Introduction
An increasing number of class action complaints have been filed over the past several months regarding initial coin offerings (“ICOs”). These suits have primarily focused on alleged securities law implications—for example, whether the token is a security, whether the token issuer conducted the ICO in compliance with federal and state securities laws, and whether the issuer engaged in securities fraud. Enforcement actions brought by state and federal regulators have also focused on alleged securities laws implications.
An often-overlooked aspect of many ICO lawsuits, however, are the claims alleging violation of state unfair and deceptive acts and practices (“UDAP”) laws. Defendants in ICO litigation and other companies contemplating an ICO should pay careful attention to potential UDAP claims because the standard of proof in a UDAP claim may vary from that of a securities law claim, and UDAP claims can carry significant monetary liability, among other sanctions. State consumer protection regulators, often belonging to a different division from state securities regulators, are empowered to bring UDAP claims seeking monetary penalties and injunctive relief. Once the initial wave of securities-related ICO litigation and enforcement matters are resolved, there will likely be an increasing focus—both in existing and new suits—on UDAP claims.
Elements of a UDAP Claim
Every state has a UDAP-type statute. Although the statutes vary in their scope, standards of proof, and damages, they all share at least one common theme: significant consequences for defendants that are found liable. Consider, for example, the Florida Deceptive and Unfair Trade Practices Act. The act prohibits a broad range of activity; anyone engaging in trade or commerce is barred from conducting “unfair methods of competition,” and “unconscionable,” “unfair,” or “deceptive” acts or practices. [1] An unfair practice is one that “offends” public policy and is unethical, oppressive, or substantially injurious to a consumer; [2] an act is deceptive if it is likely to mislead a consumer acting reasonably to her detriment. [3] The act also covers a wide range of economic activity because trade and commerce are defined to include advertising, soliciting, providing, offering, or distributing any good, service, property, or thing of value. [4]
To prove a violation of the Florida UDAP statute, a plaintiff must show: (1) the defendant committed a deceptive or unfair practice in any act of trade or commerce; (2) the plaintiff suffered damages; and (3) the plaintiff’s unfair or deceptive act caused the damages. [5] When establishing damages, the plaintiff need not show her own reliance on the alleged unfair or deceptive act. [6] The plaintiff must show, however, that a similarly situated, reasonable consumer would have relied on the alleged unfair or deceptive act. [7] Under the Florida law, a successful plaintiff can obtain injunctive relief and recover actual damages, attorneys’ fees, and court costs. [8]
But not all UDAP statutes are created equal. The California Unfair Competition Law (“UCL”) prohibits “unfair competition,” which includes “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” [9] To assert a UCL claim, a plaintiff must allege that (1) the defendant committed an unfair, unlawful, or fraudulent business act or practice, or put forth a deceptive, false, or misleading advertisement, and (2) the plaintiff suffered economic injury because of the defendant’s act. [10] A plaintiff asserting a California UCL claim alleging fraud or false, deceptive, or misleading advertising must prove that she relied on the challenged action. [11] In particular, the plaintiff must demonstrate that the alleged unlawful conduct was “an immediate cause of [the plaintiff’s] injury-producing conduct.” [12] A successful private plaintiff can obtain restitution and injunctive relief. [13]
Rise in ICO-Related UDAP Claims
In the last five months, plaintiffs have filed approximately 15 ICO class actions, some concerning the same ICO. At least one-third of these suits have alleged violations of state UDAP statutes. The UDAP allegations generally fall into two categories: (1) statements about the status of the network to be employed, and (2) statements about potential profits.
For instance, in Hodges v. Monkey Capital, LLC, [14] the plaintiffs prefunded the Monkey Capital ICO for the company’s to-be-developed cryptocurrency exchange, hedge fund, and “unified network of news and data distribution” of “virtual capital assets.” According to the complaint, the defendants originally announced that the Monkey Capital ICO would commence by a date certain but then delayed the launch date. The plaintiffs also claimed they were told the network would be fully operational soon after the ICO period ended. When the ICO did not occur, and the promised network was not launched, the plaintiffs filed suit for, among other claims, violations of the Florida UDAP statute. They based their UDAP claims primarily on the defendants’ statements about...
