Uniswap Wins Big: Court Affirms Dismissal of Class Action Suit, SEC Drops Investigation

The U.S. Court of Appeals for the Second Circuit has largely affirmed a lower court's 2023 decision to dismiss a class action suit against decentralized exchange Uniswap. The ruling, issued on Wednesday, aligns with the previous decision by District Court Judge Katherine Polk Failla of the Southern District of New York (SDNY), who likened the plaintiffs' arguments to suing an application like Venmo or Zelle for facilitating a drug deal.

A group of investors had initially sued Uniswap Labs, the company behind the decentralized protocol, and some of its venture capital investors in 2022. The plaintiffs alleged that the company was responsible for harming investors by allowing scam tokens to be issued on its protocol. However, the Second Circuit judges agreed with Failla's decision to throw out the plaintiffs' claims under both the Securities Act and the Exchange Act.

The judges wrote, "In sum, we agree with the district court that it 'defies logic' that a drafter of a smart contract, a computer code, could be held liable under the Exchange Act for a third party user’s misuse of the platform." The only part of Failla's ruling that was vacated and remanded back to a district court were the state law claims, which seek to try similar allegations under state, rather than federal law, in New York, North Carolina, and Idaho.

The ruling comes as a victory for Uniswap, following Tuesday's announcement that the U.S. Securities and Exchange Commission (SEC) would drop its investigation into the decentralized exchange. The SEC had been probing Uniswap for allegedly operating as an unregistered securities broker and unregistered securities exchange, as well as issuing an unregistered security. The SEC's decision to drop the investigation further solidifies Uniswap's position in the decentralized finance (DeFi) landscape.