Wednesday, April 14, 2021
As many blog readers know, Coinbase went public today. Coinbase, of course, is the exchange where regular people can buy Bitcoin, Ethereum, and other cryptocurrency. There are so many different, interesting aspects of this listing (including the fact that it is a direct listing, meaning no I-bankers – and their overworked analysts – were harmed in the making of these billions….). Here at the contractsprofblog, we prefer to get into the nitty gritty of the fine print. As the NYT reported, Coinbase users accounts have been hacked and several have lost hundreds of thousands of dollars. A lawyer and former employee of Coinbase who lost over $400,000 worth of cryptocurrency is suing the company. Others have found themselves inexplicably locked out of their accounts. User have complained about the company’s lack of customer service when it comes to trying to retrieve their money or unlock their accounts. Unlike traditional financial institutions which are heavily regulated, Coinbase’s business is as-of-yet largely unregulated and governed by….you guessed it – TOS. As the NYT article notes, “legal recourse is limited” because the company’s terms of service require users to settle dispute through arbitration or small claims court, not a class action lawsuit. But after taking a look at Coinbase’s TOS, I’m not so sure.
There’s more trouble ahead for the TOS. The dispute resolution clause is nestled toward the bottom (I had to hit the “page down” key 29 times). Furthermore, they don’t make it easy to file an arbitration claim. The TOS requires the user to follow a rigid “formal complaint process” before filing a claim in arbitration or small claims. Their formal complaint process imposes a fair number of roadblocks in an effort to deter complaints. The user must fill out a “Complaint form,” and then someone will review and respond to the complaint “within 15 business days” of receipt – unless for unspecified “exceptional circumstances” they can’t for some reason in which case they will respond within 35 days. If after that, the dispute can’t be resolved, then the user has to go through “binding arbitration on an individual basis” (i.e. no class action). They generously agree that the user may elect local small claims court rather than arbitration “so long as your matter remains in small claims court and proceeds only on an individual (non-class and non-representative) basis.” Then, in the dreaded, useless all-caps, nestled at the very bottom of this very lengthy TOS, is the following class action waiver and a jury trial waiver:
CLASS ACTION WAIVER: TO THE EXTENT PERMISSIBLE BY LAW, ALL CLAIMS MUST BE BROUGHT IN A PARTY’S INDIVIDUAL CAPACITY, AND NOT AS A PLAINTIFF OR CLASS MEMBER IN ANY PURPORTED CLASS, COLLECTIVE ACTION, OR REPRESENTATIVE PROCEEDING (COLLECTIVELY “CLASS ACTION WAIVER”). THE ARBITRATOR MAY NOT CONSOLIDATE MORE THAN ONE PERSON'S CLAIMS OR ENGAGE IN ANY CLASS ARBITRATION. YOU ACKNOWLEDGE THAT, BY AGREEING TO THESE TERMS, YOU AND COINBASE ARE EACH WAIVING THE RIGHT TO A TRIAL BY JURY AND THE RIGHT TO PARTICIPATE IN A CLASS ACTION.
The arbitration will be conducted by a single, neutral arbitrator and shall take place in the county or parish in which you reside, or another mutually agreeable location, in the English language. The arbitrator may award any relief that a court of competent jurisdiction could award and the arbitral decision may be enforced in any court. An arbitrator’s decision and judgment thereon will not have a precedential or collateral estoppel effect. At your request, hearings may be conducted in person or by telephone and the arbitrator may provide for submitting and determining motions on briefs, without oral hearings. To the extent permitted by law, the prevailing party in any action or proceeding to enforce this Agreement, any arbitration pursuant to this Agreement, or any small claims action shall be entitled to costs and attorneys' fees. If the arbitrator or arbitration administrator would impose filing fees or other administrative costs on you, we will reimburse you, upon request, to the extent such fees or costs would exceed those that you would otherwise have to pay if you were proceeding instead in a court. We will also pay additional fees or costs if required to do so by the arbitration administrator's rules or applicable law.
I’m not convinced that the dispute resolution clauses would be enforceable because I don't think there was reasonable notice of them. As I’ve noted in my annual review of wrap contracting cases for the ABA’s The Business Lawyer, courts have become more sophisticated about their analysis of what constitutes reasonable notice, often requiring notice of specific terms, such as arbitration. Based on this trend, the Coinbase agreement is lacking and there’s a good chance that a court would find the complaint process and arbitration clause unenforceable.