Federal Judge Dismisses Class-Action Lawsuit Against Yuga Labs

A federal judge in California has dismissed a class-action lawsuit against Yuga Labs, the creator of the once-dominant Bored Ape Yacht Club NFT collection, ruling that the digital collectibles cannot be considered securities.

The Los Angeles-based judge, Fernando M. Olguin – appointed to the bench in 2013 by former president Barack Obama – ruled on Thursday that Bored Ape NFTs do not meet several criteria of the test used to determine the security status of financial transactions.

Olguin stated that the Bored Ape NFTs should be distinguished from other NFT collections previously identified as potential securities, such as Dapper Labs’ NBA Top Shot NFTs and DraftKings NFTs. This is because plaintiffs purchased Bored Apes on third-party marketplaces like OpenSea and Coinbase, rather than on a marketplace controlled by the NFT issuer.

The ruling found that Bored Ape NFTs do not satisfy the necessary “common enterprise” criterion for defining an asset as a security.

> “In sum, plaintiffs have not alleged the type of ‘interplay’ between the alleged securities and proprietary ‘ecosystem’ that underpinned the logic of Dapper Labs and DraftKings, and therefore have not adequately alleged horizontal commonality,” Olguin wrote.

Additionally, the judge concluded that Yuga Labs’ collection of a creator royalty fee on every Bored Ape sale indicates a disconnection between the plaintiffs’ fortunes and those of the defendants, who benefit even if the plaintiffs sell their NFTs at a loss. NFT issuers use creator royalties as a revenue source, often charging fees over 10% each time the collectible token is traded.

This court’s logic significantly contrasts with legal arguments made by the SEC under the Biden administration, which claimed that creator royalties suggested an asset was a security, as it was encouraged by its creators to be resold.

Yuga Labs has been involved in a long-standing legal confrontation with the federal government concerning the security status of NFTs, owing to the company’s leading role in the industry. Despite a decline in their status, cultural relevance, and value, Bored Ape NFTs have achieved a significant trading volume of $7.2 billion since their launch in 2021.

Earlier this year, Yuga Labs announced that the SEC concluded its years-long investigation into the company as part of the Trump administration’s pro-crypto stance, and a similar investigation into NFT marketplace OpenSea was closed as well.

While it is noteworthy that the SEC declined to pursue certain cases against NFT projects, a federal court’s definitive ruling on the issue represents a substantial development, as seen in Yuga’s case.

Despite the importance of the ruling, Bored Ape NFTs appear to remain unaffected. The collection’s floor price, the lowest price for an NFT in the collection, has dipped 2% in the last 24 hours to $37,337. This reflects a 90% drop from the project’s peak value of $369,900, which was reached in April 2022.

Representatives for Yuga did not immediately respond to Decrypt‘s request for comment on this story.