INTRODUCTION
This is a case about Defendants misleading "Ripple" to enter into multiple contracts, and then breaching those contracts after they were signed. "Ripple" is a financial technology company that has developed state-of-the-art software for financial transactions with a vision to connect banks, payment providers, digital asset exchanges and corporates to provide a frictionless experience to send money globally. This state-of-the-art technology is built on distributed ledger concepts. "Ripple" also holds XRP, a unique digital asset that solves the current friction experienced with global payments. XRP is a highly valued cryptocurrency (other cryptocurrencies include Bitcoin and Ethereum).
"Ripple"'s success is driven in large part by the adoption of its state-of-the art software by international banks and financial institutions and the use of XRP by those financial institutions to move value worldwide. To that end, "Ripple" has expended significant time and effort to expose these financial institutions, including banks, central banks and regulators worldwide, to the technology and the unique properties of XRP, to demonstrate how these technologies can facilitate seamless international financial transactions in revolutionary ways.
Beginning in 2016, R3 touted itself to "Ripple" as a leading consortium of banks with whom "Ripple" should partner. R3 represented to "Ripple", among other things, that R3 would work to get "Ripple" access to R3's large body of banks, would help promote "Ripple"'s technology and XRP to those banks, and would be a foundational component of "Ripple"'s success. With respect to these efforts, R3's CEO assured to "Ripple" that "the endgame IS commercialization of a product.'
On the strength of those and many other R3 representations, "Ripple" entered into a Technology Provider Agreement (the "TPA") and Option Agreement (the "Option' and, collective with the TPA, the “Agreements”) with R3. The TPA described the Option and its terms, and the Option expressly noted that it was part of the TPA. The Option granted R3 the right to purchase 5 billion XRP at a certain price.
Almost immediately after the Agreements were signed, R3 disappeared as a partner. R3 failed to take any steps to perform remaining obligations under the TPA, and instead focused all its attention on fund-raising. That shifted focus continued for months and months. Indeed, eight months after the signing of the Agreements, R3's CEO wrote that he had "no idea what's going on with XRP," and hoped to soon be able to start paying attention to "Ripple"'s business. That attention, or efforts to comply with R3's obligations under the TPA, never came.
In addition, within months of the Agreements' execution, several key banks departed from R3's consortium. These departures and R3's reduced status in the banking world greatly decreased the value proposition of "Ripple"'s partnering with R3.
R3 failed to disclose any of these impending issues to "Ripple" before inducing "Ripple" to sign the Agreements. Indeed, R3 instead sold itself by touting facts to thecontrary, and suggesting that R3 would be highly focused on helping "Ripple" succeed. Then, after receiving the Option Agreement for 5 billion XRP, R3 went aboutbreaching and carrying out actions damaging to "Ripple", actions that R3 doubtless knew it would undertake before it signed the Agreements.
In June of 2017, after having burned almost a year waiting for R3 to live up to its promises, "Ripple" terminated the Agreements. R3 failed to cure its material breaches within 10 days, and instead threatened "Ripple" with litigation. "Ripple" brings this lawsuit to address the harm caused to it by R3's fraud, breaches, and misconduct.
PARTIES
Plaintiff "Ripple" Labs Inc. is a Delaware corporation headquartered at 315 Montgomery Street in San Francisco, California.
Plaintiff XRP II, LLC is a New York corporation headquartered at 315 Montgomery Street in San Francisco, California.
Defendants R3 LRC LLC and R3 HoldCo LLC (collectively, "Defendants' or "R3') are Delaware limited liability corporations both located in New York, New York.
"Ripple" is unaware of the true names and capacities, whether individual, corporate, associate, or otherwise, of Defendants Does 1 through 10, inclusive, or any of them, and therefore sues these Defendants, and each of them, by such fictitious names. "Ripple" will amend this Complaint when the identities of these Defendants are ascertained.
JURISDICTION AND VENUE
This is an unlimited civil action as the amount in dispute exceeds $25,000.
Jurisdiction and venue are proper in this Court because (a) the Defendants conduct business in San Francisco County; (b) the causes of action asserted in this Complaint arise from an obligation that arose and/or was to be performed in San
Francisco. The causes of action asserted in this Complaint arise from transactions conducted in San Francisco, California.
STATEMENT OF FACTS
A. "Ripple"'s Innovative Technology
As technology continues to flatten the world, businesses increasingly engage in transactions across international borders. Consumers and businesses expect quick, seamless, on-demand delivery of services and information.
Before the rise of the internet, banks developed systems for facilitating payments for international transactions. But these systems are cumbersome, inefficient, and can create security concerns.
"Ripple" is a financial technology company that has supported the development of conducting state-of-the-art technology to facilitate financial transactions (the ""Ripple"Technology"). The "Ripple" Technology enables financial institutions to connect with one another directly to reliably and efficiently communicate information about, and settle, cross border payments. This technology has never existed before. And it ensures the payment speed and certainty necessary to service high volumes of all sizes and types of payments, while making them fast, cost-effective and transparent for banks and financial institutions.
"Ripple" works with banks and financial institutions to minimize unnecessary transaction fees and to transform how they send money around the world - a necessary step to compete in today's growing economy.
"Ripple" also supports the development of an open source technology distributed ledger, the XRP Ledger, to which the digital asset XRP is native. Financial institutions that use the "Ripple" Technology, which include products xCurrent and xVia, are not required to use XRP, but can if they choose. In particular, they can use XRP to expand reach into new markets, lower foreign exchange costs, and provide faster payments.
B. R3 Promises to Grow "Ripple" Into a Market Leader
"Ripple"'s success is driven in substantial part by having international banks and financial institutions adopt the "Ripple"Technology, and embrace XRP. To that end, in 2016, "Ripple" began talking with R3, a company that touts itself as a "50 member initiative” and the first consortium of the world's largest financial institutions, "focused exclusively on developing a next generation financial transaction network... based on distributed ledger technology." R3 represented to "Ripple" that R3 could help "Ripple" succeed by partnering with "Ripple" to promote the "Ripple" Technology to banks in the R3 consortium. For example, on February 22, 2016, R3's CEO, David Rutter reached out to "Ripple" regarding new proof of concepts with banks in R3's consortium, and solicitously offered, "If we R3) could help you guys by building a broader community around this project by doing it in our lab let me know.”
Based on R3's representations, "Ripple" engaged in discussions with R3 and its CEO, beginning in March 2016, to explore joint opportunities between the two companies. CEO Rutter made R3's end goal clear in a March 9, 2016 email to "Ripple": “we are really excited to work with you guys... I would like to be very clear with the banks that if we run this experiment the end game IS commercialization of a product.” Mr.Rutter emphasized in a March 28, 2016 email to "Ripple", regarding potential joint opportunities, that the "commercial angle' is indeed "why we all want to do these things anyway.'
Discussions proceeded through the spring of 2016. On April 1, 2016, "Ripple" had a call with R3's team, including Mr. Rutter. On that call, the "Ripple" staff described their goals of becoming a market leader in cross border payments and growing XRP into the primary digital asset used among global banks. Mr. Rutter and the R3 team indicated that they understood "Ripple"'s goals and promised that R3 could put XRP on the map-just as they represented they had done with Ethereum, another cryptocurrency on the market.
The Parties created a multi-phase plan to accomplish "Ripple"'s goals. The plan started with Project Xenon, a test where participating banks would use XRP with "Ripple" Technology. Those banks would use XRP provided by "Ripple" to settle cross border payments. If Project Xenon was successful, the Parties planned to next form a Commercial Partnership with the goal of supporting full, on-going deployment of XRP by banks as a bridge asset to settle their cross-border transactions using "Ripple" Technology.
On May 24, 2016, the Parties executed a Memorandum of Understanding Regarding Project Xenon and Potential Commercial Partnership, which reiterated the Parties' understanding of forming a Commercial Partnership upon "the successful conclusion of Project Xenon).”
In the weeks that followed, "Ripple" worked with R3 and the participating banks, sharing confidential and proprietary technological information about the "Ripple" Technology. "Ripple" also provided XRP to each participating bank to undertake the transfers.
In early July 2016, the Parties initiated Project Xenon. Twelve of R3's participating banks were tasked with operating "Ripple" Technology and settling transactions with each other in XRP over the course of several weeks.
On July 29, 2016, an R3 Associate Director, Clemens Wan, sent an email titled, "Xenon Overview (midpoint)' to all participating banks and the "Ripple" team touting Project Xenon's "successes' by the halfway mark. Todd McDonald, a co-founder of R3, forwarded Mr. Wan's email to the "Ripple" executive team stating: "Great momentum and looks to be really solid outputs from the Xenon project. Exciting stuff.)" R3 CEO Rutter wrote the "Ripple" team congratulating them: "Great stuff guys."
Mr. Wan continued to stoke the teams' enthusiasm through early August, confidently assuring "Ripple" in an August 3, 2016 email that "once projects like the Xenon project) are completed and reviews are shared with members, other banks tend to get interested and want to participate in second versions of these projects (never an exact redo, but usually an increase of scope and more members).” Mr. Wan further positioned R3 as uniquely capable of delivering eager banks to the table, describing R3 in an August
15, 2016 email to "Ripple" as "a growing group with so many members.”
C. "Ripple" and R3 Enter Into a Technology Partnership Agreement and Option Contract
By mid August 2016, ProjectXenon was shaping up to be a great success. "Ripple" was gaining momentum, and excited to start a Commercial Partnership with R3, which "Ripple" understood-based on R3's representations - would allow "Ripple" to really benefit from R3's banking consortium. With additional projects in mind, and in an effort to solidify the Commercial Partnership, "Ripple" agreed to execute a Technology Partnership Agreement (the "TPA") with R3.
On August 16, 2016, "Ripple" and R3 executed the TPA, which outlined both Project Xenon (and other phases of the Project) and the Commercial Partnership.
Because Project Xenon was already effectively completed at the time of the TPA's execution, the TPA was intended to formalize the Commercial Partnership.
Under the TPA, in consideration for R3's solicitation of participating banks in Project Xenon and “its role in managing the Project ()," R3 would receive 15% of the revenue received by "Ripple" from any participating bank.
The TPA also outlines terms related to the Commercial Partnership. Article IV.1 of the TPA states: "The parties will negotiate in good faith with the goal of executing a term sheet reflecting the key terms of the Commercial Partnership) by no later than the conclusion of the Project.” The paragraph further states: "Following the execution of the term sheet, the parties will commence negotiations of a full agreement), with the goal of executing the agreement by no later than 30 days after the execution of the term sheet.”
Thus, R3 was obliged to immediately negotiate in good faith towards a term sheet on the Commercial Partnership, and work in good faith to finalize and execute an agreement on the Commercial Partnership within 30 days thereafter.
As consideration and incentive for the TPA-specifically the Commercial Partnership-"Ripple" also executed the Option, which gave R3 the option to purchase 5 billion XRP at an exercise price of $0.0085 per unit of XRP.
The Option was given as consideration for, and to incentivize the success of, the TPA and Commercial Partnership. The Option is described in detail in the TPA. The face of the Option itself states as follows: "This Option () is issued... in connection with that certain Technology Provider Agreement regarding Project Xenon and Potential Commercial Venture.)" (emphasis added). And the Option was executed after the substantial performance of Project Xenon, because "Ripple" desired to incentivize R3 to perform its obligations related to the Commercial Partnership.
"Ripple" understood that the purpose of the Agreements was to build a long lasting relationship between "Ripple" and R3, where "Ripple" could benefit from R3's many banking contacts, and in turn, R3 could reap the financial benefits of "Ripple"'s success (i.e. through its 15% commission and the Option). This is what "Ripple" understood R3 intended when "Ripple" agreed to enter the TPA, and later signed the Option.
However, soon after executing the TPA and the Option, "Ripple" began to find out the truth: that R3 had no intention of working towards the Parties' Commercial Partnership, and had dangled it before "Ripple" in an effort to persuade "Ripple" to sign the Option.
D. R3 Fails to Perform under the TPA
R3 did not tell "Ripple" - before the Agreements were signed - that R3 intended to spend the next several months focusing on R3's own fundraising, not working towards the Commercial Partnership with "Ripple". But almost immediately after signing the Agreements, R3 began, at various levels of the organization, to beg off on putting any meaningful effort towards the Commercial Partnership. R3's fundraise would ultimately last almost a year, and even thereafter, R3 would dedicate no time or attention towards making the Commercial Partnership with "Ripple" a reality. Had "Ripple" known this before R3 induced "Ripple" to sign the Agreements, "Ripple" never would have entered into the
Agreements.By October 2016, clearly after the conclusion of Project Xenon, R3 had still never engaged on completing a term sheet despite "Ripple"'s frequent reminders. In response to a modest request from "Ripple" to announce that "following the successful completion of the pilot Project Xenon), R3 and "Ripple" are in talks to commercialize this offering for R3 banks," Mr. Wan demurred. He concluded in an October 12, 2016 email to "Ripple", "Upon mulling this over, I think the words imply a very strong phase 3 that we have not yet discussed with the members' - a far cry from R3's confident assurances before the TPA and Option were executed. "Ripple" tried repeatedly to spur R3 to action, providing its own structure of the draft term sheet for the Commercial Partnership to R3. R3 failed to engage in good faith.
R3's technical higher-ups were not the only ones "too busy" to work towards the Commercial Partnership. In November 2016, "Ripple" CEO Brad Garlinghouse contacted R3 CEO David Rutter, to press for advancement of efforts on the Commercial Partnership. Mr. Garlinghouse reminded Mr. Rutter that the consideration for the TPA, the Option, had real value. Using the Option as encouragement for action-for R3 to make good on its promises-"Ripple" once again asked R3 to engage on its obligations related to the Commercial Partnership.
R3 and Mr. Rutter responded to "Ripple" days later, saying that R3 simply did not have the time to make efforts on the Commercial Partnership at that point. Mr. Rutter wrote as follows: "Brad I really like you guys and I have been clear about that. Love to see you win the payments space and even better I would love to be involved in that journey. BUT I am personally being crushed by a ridiculously complicated funding round
Mr. Rutter's response mirrored that of R3 writ large. Like its CEO, R3 directed its efforts and energy elsewhere, and simply ignored its obligations to negotiate in good faith with "Ripple" towards a Commercial Partnership. Had "Ripple" been put on notice that R3 would be focusing its energies in direction other than "Ripple" immediately following signing of the TPA and Option, "Ripple" never would have signed either Agreement. R3 gave no such inkling to "Ripple" before inducing "Ripple" to sign the Agreements; indeed, R3 suggested just the opposite to induce R3 to move forward with the Agreements. R3 led "Ripple" to believe that R3 would be an eager and engaged business partner trying to help "Ripple" succeed.
In the ensuing months, "Ripple" continued to hope that R3 would eventually complete its fundraise and refocus on the Parties' Commercial Partnership. "Ripple"'s executives held onto Mr. Rutter's promises of spreading the XRP brand among its 50 plus banking consortium. After all, R3's promises of "access” to its group of global banking institutions was the main reason "Ripple" contracted with R3.
E. "Ripple" Learns of R3's Material Misrepresentations and Omissions
Only after being induced to enter the TPA and Option did "Ripple" learn the truth - that R3 was anticipating significant changes to its "collaborative consortium” of banks, even as R3 was touting it. R3 never missed an opportunity to tout these banks such as Goldman Sachs and JPMorgan - to prospective business partners like "Ripple". The opportunity to connect with these types of institutions about its technology is what attracted "Ripple" to R3 in the first place. However, within months after signing the TPA and Option, R3 announced departures of leading financial institutions from its consortium,
including three of the top six largest banks in the US-JPMorgan, Goldman Sachs, and Morgan Stanley - and one of the largest financial institutions (by revenue) in the world, Banco SantanderThese events came as a shock to "Ripple". First and foremost, R3's consortium of top financial institutions was of utmost importance to "Ripple". News of departures of such influential members significantly decreased the value proposition R3
presented for "Ripple". It was akin to a company promising a counter-party access to the leading US car companies, and then removing Ford and GM from the group.R3 doubtless was aware of the shakiness of its consortium - and the likely departure of key members of its banking group - when R3 induced "Ripple" to execute the Agreements. Despite this, R3 failed to disclose this material information and continued to trade on its inflated member list.
R3 was also under a duty to disclose these facts to "Ripple". R3 had exclusive, peculiar knowledge of these facts. In addition, R3 had a duty to disclose by virtue of its half truths. R3 was aware of the importance to "Ripple" of R3's cooperation in trying to finalize the Commercial Partnership, and that R3's value to "Ripple" in the Agreements was
in no small measure due to the makeup of R3's consortium. Before the TPA and Option were ever signed, R3 represented to "Ripple" that it could help "Ripple" position itself as a market leader in cross broader payments through R3's relationships with global banking institutions. R3 explicitly represented itself-both in the TPA and at other times-as a gateway to its 50 plus consortium of member banks. See, e.g., TPA at 1 ("WHEREAS, Distributed Ledger Group, LLC... has entered into an Advisory Services Agreement... with the 42 global banks party thereto."); id. at III.1 ("In consideration for its solicitation
of R3 Members as Participating Members...”). R3's representations of what it could do for "Ripple" through its growing list of banking members were improper when R3 knew, or should have known, that it was at risk of having many investor banks to withdraw from its roster-which ultimately happened."Ripple" reasonably relied on R3's foregoing representations to its detriment when it entered into the TPA and Option agreements.