Ripple's SEC lawsuit cannot be reopened without new laws or presidential consent

The long-running legal dispute between the U.S. Securities and Exchange Commission and Ripple Labs cannot be reopened on the same core issues, according to an Australian-based lawyer closely following the case.

Lawyer Bill Morgan explained that the doctrine of res judicata now bars any additional litigation on whether XRP itself is a security, as well as any further discussion of the historical sales of XRP by Ripple between 2013 and 2020.

His statement follows the criticism of the SEC by U.S. legislators over the agency’s decision to forego various crypto-related enforcement actions, such as the one against Ripple.

Morgan stated that res judicata includes claim preclusion and issue preclusion, i.e. once a court has delivered a final verdict on a matter, then the same parties cannot re-litigate the matter in the future. He stated that the very litigation strategy of the SEC in the Ripple case caused such wide judicial review that in the future, it would limit the choices of the agency.

How the SEC’s strategy shaped the court’s ruling

According to Morgan, the SEC framed its lawsuit by dividing Ripple’s XRP activity into multiple broad categories. These included institutional sales, programmatic sales on secondary markets, and other forms of XRP distribution. At the same time, the regulator advanced the theory that XRP itself constituted a security.

Because of this framing, the court was required to analyze the legal status of XRP itself before examining the different categories of sales. Morgan described this approach as a high-risk strategy, noting that if the court had determined that XRP itself was an investment contract, it would not have needed to assess the facts and circumstances of each category separately.

In that scenario, any offer or sale of XRP by Ripple would have been treated as a securities transaction.

Instead, U.S. District Judge Analisa Torres ruled in July 2023 that XRP, in and of itself, is not an investment contract. This finding enabled the court to distinguish between institutional sales and programmatic or secondary-market sales, leading to separate legal conclusions for each category. As a result, the SEC lost key claims tied to XRP transactions outside of direct institutional sales.

Morgan noted that the SEC did not challenge the specific finding that XRP itself is not an investment contract when it appealed parts of Judge Torres’ decision. He said that omission further solidified the issue for purposes of future litigation.

Res judicata limits any revival of past claims

In his argument, Morgan held that, since the court has already decided the merits of these issues, the SEC cannot relitigate them. This would encompass any assertions by Ripple regarding XRP sales made between 2013 and 2020. By the principle of res judicata, such cases are deemed closed.

This came after House Democrats criticized SEC Chair Paul Atkins over abandoning over a dozen crypto enforcement cases, including those concerning Ripple and Binance. Legislators had asked the agency to keep up litigation against other actors, including Justin Sun.

Morgan responded to such criticism by saying that closed cases cannot be reactivated after a final judgment has been passed.

He further stated that the SEC undercut itself by contending in general that XRP itself and several groups of XRP sales by Ripple were securities. This method enabled the court to issue detailed decisions, resulting in binding determinations that limit the regulator’s legal discretion.

What the SEC can still do

Although Morgan asserts that the Ripple case is legally complete, he added that the SEC can do nothing in the future. The agency had the option to continue claiming sales of XRP made after 2020, as well as any subsequent distribution by Ripple.

Any new litigation would be limited by issue preclusion arising from Judge Torres’s 2023 ruling, especially the conclusion that XRP itself is not a security. Morgan added that this limits the arguments the SEC has.

Other critics have suggested that the SEC could reopen the case if the law changes. Morgan replied that this would involve, at least, action by a direct congressional decision, such as the enactment of new laws, and presidential consent.

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