Ripple and R3 have been in a lawsuit since September last year over an amount in dispute of up to $ 18.3 billion for R3 in top cryptocurrency valuations. Yesterday, Ripple released a two-sentence statement saying there had been a confidential agreement. Below is a summary of the dispute and some thoughts on the possible motivations for the settlement and how difficult it will be to keep the settlement completely secret.
In September 2016, Ripple and R3 signed an agreement under which R3 would promote Ripple to its banking consortium. In the lawsuit, however, the agreement is referred to as the “Technology Provider Agreement” (TPA). In addition, a separate option contract was drawn up, which, according to Ripple, was intended as compensation. The option gave R3 the right to purchase 5 billion XRPs at $ 0.0085 anytime through September 2019. At the time of the agreement, the XRP price was a little below that.
On June 12, 2017, Brad Garlinghouse, CEO of Ripple, announced to R3 that the agreement was being terminated, allegedly on the basis that R3 had failed to honor its side of the deal. On that day, the XRP price was 28 cents and the option was worth $ 1.35 billion. It appears that the promotional contract did not include any performance clauses like the number of banks introduced by R3 at Ripple. Instead, there was a clause obliging both parties to act in good faith.
In September 2017, R3 sued Ripple in New York and Delaware to reinstate the options contract. The options would have been worth nearly $ 1 billion at the time.
On January 4 of that year, Ripple’s XRP hit $ 3.67, which would have valued R3’s options at $ 18.3 billion. At today’s price, the options would have been worth $ 1.25 billion.
In January 2018, Ripple sued R3 alleging that R3 violated the Promotion Agreement (TPA), alleging that R3 fraudulently induced Ripple to enter into the TPA and Option Agreement.
Ripple said in the claims that “Although R3 represented to Ripple that it would have access to its large consortium of leading banks, R3 knew and had reason to believe that several key banks that would be critical to Ripple’s success would soon be would leave his consortium. ”This refers to Goldman Sachs, JP Morgan, Morgan Stanley and Santander who have chosen not to stay in the consortium of R3’s nearly forty banks.
The Ripple counterclaim continued, “Although R3 argued against Ripple that it would use its financial market expertise and relationships to drive Ripple’s rollout, R3 knew and had reason to believe that it would be too busy and relying on its own own fundraising focused to help Ripple in every way. ”R3 closed a $ 107 million financing round in May 2017. Ripple canceled its contract weeks later.
Ripple’s counterclaim also alleged that “while R3 represents that the commercialization of Ripple’s product is R3’s” end game “and that R3 has no plans or intentions to compete directly with Ripple in any cross-border payment product, it does Representations are wrong. R3’s “end game” apparently was to introduce a product that competed directly with Ripple’s cross-border payment technology.
Conduct versus legal recourse
From Ripple’s point of view, it’s understandable that they’d be upset if R3 did as little as Ripple claims. But being unhappy and appealing are not the same thing. It sounds like there was a lack of details in the contract, which wouldn’t help Ripple. At the same time, it is not good for R3 if the performance of R3 is completely lacking.
However, it appears that there are two contracts, and it’s not entirely clear that the two deals were closely enough related. In other words, if the contract of carriage or the TPA fails due to a lack of consideration, does this terminate the option contract? This was expressly stated in the Ripple counterclaim as a point that required a court decision: “whether the option has become contestable due to failure to weigh up the options”.
Winner and Loser?
To find out the type of settlement, consider what each side had to gain or lose. What would hypothetically have happened if the case had gone to court?
If R3 won, what would be the result? Would the court have restored the option contract? An award for $ 1.25 billion, $ 18.3 billion, or maybe something in between? Or maybe a fraction of it, realizing that R3 supposedly got something for free. Probably the result would be somewhere between $ 100 million and more than $ 1 billion.
What if Ripple Wins? How high would the damage have been? Much harder to quantify compared to the options, and Ripple has done pretty well since then, making their case more difficult. Then there is the fact that R3 would no longer have the options contract, which could also put downward pressure on any allotment.
In the same month that Ripple and R3 closed their original deal, Ripple closed $ 55 million in Series B financing. Did the R3 agreement help Ripple complete this funding round? And maybe the time pressure from their own round of funding has resulted in them spending less than desirable time on the R3 contract.
So, if Ripple had won the lawsuit, might they have been lucky if they’d been awarded about $ 10 million? But that would have been a very significant gain for them as they would be exempt from the option contract.
Ripple fought to have the case moved to California. You may have been hoping a California jury would have less understanding of bankers’ behavior. But with any lawsuit, even if one side has an 80% chance of winning on paper, going to court is much closer to a coin toss.
Fighting lawsuits is incredibly time consuming and very distracting for executives when they need to focus on growth. In addition, such legal cases are expensive. It will be surprising if not every party has amassed at least a million in fees so far, probably more.
But Ripple has much deeper pockets than R3. A few months ago there were rumors that R3 was short of cash. The gossip was probably exaggerated, but R3 has significantly fewer resources. Could R3 afford to fight the case indefinitely? Yes, they could financially. Unless the case was hopeless for R3, the numbers are so significant that it would be easy to find a lawyer who works for no profit with no fees.
Nevertheless, R3 could come under financial pressure. If another round of funding is planned, major litigation will not help. Potential supporters may want to wait and see. If Ripple could reach an agreement, it may not need another round of funding anytime soon.
Also, there are usually several rounds of testimony or testimony in which confidential information is exchanged prior to the trial. This information will be published in court. This is probably the stage they have recently reached. This confidentiality pressure applies to both sides, but even more so to R3 with all of its bank shareholders.
For all other compulsions, the occasional occurrence of something in a statement or someone saying something wrong and both parties know that the direction of the case has changed. That’s before they go to court.
The confidentiality of the agreement will be difficult. R3 has more than forty shareholders who are aware of this. Even Ripple has over thirty investors. Without attorneys, at least seventy people will know some of the details, hundreds more likely. And if the deal is sufficiently significant and in R3’s favor, it will be obvious if R3 won’t need another round of funding anytime soon. Watch the R3 workforce as a key indicator.
On the one hand, both sides must be relieved to have it behind them. On the other hand, a lawsuit with these two would have been both enlightening and entertaining.