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  • Writer's pictureS Pettigrove and M Bacina

Dismissed! Judge rejects US Uniswap class action and critiques developer liability claim

Updated: Sep 5, 2023



On 29 August 2023, a US District Court judge dismissed a class action lawsuit against Uniswap Labs and certain venture capital firms (VC) over allegations that the defendants had facilitated the sale of ‘scam’ tokens via the Uniswap decentralised exchange in violation of US securities laws.


The Plaintiffs had alleged that they had lost money after purchasing ‘scam’ tokens from Uniswap liquidity pools. The judge dismissed the Plaintiffs' allegations against Uniswap Labs and its co-defendants, finding that they were not responsible for the actions of issuers of the scam tokens who could not otherwise be identified. The plaintiffs claimed that, under US federal securities laws, the:

[t]okens at issue are securities and, by extension...the Uniswap Protocol functions as an exchange of such securities.

In the absence of information regarding the issuers of the 'scam' tokens, the plaintiffs sought redress from Uniswap Labs, the founder of Uniswap Labs, Hayden Adams, and VC investors in Uniswap Labs, alleging Uniswap had 'provid[ed] a marketplace' in exchange for transaction fees, and that by developing the 'smart contracts that allow the [Uniswap] Protocol to operate' and for making public statements about the Protocol's safety and accessibility on social media the parties were liable. The plaintiffs sought rescission of the contracts embodied in the smart contracts associated with the purchase of the 'scam' tokens and compensation for lost funds.


The claims were ultimately rejected, with the Court:

declin[ing] to stretch the federal securities laws to cover the conduct alleged and concludes that Plaintiffs' concerns are better addressed to Congress than to this Court.

and on the subject of software developer's liability the Court said:

it defies logic that a drafter of computer code underlying a particular software platform could be liable...for a third-party's misuse of that platform.

The Court rejected the plaintiff's assertion that the harm was caused by the defendants by reason of them creating code and a system that could facilitate the sale of scam tokens. Instead, it found that a 'collateral, third-party human intervention' had caused the harm, 'not the underlying platform'.


The Court described smart contracts in a sensible way saying that:

smart contracts are self-executing, self-enforcing code that contain the terms of the agreement between the buyer and seller.

and a passing comment was made referring to ETH and BTC as 'commodities' which under US law are distinct from securities:

While no court has yet decided this issue in the context of a decentralized protocol’s smart contracts, the Court finds that the smart contracts here were themselves able to be carried out lawfully, as with the exchange of crypto commodities ETH and Bitcoin.

The plaintiffs sought to rely on the unsuccessful class action against Coinbase in 2022, which concerned allegations that Coinbase was operating as an unregistered securities exchange. However, the judge found that the wallets connected to the Uniswap protocol in the current case were distinguishable from user wallets on Coinbase, which is connected to a 'centralized platform'. Justice Failla referred to Uniswap's Whitepaper to further explain that the smart contracts enable the Protocol to carry out its functions 'pursuant to a given party's request'.


The Court also dismissed allegations that the defendants passed title to the tokens to the plaintiffs or that the defendants sold, promoted, and/or solicited the tokens to the plaintiffs. The judge emphasised:

Labs is a mere developer...VC Defendants are merely alleged to be liquidity providers.

Ultimately, the Court held that the defendants were not a party to the relevant smart contracts creating the scam tokens and that the core and router smart contracts underlying the Uniswap Protocol were more akin to overarching terms of service and able to be carried out lawfully as in the case of exchanging crypto commodities such as ETH and Bitcoin.

Indeed, this...is more like a suit attempting to hold an application like Venmo or Zelle liable for a drug deal that used the platform to facilitate a fund transfer. There, as here, collateral, third-party human intervention causes the harm, not the underlying platform

Further, the Court held that the defendants were not liable for the scam token sales merely because of their collateral participation in the sales which the Court analogized was like seeking to hold the NASDAQ and/or New York Stock Exchange liable as a facilitator of a stock purchase that went awry, but noting that Uniswap is not an exchange.


The Court dismissed the class action entirely with prejudice, preventing refiling of the case at the Federal level. However, the state based claims were dismissed without prejudice, leaving the opportunity for the plaintiffs to refile under US state law.


The case has been celebrated both for it's technical unpacking of smart contract principles, because it is simply accepted ETH and BTC as 'commodities', and for pushing back on suggestions that the authors of smart contracts should find themselves to be parties to the dealings under those smart contracts.

Yorumlar


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