`Case 1:20-cv-10832-AT-SN Document 440 Filed 03/11/22 Page 1 of 10
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` UNITED STATES DISTRICT COURT
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`USDC SDNY
`DOCUMENT
`ELECTRONICALLY FILED
`DOC #:
`DATE FILED: 3/11/2022
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`20 Civ. 10832 (AT) (SN)
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`ORDER
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`SOUTHERN DISTRICT OF NEW YORK
`SECURITIES AND EXCHANGE
`COMMISSION,
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`Plaintiff,
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`-against-
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`RIPPLE LABS, INC., BRADLEY
`GARLINGHOUSE,and CHRISTIAN A.
`LARSEN,
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`Defendants.
`ANALISA TORRES,District Judge:
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`Plaintiff, the United States Securities and Exchange Commission (the “SEC”), brings this
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`action against Defendants Ripple Labs, Inc. (“Ripple”), and two ofits senior leaders, Bradley
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`Garlinghouse and Christian A. Larsen, alleging that Defendants engaged in the unlawful offer
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`and sale of securities in violation of Section 5 of the Securities Act of 1933 (“Section 5”),
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`15 U.S.C. §§ 77e(a) and (c). Amend. Compl. § 9, ECF No. 46. Ripple asserts, as an affirmative
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`defense, that it lacked “fair notice that its conduct wasin violation of law, in contravention of
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`Ripple’s due processrights.” Answer, Affirmative Defenses at 97-99, ECF No. 51. The SEC
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`movesto strike Ripple’s fair notice defense under Federal Rule of Civil Procedure 12(f). SEC
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`Mot., ECF No. 128. For the reasons stated below, the SEC’s motion is DENIED.
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`BACKGROUND
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`The following facts are taken from Ripple’s answerand are presumedto be true solely
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`for the purpose of considering the motion to strike. See Tradeshift, Inc. v. Smucker Servs. Co.,
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`No. 20 Civ. 3661, 2021 WL 4463109, at *4 (S.D.N.Y.Sept. 29, 2021).
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`Ripple was founded in 2012 as a “privately-held payments technology company that uses
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`blockchain innovation .
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`.
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`. to allow moneyto be sent around the world instantly, reliably, and
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`more cheaply than traditional avenues of money transmission.” Answer, Preliminary Statement
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`Case 1:20-cv-10832-AT-SN Document 440 Filed 03/11/22 Page 2 of 10
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`¶ 6 (footnote omitted). Ripple holds a large percentage of XRP, id. ¶ 11, “a fast, efficient and
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`scalable digital asset” that “is transacted on the cryptographic XRP Ledger,” id. ¶ 7. XRP has a
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`“fully functional ecosystem and [has] utility as a bridge currency” and other types of currency
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`uses. Id. ¶ 13. XRP’s price is not and has not been determined by Ripple’s activities. Id.
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`Rather, the market prices XRP in correlation with other virtual currencies, including bitcoin and
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`ether. Id. Ripple has not filed a registration statement for XRP with the SEC. Answer,
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`Response ¶ 1.
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`In February and October 2012, at Ripple’s request, a law firm provided two legal
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`memoranda assessing the potential legal risks involved with Ripple’s then-proposed business
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`plans, including risks related to banking and money transmission laws, securities laws,
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`commodities laws, gambling laws, consumer protection laws, copyright laws, criminal laws, and
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`tax laws. See id. ¶ 51.
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`Ripple has sold XRP in exchange for fiat or other currencies. Id. ¶ 1. To effectuate those
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`sales, Ripple worked with third-party companies known as “market makers” that buy and sell
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`XRP “on-ledger and on exchanges through blind bid/ask transactions.” Id. ¶ 93. At times,
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`Ripple has included on its website a list of third-party digital asset exchanges that listed XRP.
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`Id. ¶ 97. Ripple concedes that Ripple employees at times observed the trading price and volume
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`of XRP. Id. ¶ 193. Ripple also admits that proceeds from Ripple’s sales of XRP were used to
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`support Ripple’s operations, id. ¶ 294, but maintains that its sales of XRP consistently
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`constituted a small portion of XRP trading volume, id. ¶ 99. In addition to selling XRP, Ripple
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`has also made certain payments in XRP as a virtual currency substituting for fiat currency. Id.
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`¶¶ 83, 127.
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`2
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`Case 1:20-cv-10832-AT-SN Document 440 Filed 03/11/22 Page 3 of 10
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`Ripple claims that it has not sold XRP as an investment. Answer, Preliminary Statement
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`¶ 9. XRP holders do not acquire any claim to the assets of Ripple, hold any ownership interest in
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`Ripple, or have any entitlement to share in Ripple’s future profits. Id. Ripple did not hold an
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`“initial coin offering” (“ICO”)1; “offer[] or contract[] to sell future tokens as a way to raise
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`money to build an ecosystem;” or promise profits to any XRP holder. Id. Ripple also has no
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`relationship with the majority of XRP holders, nearly all of whom purchased XRP from third
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`parties on the open market. Id. Moreover, Ripple has no obligation to any counterparty to
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`expend efforts on their behalf, and does not pool proceeds of XRP sales in a “common
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`enterprise.” Id. ¶ 10. Indeed, “Ripple has its own equity shareholders who purchased shares in
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`traditional venture capital funding rounds and who . . . did contribute capital to fund Ripple’s
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`operations, do have a claim on its future profits, and obtained their shares through a lawful (and
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`unchallenged) exempt private offering.” Id. ¶ 13. Ripple claims that if it ceased to function
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`tomorrow, XRP “would continue to survive and trade in its fully developed ecosystem.” Id.
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`¶ 10.
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`Ripple states that it has “worked to develop products that utilize XRP to allow financial
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`institutions to effect currency transfers.” Answer, Response ¶ 67. One of those products is “On-
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`Demand Liquidity” (“ODL”), which is intended to effect cross-border payments. Id. ¶ 131.
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`Ripple asserts that it has made certain payments in XRP as a virtual currency in connection with
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`ODL, “in accordance with standard market practices in connection with new products and
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`markets.” Id.
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`1 Ripple states that an ICO “commonly describes a fundraising mechanism where an entity sells directly to investors
`a digital asset that has no functionality or utility yet, as a means of raising funds for the operations of the entity.”
`Answer, Preliminary Statement ¶ 9 n.4. An ICO “typically involves the release of a white paper by the token issuer
`to prospective investors describing, among other issues, how the token and the system would function in the future;
`how the funds raised will be allocated; and what future efforts will be undertaken by the issuer to develop the system
`and drive returns on the token’s price.” Id.
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`3
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`Case 1:20-cv-10832-AT-SN Document 440 Filed 03/11/22 Page 4 of 10
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`XRP II, LLC (“XRP II”) is a wholly-owned subsidiary of Ripple. Id. ¶ 19. XRP II is
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`registered as a money service business with the Financial Crimes Enforcement Network
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`(“FinCEN”) and is licensed by the New York Department of Financial Services to conduct
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`certain virtual currency business activities. Id. In May 2015, Ripple and XRP II entered into a
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`settlement agreement with the Department of Justice and FinCEN, which refers to XRP as a
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`“convertible virtual currency.” Id. ¶ 379.
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`On May 16, 2017, Ripple announced that “it would place 55 billion XRP into an escrow
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`on the XRP Ledger, and thereafter implemented the escrow of that XRP.” Id. ¶ 191.
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`In June 2018, the SEC’s then-Director of Corporate Finance stated that the SEC did not
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`consider the virtual currencies bitcoin or ether to be securities, and that it would “put[] aside the
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`fundraising that accompanied the creation of [e]ther” and look instead at the “present state of
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`[e]ther.” Answer, Affirmative Defenses at 98 (alterations in original). And, in 2019, SEC staff
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`met with a digital asset platform that was considering listing XRP. Id. That platform sought
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`guidance on whether the SEC considered XRP a security. Id. During the meeting, the SEC did
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`not say that it considered XRP to be a security. Id. The platform then proceeded to list XRP. Id.
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`SEC officials have also stated publicly that digital assets may be considered securities under
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`certain circumstances.2
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`Before the SEC filed the complaint in this action, “XRP was listed on over 200
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`exchanges, billions of dollars in XRP was bought and sold each month, numerous market makers
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`engaged in daily XRP transactions, Ripple’s ODL product was used by many customers, and
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`2 See, e.g., SEC, No. 81207, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of
`1934: The DAO (2017), https://www.sec.gov/litigation/investreport/34-81207.pdf; SEC Chairman Jay Clayton,
`Statement on Cryptocurrencies and Initial Coin Offerings (Dec. 11, 2017), https://www.sec.gov/news/public-
`statement/statement-clayton-2017-12-11; Jay Clayton & J. Christopher Giancarlo, Regulators are Looking at
`Cryptocurrency, WALL ST. J. (Jan. 24, 2018), https://www.wsj.com/articles/regulators-are-looking-at-
`cryptocurrency-1516836363. The Court shall consider these statements only to the extent they establish that SEC
`leadership and employees made certain statements. See United States v. Strock, 982 F.3d 51, 63 (2d Cir. 2020).
`4
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`Case 1:20-cv-10832-AT-SN Document 440 Filed 03/11/22 Page 5 of 10
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`XRP was used in third-party products, many of which were developed independently of Ripple.”
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`Id. at 96.3
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`I.
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`Legal Standard
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`ANALYSIS
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`Under Federal Rule of Civil Procedure 12(f), a court may strike from a pleading any
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`“insufficient defense.” Fed. R. Civ. P. 12(f). Motions to strike an affirmative defense are
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`disfavored and should generally not be granted. SEC v. Thrasher, No. 92 Civ. 6987, 1995 WL
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`456402, at *5 (S.D.N.Y. Aug. 2, 1995); see also SEC v. Honig, No. 18 Civ. 8175, 2021 WL
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`5630804, at *4 (S.D.N.Y. Nov. 30, 2021). In ruling on such a motion, courts “deem the non-
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`moving party’s well-pleaded facts to be admitted, draw all reasonable inferences in the pleader’s
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`favor, and resolve all doubts in favor of denying the motion to strike.” Tradeshift, 2021 WL
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`4463109, at *4 (citation omitted).
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`To succeed on a motion to strike an affirmative defense, the SEC must “show that: (1)
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`there is no question of fact which might allow the defense to succeed; (2) there is no question of
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`3 The SEC asks the Court to take judicial notice of 72 SEC enforcement actions enumerated in an appendix to a
`report created by a private entity (the “Report”). See SEC Reply Mem. at 4–5 & n.2, ECF No. 205; see also Report
`at 12–18, ECF 205-1. The SEC argues that the Court may take judicial notice of the complaints and charging
`documents listed in the appendix because they are public records. See SEC Reply Mem. at 5 n.2. The Court agrees
`that it may take judicial notice of these filings to the extent that they “establish the fact of such litigation and related
`filings.” Glob. Network Commc’ns, Inc. v. City of New York, 458 F.3d 150, 157 (2d Cir. 2006) (citation omitted).
`But here, the SEC appears to argue that the Court should accept that these enforcement actions “related to digital
`assets,” and that a subset of these actions “alleged an unregistered securities offering in violation of Section 5.” SEC
`Reply Mem. at 4–5. The SEC also asks the Court to accept that “each of these actions was premised on the
`allegation that the investment product at issue was a ‘security’ subject to the provisions of the federal securities
`laws.” Id. at 5. To the extent that the SEC urges the Court to adopt this characterization of these enforcement
`actions, the Court rejects such a suggestion because the Report’s analysis and conclusions with respect to these
`actions are not proper subjects for judicial notice. See Abraham v. Town of Huntington, No. 17 Civ. 3616, 2018 WL
`2304779, at *9 (E.D.N.Y. May 21, 2018). Moreover, to the extent that the SEC requests that the Court parse each of
`these filings to determine the underlying facts and legal basis for the enforcement actions and draw conclusions that
`they are similar to the enforcement action taken against Ripple, the Court declines to do so. Ripple disputes the
`SEC’s interpretation of these filings, see Ripple Sur-Reply at 5–6, at ECF No. 423; cf. White Plains Hous. Auth. v.
`Getty Properties Corp., No. 13 Civ. 6282, 2014 WL 7183991, at *3 (S.D.N.Y. Dec. 16, 2014), and the Court finds
`that such an assessment would be improper in resolving a motion to strike, cf. Glob. Network Commc’ns, 458 F.3d at
`157.
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`5
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`Case 1:20-cv-10832-AT-SN Document 440 Filed 03/11/22 Page 6 of 10
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`law which might allow the defense to succeed; and (3) the plaintiff would be prejudiced by
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`inclusion of the defense.” Town & Country Linen Corp. v. Ingenious Designs LLC, No. 18 Civ.
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`5075, 2020 WL 3472597, at *5 (S.D.N.Y. June 25, 2020) (quoting GEOMC Co. v. Calmare
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`Therapeutics Inc., 918 F.3d 92, 96 (2d Cir. 2019)).
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`With respect to the first factor, “the plausibility standard of Twombly applies to
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`determining the sufficiency of all pleadings, including the pleading of an affirmative defense.”
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`GEOMC, 918 F.3d at 98 (discussing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
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`Therefore, the pleading party, here Ripple, must support its defenses with enough factual
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`allegations to make them plausible. Id. at 99. That said, courts generally apply a lower
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`plausibility threshold when evaluating motions to strike affirmative defenses as opposed to
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`motions to dismiss because the pleader has less time to gather facts and craft a response. See id.
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`at 98. As to the second factor, “an affirmative defense is improper and should be stricken if it is
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`a legally insufficient basis for precluding a plaintiff from prevailing on its claims.” Id.
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`Furthermore, in considering the third factor, courts generally look to when the defense was
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`presented. Id. “A factually sufficient and legally valid defense should always be allowed if
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`timely filed even if it will prejudice the plaintiff by expanding the scope of the litigation”
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`because “[a] defendant with such a defense is entitled to a full opportunity to assert it and have it
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`adjudicated before a plaintiff may impose liability.” Id.
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`II.
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`Application
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`“A fundamental principle in our legal system is that laws which regulate persons or
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`entities must give fair notice of conduct that is forbidden or required.” F.C.C. v. Fox Television
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`Stations, Inc., 567 U.S. 239, 253 (2012). This clarity requirement is “essential to the protections
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`provided by the Due Process Clause of the Fifth Amendment,” and requires the invalidation of
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`6
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`Case 1:20-cv-10832-AT-SN Document 440 Filed 03/11/22 Page 7 of 10
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`laws that are “impermissibly vague.” Id. Laws fail to comport with due process when they
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`“fail[] to provide a person of ordinary intelligence fair notice of what is prohibited,” or when
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`they are so standardless that they authorize or encourage “seriously discriminatory enforcement.”
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`Id. (citation omitted). But, “the degree of vagueness that the Constitution tolerates” often
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`depends, at least in part, on the type of law at issue. Vill. of Hoffman Ests. v. Flipside, Hoffman
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`Ests., Inc., 455 U.S. 489, 498 (1982). Courts, therefore, find that “economic regulation is subject
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`to a less strict vagueness test because its subject matter is often more narrow, and because
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`businesses, which face economic demands to plan behavior carefully, can be expected to consult
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`relevant legislation in advance of action.” Id. (footnotes omitted). The Supreme Court has also
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`expressed greater tolerance of enactments with civil penalties because “the consequences of
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`imprecision are qualitatively less severe.” Id. at 498–99.
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`As an affirmative defense, Ripple pleads that it lacked, and the SEC failed to provide,
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`“fair notice that its conduct was in violation of law, in contravention of Ripple’s due process
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`rights.” Answer, Affirmative Defenses at 97. The SEC argues that the Court should strike this
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`defense at the pleadings stage because it is a “legally insufficient defense on which Ripple
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`cannot prevail as a matter of law.” SEC Mem. at 16, ECF No. 132. The SEC also contends that
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`it would be prejudiced by Ripple’s defense because the defense would lead Ripple to seek
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`intrusive discovery. Id. at 30. After considering the SEC’s arguments, the Court holds that the
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`SEC has not met its burden of showing that Ripple’s fair notice defense should be stricken at this
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`time.
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`The parties agree that Ripple is not bringing a facial challenge to the statute. See SEC
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`Mem. at 16; Ripple Mem. at 15, ECF No. 172. Because the Court is reviewing an “as applied”
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`challenge, the Court shall consider “the application of the challenged statute to the person
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`7
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`Case 1:20-cv-10832-AT-SN Document 440 Filed 03/11/22 Page 8 of 10
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`challenging the statute based on the charged conduct.” United States v. Smith, 985 F. Supp. 2d
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`547, 592–93 (S.D.N.Y. 2014), aff’d sub nom. United States v. Halloran, 664 F. App’x 23 (2d
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`Cir. 2016). Such a consideration requires the Court to evaluate whether a law can be
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`constitutionally applied to the challenger’s individual circumstances. Copeland v. Vance, 893
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`F.3d 101, 110 (2d Cir. 2018). This assessment cannot be conducted in the abstract; rather, the
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`Court must consider whether the party claiming a lack of notice has shown “that the statute in
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`question provided insufficient notice that his or her behavior at issue . . . was prohibited.” Id. at
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`117 (quotation marks omitted). Therefore, the Court must first determine what Ripple did before
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`assessing whether the statute fairly apprised Ripple that its conduct was prohibited. Cf. id.
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`At the pleading stage, the Court’s examination of Ripple’s conduct is limited to facts
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`pleaded in Ripple’s answer, the undisputed facts in the amended complaint, and any fact of
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`which the Court may properly take judicial notice. As discussed above, Ripple states that XRP’s
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`price bears no relation to Ripple’s activities. Answer, Preliminary Statement ¶ 13. It also asserts
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`that it has not sold XRP as an investment, and that it has no relationship with the vast majority of
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`XRP holders. Id. ¶ 9. At the very least, these facts, if true, would raise legal questions as to
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`whether Ripple had fair notice that the term “investment contract” covered its distribution of
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`XRP, and the Court may need to consider these questions more deeply. Cf. SEC v. W.J. Howey
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`Co., 328 U.S. 293, 299, 301 (1946). Thus, accepting all of Ripple’s pleaded facts as true and
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`drawing all reasonable inferences in Ripple’s favor, as the Court must do at this stage, it
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`concludes that the SEC has not met its burden of demonstrating that there are no questions of
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`fact or law that might allow the defense to succeed. See Town & Country Linen, 2020 WL
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`3472597, at *5; see also GEOMC, 918 F.3d at 96–99.
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`8
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`Case 1:20-cv-10832-AT-SN Document 440 Filed 03/11/22 Page 9 of 10
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`None of the cases cited by the SEC support a contrary result. In some of these cases, the
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`courts assessing a fair notice defense did so when ruling on a motion to dismiss, where the court
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`was obligated to draw presumptions and inferences in favor of the SEC. See United States v.
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`Zaslavskiy, No. 17 Cr. 647, 2018 WL 4346339, at *8 (E.D.N.Y. Sept. 11, 2018); SEC v. Fife,
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`No. 20 Civ. 5227, 2021 WL 5998525, at *7 (N.D. Ill. Dec. 20, 2021); United States v. Bowdoin,
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`770 F. Supp. 2d 142, 146–49 (D.D.C. 2011). Other courts analyzed this issue in ruling on
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`motions for summary judgment, with the benefit of a fully developed factual record. See SEC v.
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`Keener, No. 20 Civ. 21254, 2022 WL 196283, at *13–14 (S.D. Fla. Jan. 21, 2022); SEC v. Kik
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`Interactive Inc., 492 F. Supp. 3d 169, 182–84 (S.D.N.Y. 2020). And, a couple of courts
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`addressed facial challenges to the term “investment contract,” where the courts’ analysis did not
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`depend on the particular facts of the case. See SEC v. Brigadoon Scotch Distrib. Co., 480 F.2d
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`1047, 1052 n.6 (2d Cir. 1973)4; Bowdoin, 770 F. Supp. 2d at 149. Moreover, the cases cited by
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`the SEC in which courts did strike affirmative defenses at the pleadings stage dealt with
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`equitable defenses that generally cannot be brought against the SEC. See SEC Reply Mem. at 7–
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`8, ECF No. 205; see also, e.g., SEC v. KPMG LLP, No. 03 Civ. 671, 2003 WL 21976733, at *2–
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`4 (S.D.N.Y. Aug. 20, 2003) (striking estoppel, waiver, and unclean hands defenses); SEC v.
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`McCaskey, 56 F. Supp. 2d 323, 327 (S.D.N.Y. 1999) (striking laches defense). In short, the SEC
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`4 The SEC appears to contend that the statements in Brigadoon were made during the Second Circuit’s assessment
`of an as-applied challenge, and that the Second Circuit, therefore, made a broad statement prohibiting a party from
`ever being able to bring a vagueness challenge to the term “investment contract.” See SEC Mem. at 24. The Court
`does not find that Brigadoon stands for that proposition. Because of the procedural posture of the case—an appeal
`from decisions granting and denying enforcement of subpoenas—the Second Circuit specifically disclaimed any
`assessment of the regulated parties’ activities. See Brigadoon, 480 F.2d at 1052. And, the Second Circuit
`characterizes the regulated parties’ challenge to the term “investment contract” as an argument that the term “is void
`for vagueness,” without any reference to their conduct. See id. at 1052 n.6.
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`has cited no caselaw where a court has stricken a fair notice affirmative defense at the pleadings
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`stage, and the Court is not persuaded that doing so is appropriate here.5
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`Moreover, the SEC has not shown that it will suffer undue prejudice as a result of the
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`continuation of Ripple’s fair notice defense. An increase in the time, expense and complexity of
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`a trial may constitute sufficient prejudice to warrant granting a plaintiff’s motion to strike.
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`Thrasher, 1995 WL 456402, at *5. However, a sufficiently pleaded defense “should always be
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`allowed if timely filed even if it will prejudice the [SEC] by expanding the scope of the
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`litigation.” GEOMC, 918 F.3d at 98. The SEC does not contend that Ripple’s affirmative
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`defense is untimely, and the Court shall not conclude, at this early stage of the case, that Ripple’s
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`defense is invalid.
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`Accordingly, the SEC’s motion to strike Ripple’s fair notice affirmative defense is
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`DENIED.
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`CONCLUSION
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`For the foregoing reasons, the SEC’s motion is DENIED. The Clerk of Court is directed
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`to terminate the motion at ECF No. 128.
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`SO ORDERED.
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`Dated: March 11, 2022
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`New York, New York
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`5 Because these factual and legal questions are relevant to any form of as-applied fair notice- or vagueness-based
`legal challenge, this result would be the same under both sides’ proposed articulation of the fair notice test. The
`Court, therefore, need not reach the issue of how Ripple’s fair notice defense should be assessed at a later stage in
`the litigation. The Court, however, notes that the evaluation of any fair notice defense is objective—it does not
`require inquiry into “whether a particular [party] actually received a warning that alerted him or her to the danger of
`being held to account for the behavior in question.” Smith, 985 F. Supp. 2d at 587.
`10
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