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Friday, March 24, 2023

Tamar Meshel on Coinbase, Inc. v. Bielski: SCOTUS' First Encounter with Arbitration Relating to Crypto

TamarWe introduced readers to Tamar Meshel (left) in Wednesday's post.  We are happy to have her back again to provide a primer on this week's oral argument in a new arbitration case.

First Crypto Arbitration Case Heard by SCOTUS
Tamar Meshel

Coinbase, Inc. v. Bielski is the first case before SCOTUS involving arbitration in the crypto context. Oral argument was heard on March 21.

Background

Coinbase, a cryptocurrency exchange, was sued by two of its customers in federal district courts in California.

The first case, Suski v. Marden-Kane, Inc., concerned a purported class action commenced by persons who opted into Coinbase’s Dogecoin sweepstakes. The plaintiffs alleged that the sweepstakes was an unlawful lottery that violated various California laws. Coinbase moved to compel arbitration and the district court denied its motion. The court found that Coinbase’s User Agreement containing the arbitration provision was superseded by its subsequent Rules for the Dogecoin sweepstakes, which contained an exclusive forum selection clause designating California courts for disputes arising out of the sweepstakes.

The second case, Bielski v. Coinbase, Inc., concerned a purported class action commenced by a victim of a scam that resulted in thousands of dollars being stolen from his Coinbase account. The action alleged violations of the Electronic Funds Transfer Act. Coinbase again moved to compel arbitration. The district court refused, finding that the arbitration agreement (as well as the delegation clause it contained) formed part of a dispute resolution procedure that was substantively and procedurally unconscionable.

Coinbase appealed both decisions denying arbitration to the Ninth Circuit pursuant to section 16 of the Federal Arbitration Act (FAA), which permits an appeal from a federal district court’s refusal to compel a dispute to arbitration (but not from a grant of a motion to compel arbitration). Coinbase also requested the district courts to stay the trial proceedings pending resolution of the appeals. The district courts and the Ninth Circuit refused Coinbase’s stay requests. The Supreme Court granted cert and heard the two cases together.

Issue on Appeal

Typically, a court has discretion to grant or deny a stay request. As a general rule, however, a notice of appeal divests a district court of power to proceed with those aspects of the case that are involved in the appeal (Griggs v. Provident Consumer Disc. Co.). The question before the Supreme Court in Coinbase is whether the Griggs rule applies to an appeal under section 16 of the FAA from a district court’s decision that the underlying dispute is not arbitrable. In other words, once a district court has decided to hear the underlying dispute, must the case be stayed pending appeal given that section 16 of the FAA allows appeals from denials of arbitration as a matter of right.

The circuit courts of appeals have split on this question, with the majority of circuits holding that an appeal from a district court’s denial of arbitration divests the court of jurisdiction to hear the underlying dispute, so long as the appeal is not frivolous. The disagreement among the courts turns on whether a district court’s finding that the underlying dispute is not arbitrable is independent of the underlying dispute, or rather implicates the entire case because it concerns the district court’s jurisdiction to hear it in the first place. 

Oral Argument

During oral argument, the Justices focused on the FAA’s appeal and stay procedures and on the potential implications of the Court’s decision for the parties. While the specific crypto context in which the procedural question before the Court arose did not seem to be on the Justices’ minds, more crypto cases involving arbitration are likely to creep up into the courts’ dockets.   

Sotomayor KaganJustices Kagan, Jackson, and Sotomayor seemed sympathetic to the respondent customers, emphasizing their right to proceed in litigation once arbitration has been denied. These Justices doubted the link that Coinbase attempted to draw between the right to an interlocutory appeal under section 16 of the FAA and Congress’ presumed intention that such an appeal would be accompanied by a mandatory stay of the merits litigation. The Justices seemed to prefer a textualist approach that focused on Congress’ silence regarding a stay of proceedings in section 16 as compared with section 3 of the FAA, which explicitly provides for a stay of litigation pending arbitration. Justice Sotomayor also raised section 6 of the FAA, which states that unless expressly provided otherwise in the act, applications to the courts are to be made and heard “in the manner provided by law f KBJacksonor the making and hearing of motions.” In its recent decision in Morgan v. Sundance Inc. the Court held that section6 was “simply a command to apply the usual federal procedural rules.” Under these rules, Justice Sotomayor pointed out, an automatic stay is the exception rather than the rule. Justice Kagan emphasized that the Griggs rule was a judge-made rule that should be interpreted narrowly, and did not view the district courts and courts of appeals as “doing the exact same thing” in this case. Finally, Justice Jackson pointed to a “conceptual problem” with imposing a mandatory stay when it is not clear that arbitration will happen at all.

Amy_Coney_Barrett KavanaughIn contrast, Justices Alito, Barrett, Gorsuch, and Kavanaugh seemed more sympathetic to Coinbase. Justices Kavanaugh, Gorsuch, and Barrett appeared open to applying the Griggs rule given that the FAA is silent on the issue of a stay pending appeal. Justice Barrett suggested that while the question of arbitrability is distinct from the underlying merits of a dispute, that question is intertwined with the merits proceedings before the lower court thereby Alitotriggering the Griggs rule. Justice Alito was concerned that it would be impossible for a defendant to satisfy the irreparable harm requirement for a discretionary stay if the only potential injury is significant litigation costs. Finally, Justice Kavanaugh was concerned that a defendant could be coerced into “massive settlements” absent a mandatory stay pending appeal.

Conclusion

Refusing to impose a mandatory stay of proceedings while an appeal is pending from a denial of arbitration may defeat the very purpose of section 16 of the FAA. This section evidences a legislative preference for enforcing arbitration agreements by allowing an appeal from an order denying, but not from an order compelling, arbitration. Such an outcome would also be contrary to the federal policy favoring arbitration that the Supreme Court has long espoused. At the same time, section 16 of the FAA does not explicitly provide for a mandatory stay. Moreover, in Morgan as well as in Southwest Airlines Co. v. Saxon the Court placed limits on the policy favoring arbitration.

Coinbase is therefore a difficult case to predict, and may well produce a split decision. The outcome will ultimately depend on whether the majority opts for a strict textualist approach to the interpretation of the FAA or for a more pragmatic approach that accords with the purpose of the act and with the realities of litigating arbitration issues. 

https://lawprofessors.typepad.com/contractsprof_blog/2023/03/tamar-meshel-on-coinbase-inc-v-bielski-scotus-first-encounter-with-arbitration-relating-to-crypto.html

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