California judge rules DAO members liable under partnership laws

A California judge has ruled that participants in decentralized autonomous organizations (DAOs) can be held liable for the actions of other members under state partnership laws.

On Nov. 18, Judge Vince Chhabria of the United States District Court for the Northern District of California determined that governing bodies behind Lido DAO qualify as partners under California’s general partnership laws. As a result, members may not avoid liability for the organization’s actions. 

Lido DAO “partners” not immune from lawsuit

The lawsuit stems from a complaint by Andrew Samuels, who purchased tokens issued by Lido DAO. The investor sued the entity to recover his losses. Samuels alleged the tokens were unregistered securities, arguing that Lido DAO should have registered them with the US Securities and Exchange Commission.

“Samuels contends that because Lido DAO never registered the securities, it is liable for his losses under Section 12(a)(1) of the Securities Act,” the lawsuit stated.

The court ruled that Samuels adequately alleged that Lido DAO and its identifiable partners could not claim immunity. According to the filing, the judge determined that Lido DAO qualifies as a general partnership under California law, holding partners accountable.

Samuels argued that four large institutional investors in Lido — Paradigm Operations, Andreessen Horowitz, Dragonfly Digital Management and Robot Ventures — acted as Lido DAO partners and should be liable. 

In response, the four entities involved filed motions to dismiss the case. However, only one was granted. The court filing stated: 

“The upshot is that the motion to dismiss filed by Robot Ventures is granted, because Samuels has not adequately alleged that Robot Ventures is a member of the Lido general partnership. All other motions to dismiss are denied.”

The judge found that Paradigm, Andreessen Horowitz and Dragonfly were ruled as general partners due to their alleged participation in Lido DAO governance and operations. However, Robot Ventures escaped liability due to insufficient proof that it was a general partner. 

Related: TON Foundation launches new Society DAO governance model

A “huge blow” to decentralized governance

Miles Jennings, general counsel and head of decentralization at a16z Crypto, described the ruling as a huge blow to decentralized governance. 

Jennings explained that under the ruling, even posting in forums could be enough to hold DAO members liable for other members’ actions under the general partnership laws. 

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