SEC v. LBRY Foundation Inc. ( 2022 )

United States Court of Appeals
For the First Circuit
No. 21-1618
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, Appellee,
v.
LBRY, INC.,
Defendant,
LBRY FOUNDATION INC.,
Movant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Paul J. Barbadoro, U.S. District Judge]
Before
Lynch, Thompson, and Gelpí,
Circuit Judges.
Cory C. Kirchert, with whom Adriaen M. Morse, Jr., Simon R.
Brown, Arnall Golden Gregory LLP, and Preti Flaherty Beliveau &
Pachios, PLLC were on brief, for appellant.
Paul G. Alvarez, Senior Litigation Counsel, with whom Dan M.
Berkovitz, General Counsel, Michael A. Conley, Solicitor, and
Dominick V. Freda, Assistant General Counsel, were on brief, for
appellee.
February 17, 2022
LYNCH, Circuit Judge. The question presented in this
appeal is whether the district court's denial of intervention as
of right to LBRY Foundation Inc. ("Foundation") in a Securities
and Exchange Commission ("SEC") civil enforcement action against
defendant LBRY, Inc. (not Foundation) was an abuse of discretion.
The SEC charges that LBRY failed to register as investment
contracts under Section 5 of the Securities Act of 1933
("Securities Act"), 15 U.S.C. § 77e, an offering of digital assets
called LBRY Credits ("LBC").
Foundation, whose assets consist of grants of LBC from
defendant LBRY, moved to intervene. It wishes to contest the SEC's
enforcement action on what it asserts to be a different ground
than LBRY has proposed. Both the SEC and LBRY opposed Foundation's
attempt to intervene. On July 29, 2021, the district court denied
the motion to intervene.
We affirm because there plainly was no abuse of
discretion.
I.
A. Factual Background
In July 2016, the defendant LBRY, a New Hampshire-based
company, launched a blockchain-enabled network,1 called the LBRY
1 A blockchain is an electronic distributed database
"shared among the nodes of a computer network." See A. Hayes,
Blockchain Explained, Investopedia (updated Jan. 20, 2022),
https://www.investopedia.com/terms/b/blockchain.asp/.
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Protocol, to create a public and intermediary-free means of
distributing and purchasing digital content. Any individual may
publish digital content on the LBRY Protocol, and other users may
browse the LBRY Protocol and purchase the published digital content
using LBC, digital assets created by LBRY.
LBRY owned 400 million LBC in reserve at the network's
launch. Since then, LBRY has offered and sold LBC to financially
support its operations and to build its network. LBRY did not
register its offers or sales of LBC and did not file a registration
statement under the Securities Act.
In October 2019, LBRY created Foundation, a non-profit
corporation which "works to promote the growth, development, and
adoption of the LBRY Protocol in a bottom-up, community-driven
fashion." LBRY granted Foundation five million LBC to fulfill its
corporate and charitable objectives of promoting free speech,
publishing, and education through the LBRY Protocol. Foundation
in turn offers LBC in exchange for projects submitted by users
that contribute content and applications to the LBRY Protocol.
Foundation's only assets are LBC.
B. Procedural History
LBRY answered the SEC's enforcement complaint, stating
that it could not have violated Section 5 because LBC are not
securities. LBRY challenges the SEC's assertion that LBC are
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investment contracts2 because "LBRY has never offered and sold LBC
as an investment, and holders of LBC have no claim to the assets
or profits of LBRY and have no ownership interest in LBRY."
In July 2021, Foundation filed a motion to intervene as
of right and by permission. See Fed. R. Civ. P. 24(a)(2),
(b)(1)(B). It argued that it wished to focus instead on
challenging the SEC's definition of "enterprise" and "to challenge
[the] SEC's programmatic claim that a network, such as the LBRY
Protocol, can even be an 'enterprise' . . . under Howey and the
Securities Act." Foundation argued that because LBC do not satisfy
the enterprise element, they cannot be investment contracts. It
argued that LBRY and Foundation have "materially different
substantive defense strateg[ies]" and thus LBRY "cannot, and will
not, adequately represent [] Foundation's interests."
The SEC and LBRY opposed the motion. Each raised doubts
that Foundation has any protectable interest and argued that LBRY
provides adequate representation. They invoked the presumption
that LBRY adequately represents Foundation's interests and argued
that pursuit of a different litigation strategy is insufficient to
establish intervention as of right. On July 29, 2021, the district
2 In SEC v. W.J. Howey, Co., the Supreme Court held that
the test for an investment contract under the Securities Act is
whether the scheme "involves [(1)] an investment of money [(2)] in
a common enterprise [(3)] with profits to come solely from the
efforts of others." 328 U.S. 293, 301 (1946).
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court denied the motion to intervene "for the reasons set forth in
the SEC's response."
Foundation timely appealed.
II.
A. Standard of Review
We review a district court's denial of a motion to
intervene as of right for abuse of discretion.3 See Victims Rts.
L. Ctr. v. Rosenfelt, 988 F.3d 556, 559 (1st Cir. 2021); Int'l
Paper Co. v. Inhabitants of Town of Jay, 887 F.2d 338, 344 (1st
Cir. 1989). Within the abuse-of-discretion standard, "abstract
legal rulings are scrutinized de novo, factual findings are assayed
for clear error, and the degree of deference afforded to issues of
law application waxes or wanes depending on the particular
circumstances." T-Mobile Ne. LLC v. Town of Barnstable, 969 F.3d
33, 38 (1st Cir. 2020).
B. Intervention as of Right
Under Federal Rule of Civil Procedure 24(a)(2), "[o]n
timely motion, the court must permit anyone to intervene who":
claims an interest relating to the property or
transaction that is the subject of the action,
and is so situated that disposing of the
action may as a practical matter impair or
impede the movant's ability to protect its
interest, unless existing parties adequately
represent that interest.
3 In its opening brief, Foundation does not contest the
district court's denial of its request for permissive
intervention.
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To prevail on a motion to intervene as of right, a
proposed intervenor must demonstrate: "(1) the timeliness of
[its] motion; (2) a concrete interest in the pending action; (3) 'a
realistic threat' that resolution of the pending action will hinder
[its] ability to effectuate that interest; and (4) the absence of
adequate representation by any existing party." T-Mobile, 969
F.3d at 39 (quoting R & G Mortg. Corp. v. Fed. Home Loan Mortg.
Corp., 584 F.3d 1, 7 (1st Cir. 2009)). A failure to satisfy any
one of these four requirements is sufficient grounds to deny a
request for intervention as of right.4 See Victim Rts. L. Ctr.,
988 F.3d at 560-61; T-Mobile, 969 F.3d at 39.
When a proposed "intervenor's objective aligns
seamlessly with that of an existing party . . . a rebuttable
presumption of adequate representation attaches." T-Mobile, 969
F.3d at 39 (citing Students for Fair Admissions, Inc. v. President
& Fellows of Harvard Coll., 807 F.3d 472, 475 (1st Cir. 2015)).
Where the presumption of adequate representation applies, "the
applicants' burden is a heavy one, since adequacy is primarily a
4 Because we affirm solely on the ground that LBRY
adequately represents whatever interests Foundation may have in
the underlying civil enforcement action, we do not reach the
question of whether Foundation has shown that it has a "concrete
interest" sufficient to warrant intervention under Rule 24(a).
See Victim Rts. L. Ctr., 988 F.3d at 560-61, 561 n.5. We also do
not address the SEC's argument that intervention would violate
separation-of-powers principles as it chose not to bring the
enforcement action against Foundation.
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fact-sensitive judgment call and the standard of review is
deferential." Daggett v. Comm'n on Governmental Ethics & Election
Pracs., 172 F.3d 104, 111-12 (1st Cir. 1999). Here, the
presumption of adequacy applies. Indeed, Foundation concedes that
it "shares LBRY's litigation objective -- to defeat the SEC's claim
-- and attacks the same and only contestable element of the SEC's
claim": that LBC are not securities.
Foundation attempts to overcome this presumption by
arguing that LBRY's and Foundation's "arguments and approaches are
different" and pointing to the "historic failure of LBRY's approach
in prior SEC enforcement actions." According to Foundation, LBRY
implicitly accepts the SEC's definition of "enterprise."
Foundation focuses on its desire to present a challenge to the
SEC's definition of "enterprise" as inconsistent with the Supreme
Court's decision in SEC v. W.J. Howey, Co., 328 U.S. 293 (1946),
and the Securities Act. LBRY states that this is merely a
variation of the argument it intends to present when there is full
briefing in the district court on the matter.
A proposed intervenor's desire to present an additional
argument or a variation on an argument does not establish
inadequate representation.5 See Daggett, 172 F.3d at 112; see also
5 In some cases, "a refusal to present obvious arguments
could be so extreme as to justify a finding that representation by
the existing party was inadequate." Daggett, 172 F.3d at 112.
That is not the case here. Foundation has not demonstrated that
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Victim Rts. L. Ctr., 988 F.3d at 561-62 (collecting cases rejecting
proposed intervenors' argument of inadequate representation for
failure to make additional arguments); T-Mobile, 969 F.3d at 39-
40. Nor does a difference in litigation tactics support a finding
of inadequate representation. See Butler, Fitzgerald & Potter v.
Sequa Corp., 250 F.3d 171, 181 (2d Cir. 2001) ("If disagreement
with an existing party over trial strategy qualified as inadequate
representation, the requirement of Rule 24 would have no
meaning."); see also C.A. Wright & A.R. Miller, Federal Practice and
Procedure § 1909 (3d ed., Apr. 2021 update) ("A mere difference of
opinion concerning the tactics with which the litigation should be
handled does not make inadequate the representation of those whose
interests are identical with that of an existing party or who are
formally represented in the lawsuit."). Indeed, in the increasingly
frequent SEC digital asset enforcement cases, courts have denied
motions to intervene from non-parties that intended to assert
alternative legal arguments. See, e.g., SEC v. Ripple Labs, Inc.,
No. 20 Civ. 10832, 2021 WL 4555352, at *5-6 (S.D.N.Y. Oct. 4, 2021)
LBRY refuses or is incapable of raising Foundation's favored
argument. LBRY's answer argued that it could not have violated
Section 5 because LBC are not investment contracts, and thus not
securities. The answer properly raises the legal argument
Foundation wishes to present and leaves open the option for LBRY
to raise Foundation's "enterprise" definition argument.
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(denying intervention motion but permitting intervenors to proceed
as amici).6
III.
Affirmed.
6 At the district court, Foundation argued that LBRY
cannot adequately represent Foundation's interests because LBRY
may seek settlement. Foundation has waived this argument on
appeal. See Young v. Wells Fargo Bank, N.A., 717 F.3d 224, 239-
40 (1st Cir. 2013) ("We have repeatedly held, 'with a regularity
bordering on the monotonous,' that arguments not raised in an
opening brief are waived." (quoting Waste Mgmt. Holdings, Inc. v.
Mowbray, 208 F.3d 288, 299 (1st Cir. 2000))).
We reject a claim of inadequate representation based on
the possibility of settlement where "appellants' conjectures are
tendered without either specificity or record support." T-Mobile,
969 F.3d at 40. Here, Foundation has provided no evidence or
support for the proposition that LBRY would seek settlement.
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