We previously reported on the pre-emptive lawsuit that Consensys Software Inc., a software developer whose business centers on the Ethereum blockchain network, brought against the United States Securities and Exchange Commission in April 2024 in federal court in Texas. The Complaint may be found here. Three of the four counts in the Complaint relate to Consensys’s ETH transactions (ETH is the native token for the Ethereum blockchain). The fourth count relates to Consensys’s two MetaMask software products: (i) MetaMask Swaps allows users to communicate with third-party trading platforms to buy, sell, and exchange tokens, and (ii) MetaMask Staking facilitates users’ communications with two third-party applications, which allow users to “stake” their ETH to transact on the Ethereum blockchain.
In a decision on September 19, 2024, the district court in Texas dismissed the lawsuit.
After the lawsuit was commenced, SEC staff concluded the ETH investigation and informed Consensys that it did not “intend to recommend an enforcement action . . . with respect to this investigation.” Consensys thus conceded that the three ETH counts were moot and, accordingly, the court dismissed them.
Regarding the MetaMask investigation, on June 28, 2024, the SEC commenced an enforcement action against Consensys in federal court in the Eastern District of New York, alleging that Consensys violated federal securities laws through its MetaMask software. The SEC argued that the MetaMask claims in Texas should be dismissed because they were not “ripe” for adjudication.
The MetaMask claims Consensys brought in Texas sought declaratory judgments and, as the court explained, a declaratory judgment action is ripe for adjudication only where an “actual controversy” exists. Ripeness requires a court to look at two issues: the fitness of the issues for judicial decision and the hardship to the parties of withholding court consideration. As to the first, the court identified three factors, “whether the issue presented is a purely legal one, whether consideration of that issue would benefit from a more concrete setting, and whether the agency’s action is sufficiently final;” failure to show even one of these three factors can render a case unfit for judicial review.
The court held that the MetaMask claim presents a pure question of law that needs no further factual development. But the court agreed with the SEC that Consensys failed to identify final agency action that would render the claim fit for judicial review. While it was true that the SEC staff sent Consensys a “Wells Notice” stating its intent to imminently recommend that the Commission bring an enforcement action against Consensys for violating the federal securities laws through its MetaMask Swaps and MetaMask Staking products, that was not a final agency action because the SEC could decide against following the recommendation. And, with respect to the enforcement action in New York, the court said that, under Fifth Circuit precedent, “the allegations made in an enforcement suit do not impose the kind of legal obligations with which the finality doctrine is concerned.”
Turning to the second issue in the ripeness test, the court held that Consensys failed to show it will suffer hardship from withholding judicial review of its claim. The court’s explanation was that the SEC’s New York enforcement action “eliminates, or at least greatly reduces” any hardship to Consensys because there is “no clear or credible threat of future prosecution.” And, that lawsuit also provides Consensys “with an avenue to test its theories,” further mitigating any potential hardship.
For all of these reasons, the lawsuit was dismissed, without prejudice.
