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Crypto exchange fights to pause class actions that it would rather arbitrate

Coinbase, valued at nearly $86 billion when it debuted on Wall Street in 2021, fought at the Supreme Court to put litigation on hold.

WASHINGTON (CN) — A lawyer for Coinbase faced skepticism Tuesday from the liberal wing of the Supreme Court as he claimed that the cryptocurrency exchange company should not have to litigate two class actions while it goes through an appeal that could send the matter to arbitration.

The case is the first ever related to crypto go before the high court, whose liberal wing seemed particularly opposed to Coinbase's argument.

“I can understand why you'd prefer everything to stop while the appellate court is dealing with the arbitrability issue,” Justice Sonia Sotomayor told the lawyer for Coinbase. “But the district court is not any longer dealing with the arbitrability issue. So the two can go their merry way, coincident with each other.”

Arguing for the San Francisco-based crypto exchange, Neal Katyal said that Congress crafted the Federal Arbitration Act to allow immediate appeals when district courts deny motions to compel arbitration.

“When a party appeals the denial of a motion to compel arbitration, it stays litigation,” the Hogan Lovells attorney said.

Drawing an analogy to how “toothpaste can't be put back in the tube," Katyal continued to argue that a stay at the district court level would effectively prevent discovery that might interfere with future arbitration proceedings.

“When Congress wants to prevent a mandatory stay, they say so expressly with anti-stay laws,” Katyal said.

It is the position of Coinbase that the two disputes, both filed by disgruntled users, must be arbitrated under the terms of its user agreement.

Hassan Zavareei argued Coinbase on Tuesday for the user turned legal opponent Abraham Bielski.

“Congress would not without clearly expressing such a purpose, deprive the courts of their customary power to order stays under review,” Zavareei told the court.

Justice Brett Kavanaugh expressed concerns with Zavareei’s argument that both the appeals court and district court should be able to proceed in tandem.

“The other side's concern, I believe, is that they think they correctly bargained for arbitration, and they have a right that Congress has given them to have the appellate courts determine that," Kavanaugh explained. "And that they're not going to be able to afford themselves that congressionally granted right because, if the district court discovery goes forward in a class action context, that is going to coerce massive settlements. And they don't want to be coerced into massive settlements without having the opportunity to take advantage of the right that Congress has given them to have an appeals court decide whether arbitration is the appropriate forum."

Kavanaugh urged Zavareei for a response.

“You've already got a district court that has ruled that there is no valid arbitration,” the lawyer replied.

“It could be wrong,” Kavanaugh retorted.

Justice Neil Gorsuch appeared to sympathize with Coinbase, saying there’s a “one-court-at-a-time rule that is pretty ancient.”

Coinbase is one of the world's largest crypto exchanges, founded in 2012 and valued at nearly $86 billion in 2021 when it debuted on Wall Street. Users can navigate the exchange to buy various cryptocurrency coins like Bitcoin or Ethereum. Cryptocurrency uses cryptography, which is foundational to internet security, to create a string of data that denotes a value. That value goes up and down according to various market pressures, but the lure of increasing the value of one’s investments has drawn scores of users to currency exchanges like Coinbase. 

Previous decisions allowed the plaintiffs in the now-consolidated federal suit to proceed in California. 

Abraham Bielski sued Coinbase after he lost over $31,000 from his account in a scam. Bielski gave an individual who claimed to be a representative of payment processing site PayPal access to his account.


Bielski attempted to contact Coinbase after the fraud but was unable to ever reach a human representative. According to Coinbase, this specific scam is warned about in its user agreement as well as a delegation clause compelling arbitration. 

A federal judge ruled, however, that Bielski did not have to enter arbitration regardless of the delegation clause. U.S. District Judge William Alsup said the agreement did not adhere to general contract principles and therefore was unenforceable in April 2022. 

After this, Coinbase requested that the district court halt further court proceedings pending appeal of its ruling invalidating the arbitration agreement, wanting to prevent litigation and discovery from starting in the case before its appeal is complete. But the district court denied the stay motion, and the Ninth Circuit turned down an emergency stay as well. 

The second in the pair of suits was led by David Suski, who seeks to represent a class harmed by a giveaway that Coinbase ran in early June 2021. Suski says he was deceived by the contest, resulting in him trading $100 of Dogecoin for an entry into the $1.2 million in Dogecoin sweepstakes when free entry was possible. Suski says that Coinbase didn’t clearly advertise the free entry for its own profit.

As in Bielski’s case, Coinbase was unable to convince a district court to compel Suski into arbitration. The company was again denied a stay at the Ninth Circuit. 

At the high court Tuesday, the company requested the justices stay the district court rulings and consider whether the Ninth Circuit was correct to deny it a stay. The company calls the appeals court out of step with the other circuits rule on this issue, in violation of the Federal Arbitration Act. 

Justice Elena Kagan told Katyal on Tuesday that automatic stays apply only “when the appeals court and the district court are doing the exact same thing, such that the district court is kind of stepping on the appeals court.” She said that didn’t appear to be the case here.

“The appeals court is trying to figure out arbitrability,” she said. “The District Court is trying to figure out the merits.”

Katyal faced tough questions from Justice Ketanji Brown Jackson as well.

“Just the fact that you get an interlocutory appeal doesn't indicate, necessarily, that Congress is also saying that a stay follows because there are many situations in which Congress expressly divorces the two, and says, ‘you can go interlocutory, but no stay,’” Jackson said.

Jackson likewise appeared concerned about how a ruling in Coinbase’s favor might give them an edge in a settlement with users — since it might stretch out the time the case takes further.

“To the extent that the defendant doesn't want trial, they don't want arbitration either, really. They're the defendant. So wouldn't we have a dynamic in which the exact opposite of the appellate court going fast would happen? If they get an automatic stay, they get it and then they it takes like months for the appellate court to rule, and that’s just fine with the defendant,” Jackson said.

The plaintiffs’ lawyer agreed.

“That’s very real pressure,” Zavareei contended. “Look, look at this case. The entire cryptocurrency market is collapsing under our feet and other interchanges competitors with Coinbase are going bankrupt left and right.”

While he’s representing a client who lost $30,000, the lawyer said his team is getting calls from other clients who've lost hundreds of thousands of dollars. 

“In the meantime, [they’re] wondering whether Coinbase is going to be around by the time these appellate court decisions are decided,” Zavareei said, noting this could force plaintiffs with valid claims to undervalue their cases and settle early. “So absolutely. There's an interest on the other side that could push people to try and settle early to try and escape harms like bankruptcy or changes in arbitration agreements.”

Justice Sotomayor also questioned Tuesday whether if the court rules in favor of Coinbase’s mandatory stay, it could create an incentive for petitioners to file their suits in state court, rather than federal, if they can.

If Coinbase wins at the Supreme Court, it will make it easier for the crypto company to swat down future disputes with customers through arbitration. The result could also set precedent for other class actions filed against crypto companies in years to come.

Categories: Appeals Business Consumers Financial Law Technology

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