The Supreme Court seemed inclined to send a dispute involving Coinbase, a major cryptocurrency exchange that wants to force disgruntled customers into private arbitration instead of adjudicating their complaint in the courts, back to lower courts for reconsideration.
The customers’ claim that they were duped into paying $100 to enter a sweepstakes they had virtually no chance of winning was examined during oral arguments on Feb. 28 in Coinbase Inc. v. Suski.
Companies often prefer arbitration to the courts, saying the process resolves cases with greater speed and reduced expense. Some consumer advocates prefer the courts because, in their view, the judicial system provides consumers with more options and is less likely to side with the companies being sued.
Lead respondent David Suski and other Coinbase customers entered a sweepstakes that offered entrants the opportunity to win prizes of as much as $1.2 million in Dogecoin, a digital currency.
Participants had to agree to separate rules that stipulated that “California courts (state and federal) shall have sole jurisdiction of any controversies regarding the promotion” of the sweepstakes, according to Coinbase’s petition.
Despite this forum-selection provision, Coinbase insisted that the dispute raised by its customers who consented to arbitration of disputes in their user agreements with Coinbase go to arbitration.
The respondents argued that the forum-selection provision in the sweepstakes rules governs in sweepstakes-related disputes and filed a class-action lawsuit in federal court in California, arguing that the sweepstakes rules violated California law.
Coinbase argued that any dispute about the primacy of the arbitration provision in the user agreement must be sent to an arbitrator.
A federal district judge refused to send the dispute about the arbitrability of the case to an arbitrator.
The judge found that the forum-selection clause had the effect of narrowing the parties’ arbitration agreement.
“The dispute here is not over the scope of the arbitration provision, but rather whether the agreement was superseded by another separate contract,” the judge said.
The judge determined that the parties hadn’t “clearly and unmistakably delegated” to the arbitrator “how to address the interaction between two separate contracts,” the petition stated.
The U.S. Court of Appeals for the 9th Circuit ruled the case should stay in the courts.
Mr. Suski argued in a brief that Coinbase brought its Supreme Court petition in the case only after it came to regret its June 2021 decisions to “misleadingly solicit Respondents to pay $100 each for a random, low-probability chance to win up to $300,000,” and “to contractually bind each Respondent to sue—exclusively in specified courts—over any controversies regarding the Sweepstakes.”
During oral arguments on Feb. 28, Coinbase’s attorney, Jessica Ellsworth, said the Federal Arbitration Act “requires courts to enforce arbitration agreements according to their terms.”
Here Coinbase and its customers agreed to submit disputes to arbitration, she said.
“Despite this delegation clause, the parties have spent nearly three years disputing this threshold issue. That’s because, instead of enforcing the delegation clause, the courts below came up with rationales to evade it and to instead answer the question of arbitrability for themselves.”
The 9th Circuit characterized the customers’ challenge as “one of contract formation” and asserted that contract formation can never be delegated, Ms. Ellsworth said.
That court saw the issue as “whether the parties formed a contract to arbitrate these claims.”
That approach cannot be correct because it would allow courts to ignore delegation clauses by “characterizing an arbitrability dispute as a question of whether the parties formed a contract to arbitrate the claims at issue.”
The customers’ attorney, David J. Harris Jr., said there is “a strategic reason” why Coinbase is “fighting this so hard.”
“They don’t care who decides arbitrability. All they care about is how arbitrability gets decided because that’s what goes to liability at the end of the day,” he said.
But the justices seemed concerned that the 9th Circuit may not have analyzed the case properly.
Justice Brett Kavanaugh said it may be best to let the lower courts look at the case again.
Justice Sonia Sotomayor told Mr. Harris, “I think you just gave away your case.”
“They came in saying ‘vacate and remand’ because they didn’t address delegation and whether … the sweepstakes agreement superseded that. And you’re saying the 9th Circuit didn’t do that.”
Justice Neil Gorsuch told Mr. Harris, “I’m struggling.”
“So you want us to vacate and remand for more proceedings in the 9th Circuit … rather than just going to get an answer from the arbitrator,” the justice said.
Ms. Ellsworth said, “I think, as Justice Sotomayor’s question made clear, this case needs to be remanded. The Respondents and the Petitioners are in agreement on that.”
Coinbase was founded in 2012, originally as a platform for sending and receiving Bitcoin, the best-known cryptocurrency.
Although many investors are unfamiliar with cryptocurrencies, which are known for their volatility, they have been growing in popularity. There are reportedly more than 19,000 different cryptocurrencies in circulation. A cryptocurrency can be defined as a digital currency that is secured by cryptography, which reportedly makes counterfeiting or double-spending almost impossible.
The Supreme Court previously weighed in on Coinbase-related disputes. In 2022, it refused emergency applications from Coinbase to stay two class-action lawsuits pending against the company. Coinbase had asked the court to put two lawsuits filed by users on hold, arguing that not doing so would cause the company irreparable harm.
And in June 2023, the Supreme Court ruled 5–4 in Coinbase Inc. v. Bielski that customer disputes shouldn’t move forward in the lower courts, while appellate courts have yet to rule on the company’s request to divert those cases to arbitration panels.
The Supreme Court is expected to rule on Coinbase Inc. v. Suski by June.
