Surprise, Mother F’er! Coinbase Opens Lawsuit Vs. SEC With a Sneak Attack

For months, I have been covering Coinbase’ legal strategy going on offense against the SEC in its amicus filed in the SEC case against former employee Ishan Wahi, its response to the initial Wells Notice, and through its Writ of Mandamus action filed directly against the SEC. These were all clearly strategic moves, but while we could see chess pieces being moved we couldn’t tell what the eventual end goal of the moves were.

On June 28, 2023 we finally got a reveal of at least some of the Coinbase strategy when Coinbase launched a sneak attack, filing its Answer to the SEC Complaint over 30 days early and announcing its intent to utilize an unusual aspect of the Federal Rules of Civil Procedure (“FRCP”) to try to get an early win against the SEC.

WARNING: I try to write my posts in as plain speak as possible, but this is going to get into the weeds of the FRCP, so I apologize in advance for that. In football terms, Coinbase is running a hurry up offense and ran a trick play/Hail Mary with its first possession in the game. And they ran months of decoy plays to set it up. Bill Belichick level strategery.

Timing of Answer

Coinbase’s move is interesting on many levels, the first of which is its timing. Coinbase waived requiring the SEC to formally serve them, meaning under FRCP(4) Coinbase had 60 days to respond to the SEC’s Complaint. This means Coinbase had until early August to respond to the SEC. In 99% of cases, that is exactly what the party does. Litigation takes years, so usually parties are not trying to hurry up and wait.

Coinbase, however, pulled a fast one, filing an Answer over 30 days early and a letter stating it intends to file a 12(c) Motion for Judgement on the Pleadings (“MJP”) as soon as the Court allows it to. Coinbase did this over a holiday weekend, no less! While usually this would mean the SEC would have to respond by July 3rd, the Court has already granted an extension for the SEC to respond to the letter by July 7th. Still, because of this timing and the work to be done by SEC attorneys between now and then, they will almost certainly be watching fireworks from their government offices this Fourth of July.

Nobody but Coinbase and its attorneys know the exact reason(s) for timing its Answer the way it did. It’s possible this was a middle finger to the SEC, after the SEC filed its Complaint mere hours before Coinbase’s legal head was to testify in front of Congress. It could be Coinbase wanted to get onto a separate legal tract from the SEC v. Binance lawsuit and to distance itself from those bad facts. Coinbase could have decided to file early when the SEC got essentially a 180-day stay in the Mandamus action. Or it could be one of a million other reasons. I don’t think anybody in the legal community saw this coming, though.

Unique Procedural Posture

Not only was this interesting for its timing, Coinbase also is using a rarely utilized aspect of the FRCP to try to get an early dismissal or potentially set up an early appeal. Generally, when a party is looking to get an early dismissal, they do not file an Answer at all and instead file what is known as a 12(b)(6) Motion to Dismiss (“MTD”) for Failure to State a Claim.

Essentially, under a 12(b)(6) MTD, the requesting party is saying “even if all the factual allegations made by Plaintiff are correct, they still lose because the law is so clearly against them.” There is no need to file an Answer, because it doesn’t matter if the facts are in dispute. When deciding a MTD, all the Court is permitted to look at is essentially the Complaint and the law. That’s it. While the Court can potentially look at facts which run counter to the Complaint, that would require the Court to convert the MTD into an early Motion for Summary Judgment (“MSJ”). If the Court does that, the Plaintiff gets to come back with some additional facts of its own and often times there is a delay as the Court allows the parties to conduct some limited discovery.

However, Coinbase didn’t do what everybody expected and instead Answered with a 33 page “Preliminary Statement” providing a whole slew of facts telling a story as to why Coinbase believes the SEC Complaint is bullshit. To non-litigators, it is hard to explain exactly how rare it is to provide counter factual allegations in an Answer. It is virtually unheard of. It’s the invention of the alley-oop.

Answers to Complaint are boring because there is generally no way to “win” an Answer. The only thing it does is potentially provide ammo for discovery or “got-you” moments later when additional context is revealed in discovery which makes you want to take back that Answer.

Here, however, Coinbase has been preparing for months, if not years, for this litigation. It isn’t afraid of some unknown fact coming up. As far as I can tell, Coinbase answered the way it did for two reasons:

Reason 1: This particular judge only allows MJP’s to be 25 pages. If Coinbase wants this case dismissed, it has a lot of story and law to tell and not a lot of space to tell it. By putting these claims in the Answer instead of the MJP, Coinbase is saving precious page space for substantive arguments instead of factual background. It is a technically correct end-around to this Court’s rules; and to lawyers “technically correct” is the best kind of correct.

Reason 2: 12(c) MJPs, unlike MSJs, allow the Court to take Judicial Notice of facts outside the Complaint in making its determination! The Answer makes a ton of references to things like the Wahi case, the Mandamus action, and congressional testimony of SEC officials. These and others are all things which the Court can take judicial notice of for its determination. This is HUGE and allows Coinbase to try to get an early complete victory and give the Court the facts it needs for that victory without a delay for discovery. It is a maneuver I have never personally seen used before, and while I am hardly a seasoned vet, I have pretty much exclusively been practicing in federal courts since 2015 and follow federal litigation practices more than most.

Coinbase has some of the best attorneys in the world representing it. Almost all of them are former SCOTUS clerks or otherwise undisputedly brilliant practitioners with resumes to back it up. In addition to being masterfully written, the procedural posture taken by Coinbase is an undeniable stroke of genius.

Actual Defenses Raised by Coinbase

Honestly, the actual defenses raised by Coinbase are best articulated in its letter request to file its MJP, which is worth a read. Coinbase raises quite a few additional defenses in its Answer, but the primary defenses it will be hanging its hat on throughout the litigation are:

Defense 1: Coinbase Doesn’t Allow Sales of Securities on its Platform

This is the same issue raised in Coinbase’s amicus filing in Wahi and is hammered home in its Answer. Throughout its operation, Coinbase has only sold things which Coinbase and Coinbase’s outside counsel believe not to be securities based on the limited guidance provided by the SEC and the understanding that if Bitcoin and ETH are not securities then certainly some other digital assets also would not be securities.

In April of 2021, the SEC made effective Coinbase’s request to become a public company and sell shares in Coinbase to the general public through a Direct Public Offering (“DPO”). Coinbase’s practices are largely the same now as they were then, and indeed many of the tokens alleged to be illegally sold in the Complaint were sold at the time the SEC accepted the DPO filing. Nothing has changed except Gary Gensler’s attitude towards digital assets, and Gray Gensler’s attitude isn’t the law. If what Coinbase was doing was illegal, the time for the SEC to allege that would be before the DPO, and not after the American public at large was permitted to invest in what the SEC is now claiming to be a scofflaw.

Defense 2: Major Question Doctrine

The Major Question Doctrine is a judicially created idea that, under Constitutional separation of powers, executive branch administrative agencies shouldn’t be permitted to use ambiguous statutory authority to make rules on major issues, and that is instead a role reserved for Congress.

Generally, under what is called Chevron Deference, for interpretations of statutes made by Congress, courts will defer to the governmental agencies charged with enforcing those statutes, unless such interpretations are unreasonable. I.e., if Congress makes a law involving securities, then the administrative agency charged with enforcing securities laws (the SEC) is allowed to interpret those laws and so long as the interpretation is “reasonable” then the judicial branch will defer to the agency.

However, under the Major Question Doctrine (which was a fairly dead legal principal until recently revived in the case West Virginia v. EPA), courts do NOT give deference when the interpretation is a Major Question. For example, in the 1970’s Congress passed the Clean Air Act which the EPA was charged with interpreting and enforcing. In West Virginia v. EPA, after there was a major shift in the EPA’s interpretation of clean air standards, SCOTUS ruled that use of this 1970’s statute by the EPA in a way it had never been used before was a violation of the Major Question Doctrine, and the Executive branch administrative agency didn’t have that power without clear authorization from the Legislative branch Congress.

While there is no list of what makes an issue a “Major Question” vs. something within an administrative agency’s power to regulate, typically courts consider things like economic/political significance of the issue, and whether this fits into the applicable agency’s expertise. I.e., is the agency designed/equipped to do what it is doing?

Courts also consider congressional intent, which is important here. When Congress is actively considering its own legislation in the area, courts are less inclined to believe Congress intended the agency to make potentially conflicting rules/decisions in the interim. Right now, there are a BUNCH of digital asset bills pending in Congress, including the Digital Asset Market Structure Discussion Draft. This fact goes against SEC claims of Congressional intent to delegate the regulations of digital assets to the SEC under 1940’s securities laws.

It isn’t a bad argument, especially for the current makeup of SCOTUS which is far from deferential to administrative agencies. If they think use of 1970’s environmental laws in a new way is out of bounds, what will SCOTUS think about the use of 1940’s securities laws to turn magical internet money into “investment contracts” as that term was understood to mean when it was added to the law around the same time as the invention of Penicillin? That said, this matter is very likely many years away from reaching SCOTUS, if ever, so the current SCOTUS might not be the same SCOTUS as hears Coinbase’s Major Question arguments.

Other Issues

There are lots of other issues raised in Coinbase’s 175-page Answer which don’t go directly towards those two main arguments. For example, on page 85 Coinbase throws Nike under the bus by comparing the Coinbase price chart for Cardano to a similar price chart for Jordan 4 Retro sneakers. Generally, parties answer numbered paragraphs with simple “admit” or “deny” and maybe a little legalese for why they aren’t required to admit or deny a particular numbered paragraph under the FRCP.

Here, Coinbase uses many of its numbered paragraph answers to add additional facts and argue its position. This isn’t a common practice (like I said, you can’t “win” an Answer), but it also isn’t as unheard of as a 33-page intro argument in an Answer.

Final Thoughts

While I think Coinbase’s Answer is masterfully written and the strategy behind it has been months or years in the making, I don’t think they win their MJP. It is an exceedingly high threshold to overcome weighed heavily in the SEC’s favor here. It sets a good introductory tone to the litigation, and potentially gets the Court to question SEC choices down the line where the Court would otherwise give deference, but I don’t think it wins the day.

It does, however, set up an interesting scenario for the potential of an early appeal. Generally a Court’s decision to grant or dent a MSJ (or MJP) is not immediately appealable. You have to wait until after the case is closed for you to appeal everything at once, so appellate courts are not jammed up with piecemeal appeals. However, here, I could see the Court immediately certifying for appeal certain issues such as the applicability of the Major Question Doctrine to the case at hand.

Either way, while this litigation theater is something which could deeply affect my livelihood as a US attorney specializing in digital assets, it is hard not to appreciate the masterful litigation gamesmanship by both the SEC and Coinbase in this battle of life or death for Coinbase and potentially the industry at large in the US. Looking forward to seeing what the parties do next and this high stakes chess match.

Conclusion

If you have any questions or would like me to write about anything else, let me know on either of my twitter pages! As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.

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