Keeping Up with the Lawsuits: Celebrity Endorsers, Crypto Ads, and the Evolving Liability Landscape | Harris Beach PLLC

The overlap of social media, celebrity endorsement, and cryptocurrency have long been viewed as a potential breeding ground for regulatory and litigation liability. The proliferation of cryptocurrency and the lack of definitive crypto regulation in the United States only served to add to the potential quagmire. The December 7, 2022 decision of the Honorable Michael Fitzgerald, U.S.D.J., in Ryan Huegerich, Individually and on Behalf of All Others Similarly Situated, v. Steve Gentile, et al., in the United States District Court for the Central District of California, dismissing the claims against the celebrity endorsers of EthereumMax demonstrates that the future of crypto regulation and marketing is still very unclear, and raises many questions about the first, recently-filed FTX lawsuit, Edwin Garrison, et al. vs. Sam Bankman-Fried, et al.,in which various celebrities were sued for allegedly endorsing and promoting FTX’s interest-bearing crypto accounts.

Proof of the rippling effect of these litigations is evidenced by the fact that just days after the Huegerich decision, on December 9, 2022, another proposed class action celebrity endorsement lawsuit was filed in federal court in California. In Adonis Real and Adam Tichter vs. Yuga Labs Inc., et al., multiple celebrities, including Post Malone, Paris Hilton, Madonna, and Jimmy Fallon, were accused of misleading investors through their promotion of Bored Ape Yacht Club NFTs or the token ApeCoin.

EthereumMax: Unexpected Limits on Liability

In Huegerich v. Gentile, et al., the Plaintiffs alleged that Kim Kardashian[1], Floyd Mayweather Jr., and other celebrities illegally promoted (or “shilled”, as it is known in the crypto world), the cryptocurrency project EthereumMax. In turn, a proposed class of individuals (a prerequisite to a class action lawsuit) who purchased EthereumMax tokens (EMAX Tokens) alleged they were misled by these celebrity endorsers who intentionally inflated the value of the EMAX Token.

In fact, Plaintiffs alleged a civil claim for conspiracy and a RICO violation, characterizing Defendants’ activity as a classic “pump and dump”- a scheme where alleged perpetrators shill a project to artificially increase the price of the project, only to dump their shares or tokens in the project at the artificially high price, after which the asset’s value significantly drops. Plaintiffs allege they purchased the EMAX Tokens based on the celebrities’ alleged misrepresentations. Plaintiffs allege they lost large sums of money as a result of Defendants’ actions, including violations of the California Unfair Competition Law and California Consumers Legal Remedies Act. Plaintiffs also assert claims for Conspiracy, Aiding and Abetting, RICO violations, and Unjust Enrichment and Restitution.

Judge Fitzgerald largely rejected Plaintiffs’ arguments but did not dismiss the entire case.[2] Instead, Judge Fitzgerald explicitly indicated the Plaintiffs may amend their complaint to sufficiently state a claim for relief and file the amended complaint by December 22, 2022. This means they must particularize their allegations pursuant to the federal standards for pleadings and make it clear the specific Plaintiffs purchased EthereumMax because of, and relied on, the promotions in doing so. Moreover, they must particularize specifically how the endorsers had actual knowledge of the pump-and-dump scheme. If Plaintiffs successfully replead these allegations, and if they have standing to do so, several claims may survive. On the other hand, Judge Fitzgerald did formally dismiss the claim under California’s consumer protection law, reasoning that cryptocurrency does not fall under its umbrella.[3]

Bored Ape Yacht Club: Potential Downfall of the Prolific NFT

In Adonis Real and Adam Tichter vs. Yuga Labs Inc., et al.,the Plaintiffs allege that individuals who purchased the Bored Ape Yacht Club NFTs and ApeCoin did so in reliance on celebrity promotions. As a result, the Plaintiffs allege financial losses. Similar to the FTX lawsuit, the Plaintiffs allege the celebrities failed to disclose their compensation for their endorsements. The Complaint further alleges Bored Ape Yacht Club has become synonymous with an exclusive club made up of celebrities, with the only buy-in being the purchase of an NFT.

Impact on FTX

The Adonis lawsuit and knowledge of the dismissal of Huegerich spread like wildfire in the crypto community. With FTX dominating the crypto news and battlelines being drawn in that dispute, the significance of Huegerich should not be understated: the decision has potentially enormous implications in relation to the FTX litigation, as well as any future celebrity endorsement cases such as Adonis.

In the FTX lawsuit, the celebrity endorsers were accused of engaging in deceptive practices when they appeared in advertisements for FTX and assured potential investors that FTX was a sound investment. Just like in Huegerich and Adonis, the allegations are essentially that the celebrities promoted and, in some cases, benefited from a “pump-and-dump” scheme. The allegations in all three cases are that such schemes were made possible by the large followings the celebrities had and the trust their fans had in their promotions.

Keeping Up and Moving Forward

The FTX lawsuit and the Adonis lawsuit are still in the early stages of litigation and it appears Huegerich is far from over, as an attorney for Plaintiffs has already indicated he plans to amend and re-file the complaint with additional facts by December 22. Of note, the attorneys who brought the Huegerich lawsuit are the same attorneys who brought the Adonis suit. We can expect to see the attorneys implementing lessons learned from one lawsuit into the other.

The Huegerich and Adonis litigations, like the FTX litigation, will be important to monitor for the members of the crypto, financial and legal communities, as well as for celebrity promoters. A decision in these celebrity endorsement disputes will likely have a material and significant impact on other similar cases, as well as the crypto community at large.