US Judge Tosses Class Action Lawsuit Against Uniswap Labs

On Aug. 29, Judge Katherine Failla of the Southern District of New York dismissed a class action lawsuit claiming Uniswap should be liable for damages resulting from scam tokens traded on the protocol.

While the judge acknowledged the financial injury suffered by plaintiffs, Failla ruled that Uniswap Labs and its lead investor, Paradigm, should not be held accountable for harm resulting from the actions of third-party token issuers.

“In a perfect (or at least, a more transparent) world, Plaintiffs would be able to seek redress from the actual issuers who defrauded them,” Judge Failla wrote. “Plaintiffs are left to argue that Labs facilitated the trades at issue… [but] by its very nature, the Protocol has no centralized ownership structure.”

“The Court declines 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.”

The ruling establishes legal precedent that U.S-based open-source developers should not be held liable for the actions of third parties on the decentralized protocols they create.

However, the Web3 sector still faces significant regulatory hurdles in the U.S.

Last week, the Internal Revenue Service proposed legislation that would require DEXs, NFTs marketplaces, and other entities facilitating digital asset trading to comply with stringent reporting requirements when serving U.S.-based users.

“I wouldn’t take this case to mean that developers on a blanket basis can expect to be protected from third party claims — it’s really gonna depend on facts and circumstances,” tweeted Stephen Palley, a partner at the Brown Rudnick law firm. “I predict much of this will ultimately be the subject of legislation, but common law decisions will lead the way to start.”

The ruling may give a glimpse into what is to come from the legal battle between Coinbase and the U.S. Securities and Exchange Commission, with Failla also overseeing the landmark case.

The agency brought the complaint against Coinbase in June, accusing the exchange of facilitating trading of unlicensed securities. However, the SEC’s argument suffered a blow in July when a court ruled that digital assets are not automatically considered securities even if they are sold via a securities contract, in a separate case between the SEC and Ripple.