Second Circuit Court Upholds Uniswap’s Legal Victory
The U.S. Court of Appeals for the Second Circuit issued a pivotal ruling on Wednesday, largely siding with a lower court’s 2023 decision to dismiss a class action lawsuit against the decentralized exchange Uniswap. This case stems from a group of investors who initially filed suit against Uniswap Labs, the entity responsible for the decentralized protocol, as well as several of its venture capital backers, in 2022. The investors alleged that Uniswap was liable for their losses stemming from the issuance of scam tokens on its platform.
In a significant move, District Court Judge Katherine Polk Failla of the Southern District of New York (SDNY) ruled in favor of Uniswap in 2023, dismissing the lawsuit before it could proceed to trial. Judge Failla compared the plaintiffs’ arguments to an attempt to hold payment applications like Venmo or Zelle accountable for facilitating illegal transactions, such as drug deals, through their platforms.
Following Judge Failla’s ruling, the plaintiffs appealed in September 2023; however, the Second Circuit’s recent decision effectively upheld the lower court’s dismissal. The appellate judges confirmed Failla’s decision to reject the plaintiffs’ claims under both the Securities Act and the Exchange Act, stating, “In sum, we agree with the district court that it ‘defies logic’ that a drafter of a smart contract, a piece of computer code, could be held liable under the Exchange Act for a third-party user’s misuse of the platform.”
The Second Circuit’s ruling represents a significant victory for Uniswap, particularly in light of a recent announcement on Tuesday indicating that the U.S. Securities and Exchange Commission (SEC) would be discontinuing its investigation into the decentralized exchange. Under the leadership of former SEC Chairman Gary Gensler, the agency had been scrutinizing Uniswap for allegedly operating as an unregistered securities broker and exchange, as well as for issuing an unregistered security.
Notably, the only aspect of Judge Failla’s ruling that was vacated and remanded back to the district court involves the state law claims. These claims aim to pursue similar allegations under state law in jurisdictions such as New York, North Carolina, and Idaho.
