Reminder: Oral Argument in Coinbase is March 21. What You Need to Know
It will be the second case heard that morning. Oral arguments are audio livestreamed via the SCOTUS Website. The Court’s Website posts audio recordings and transcripts the same day as arguments. The docket reflects several Amicus briefs. The Court’s March 6 Order List on page 2 denied Respondents’ unopposed motion for divided argument.
“Under § 16(a) of the Federal Arbitration Act, when a district court denies a motion to compel arbitration, the party seeking arbitration may file an immediate interlocutory appeal. This Court has held that an appeal ‘divests the district court of its control over those aspects of the case involved in the appeal.’ Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58 (1982) (per curiam). The question presented is: 'Does a non-frivolous appeal of the denial of a motion to compel arbitration oust a district court’s jurisdiction to proceed with litigation pending appeal, as the Third, Fourth, Seventh, Tenth, Eleventh and D.C. Circuits have held, or does the district court retain discretion to proceed with litigation while the appeal is pending, as the Second, Fifth, and Ninth Circuits have held?'” (links added by the Alert).
We covered in SAA 2022-17 (May 5) the trial court decision below, Bielski v. Coinbase, Inc., No. C21-07478, 2022 WL 1062049 (N.D. Cal. Apr. 8, 2022). There, the District Court, applying California contract law, held that the predispute arbitration agreement covering the case before it was both substantively and procedurally unconscionable. The subsequent District Court and Ninth Circuit decisions declining to stay the case pending the appeal are unreported. We borrow heavily below from our past coverage.
Origin of the Dispute
Defendant Coinbase Inc. operated a currency exchange that also allows its users to trade in cryptocurrency. One of these users, Plaintiff Abraham Bielski, was the victim of a scammer who transferred more than $31,000 out of his digital wallet. When Bielski turned to Coinbase for help, he was unable to reach a human representative or to receive a satisfactory response. He then filed a class action on behalf of similarly situated Coinbase users, alleging that the currency platform violated the Electronic Funds Transfer Act and Regulation E. Coinbase petitioned to compel arbitration under an arbitration agreement in the user agreement Bielski signed. Bielski objected on the ground that the agreement was unconscionable.
Standards of Unconscionability
The arbitration agreement provided that: “the enforceability … of the Arbitration Agreement … shall be decided by an arbitrator and not by a judge.” The first issue, therefore, was whether this delegation clause is unconscionable. The Court explained the relevant standard:
“Under California law, substantive unconscionability relates to the fairness of an agreement’s actual terms and assesses whether they are overly harsh or one-sided. Substantively unconscionable contract terms will shock the conscience…. A delegation clause lacking mutuality imposes an unfair burden that qualifies as unconscionable…. In other words, to be enforceable, a delegation provision, as well as an arbitration agreement generally, must have a ‘modicum’ of bilaterality.”
A Nested and One-Sided Agreement
Turning to the case before it, the Court declared:
“whether the delegation clause imposes an unconscionable burden that differs from a generic delegation clause requires backtracking through the nested provisions of Coinbase’s 'Arbitration Agreement' and the tripartite dispute resolution procedure it sets out…. The arbitration provision as a whole addresses only those disputes that have previously gone through the pre-arbitration complaint procedure. Because only Coinbase users can raise a complaint though the pre-arbitration complaint procedure, the arbitration provision imposes no obligation on Coinbase itself to submit its disputes with users to binding arbitration.”
From Lack of Mutuality to Substantive Unconscionability
The Court recognized that mere one-sidedness does not necessarily equate with unconscionability, so its analysis continued:
“Pretextual or unduly onerous preconditions to arbitration, however, remain substantively unconscionable.” Here: “Coinbase’s tripartite complaint process requires users to jump through multiple, antecedent hoops before initiating arbitration…. Because the delegation clause imposes an onerous, unfair burden beyond that of a typical delegation clause, this order finds it substantively unconscionable.”
The final step is to determine whether the arbitration agreement is procedurally unconscionable:
“Procedural unconscionability addresses the circumstances of contract negotiation and formation and concentrates on two factors: oppression and surprise…. ‘Oppression occurs where a contract involves lack of negotiation and meaningful choice, surprise where the allegedly unconscionable provision is hidden within a prolix printed form.’” Here, the Court found that the arbitration agreement was a contract of adhesion and its “broad prohibition on access to formal resolution procedures would surprise the average consumer for this type of service. This order concludes that, given the level of substantive unconscionability inherent in the delegation clause previously discussed, the level of procedural unconscionability merits the finding that the delegation clause is unconscionable and, thus, unenforceable.”
The Court further found that the delegation clause was not severable from the arbitration agreement, and therefore unenforceable. For these reasons, the Court denied the petition to compel arbitration.
(ed: *We will do our usual writeup on the oral argument. To allow time to do that, we will be publishing on Friday next week. **Much of this Squib was prepared by Harry A. Jacobowitz, President of HAJ Research and Writing LLC. Mr. Jacobowitz, a member of the Pennsylvania bar, and his firm perform legal research and writing for attorneys and handle substantive searches of SAC’s Award database. He can be contacted at firstname.lastname@example.org.)