered into an agreement whereby R3 would promote Ripple to its consortium of banks. However, the lawsuit refers to the agreement as a ‘Technology Provider Agreement’ (TPA). Additionally, a separate option contract was created, which Ripple says was intended as compensation. The option gave R3 the right to buy 5 billion XRPs at $0.0085 at any point until September 2019. At the time of the agreement the XRP price was a little below that.
On 12 June 2017, Brad Garlinghouse the CEO of Ripple informed R3 it was terminating the agreement, allegedly on the basis that R3 had not upheld its side of the bargain. On that date, the XRP price was 28 cents, and the option was worth $1.35 billion. It appears the promotion contract failed to stipulate performance clauses such as the number of banks introduced by R3 to Ripple. Instead, there was a clause requiring both parties to act in good faith.
In September 2017, R3 sued Ripple in New York and Delaware to get the options contract re-instated. The options would have been worth just shy of $1 billion at that stage.
On 4 January this year Ripple’s XRP hit $3.67 which would have valued R3’s options at $18.3 billion. At today’s price, the options would have been worth $1.25 billion.
In January 2018, Ripple counter-sued R3 claiming that R3 had breached the promotion contract (TPA) and alleging R3 had fraudulently induced Ripple to enter into the TPA and option contract.
Ripple said in the claims that “although R3 represented to Ripple that it would have access to its large consortium of leading banks, R3 knew and had reason to know that several key banks that would be instrumental to Ripple’s success would soon be departing from its consortium.” This refers to Goldman Sachs, JP Morgan, Morgan Stanley, and Santander who chose not to remain in R3’s consortium of almost forty banks.
The Ripple countersuit continued: “although R3 represented to Ripple that it would use its financial markets expertise and relationships to help drive adoption of Ripple, R3 knew and had reason to know it would be too busy with, and focused on, its own fundraising to help Ripple in any respect.” R3 closed a funding round of $107 million in May 2017. Ripple cancelled their contract weeks later.
Ripple’s countersuit also alleged that “while R3 represented that commercialization of Ripple’s product was R3’s “end game”, and that R3 had no plans or intentions to directly compete with Ripple on a cross-border payments product, these representations too were false. R3’s “end game” apparently was to unveil a product that directly competed with Ripple’s cross-border payments technology.”
Behavior versus legal recourse
From Ripple’s perspective, if R3 did as little as Ripple alleges, it’s understandable they’d be upset. But being unhappy and having legal recourse is not the same thing. It sounds as though the contract was lacking in detail, which would not help Ripple. At the same time if there was a complete lack of performance from R3, then that’s not good for R3.
However, it seems as if there were two contracts, and it’s not entirely clear the two deals were sufficiently tightly linked. In other words, if the promotion contract or TPA fails because of lack of consideration, does that kill the options contract? This was explicitly stated in the Ripple counterclaim as a point that needed a judicial decision: “whether due to failure of consideration, the Option became subject to rescission”.
Winners and losers?
To figure out the nature of the settlement, consider what each side had to gain or lose. Hypothetically, what might have happened had the case gone to court?
If R3 won, what would the result be? Would the court have reinstated the options contract? An award for $1.25 billion, $18.3 billion or perhaps something in between? Or maybe a fraction of that in recognition that R3 allegedly got something for nothing. Likely the result would be somewhere between $100 million and more than a $1 billion.
What if Ripple won? How significant would the damages have been? Far harder to quantify compared to the options, and Ripple has done rather well since, which makes their case harder. And then there’s the fact that R3 no longer would have the options contract which could also put downward pressure on any award.
Also, in the same month that Ripple and R3 did their original deal, Ripple closed a $55 million Series B financing. Did the R3 agreement help Ripple to close that funding round? And perhaps the time pressures from their own funding round meant they spent less time than desirable on the R3 contract.
So had Ripple won the court case, they might have been lucky if they were awarded say $10 million? But that would have been a very substantial win for them as they’d be free of the options contract.
Ripple fought to have the case moved to California. They may have hoped a California jury might be less sympathetic to banker behavior. But with any lawsuit, even if one side on paper has an 80% chance of winning, going to court is much closer to a flip of a coin.
Fighting lawsuits is incredibly time-consuming for senior executives and very distracting when they need to focus on growth. Plus these sorts of legal cases are expensive. It will be surprising if each party hasn’t racked up at least a million in fees so far, probably more.
But Ripple has far deeper pockets than R3. A few months ago there were rumors that R3 was cash-strapped. The gossip was likely overstated, but R3 has considerably fewer resources. Could R3 afford to fight the case indefinitely? Yes, they could financially. Unless the case was hopeless for R3, the figures are so significant, it would be easy to find a lawyer to work on a no-win no-fee basis.
Nonetheless, there could be some financial pressure on R3. If it’s planning another funding round, major litigation isn’t helpful. Potential backers might want to wait and see. If it could get a settlement out of Ripple, it might not need another round of funding any time soon.
Also, prior to the court case, there’s usually multiple rounds of office-based testimony or depositions during which confidential information is shared. This information will become public in court. That’s likely the stage they reached recently. That confidentiality pressure applies to both sides, but more so to R3 with all its banking shareholders.
All other pressures aside, occasionally something crops up in a deposition, or somebody says the wrong thing, and both parties know that the direction of the case has changed. That’s before they step foot in court.
The settlement will be hard to keep confidential. R3 has more than forty shareholders who will know about it. Even Ripple has in excess of thirty investors. Not counting lawyers, a minimum of seventy people will be aware of some details, more likely hundreds. And if the settlement is sufficiently significant and in R3’s favor, it will become obvious when R3 doesn’t require another funding round any time soon. Watch the R3 headcount as a key indicator.
On the one hand, both sides must be relieved to have it behind them. On the other hand, a court case involving these two would have been both illuminating and entertaining.