Lawyers for Coinbase (COIN) went before the U.S. Supreme Court Tuesday arguing that the crypto exchange’s customer disputes should be kept from advancing in court when appellate courts have yet to rule on its requests to send the matters instead to arbitration.
If the plaintiffs prevail, Coinbase and other companies requiring their customers to agree to arbitrate disputes could see more costly, time-consuming, and public litigation, especially cryptocurrency and tech platforms that have faced wide criticism and lawsuits from plaintiffs who say that the contractual terms are illegal.
"They're playing games," Hassan Zavareei, a lawyer for one of the plaintiffs, said. "We hope to make a major change in the way that Coinbase runs its business."
Coinbase's lawyer Newal Katyal told the justices during oral arguments that a ruling against the exchange could force otherwise private information out into the open, such as corporate documents and witness testimony. Unlike litigants in arbitration, subject to more limited discovery rules, litigants in U.S. courts can demand and obtain from their opponents more extensive information.
"If [the plaintiffs] try and force discovery in the district court, and then they get access to discovery, which may have embarrassing details, it could spill out into the newspapers," Coinbase's lawyer Neal Katyal argued before the justices. "That's exactly the thing that you arbitrate for — the reason the parties agree in the first place is to have that kind of confidentiality."
The dispute stems from two recent rulings from the 9th Circuit Court of Appeals.
In 2022, the appellate court ruled against Coinbase and in favor of its customers, Abraham Bielski and David Suski who requested class-action certification, allowing their cases against the exchange to go forward in district court. That was despite the fact the court had not yet ruled on Coinbase’s request to kick the matters out of the judicial system.
The justices pressed Katyal and his opponent Zavareei, a lawyer for Bielski, on whether or not parties like Coinbase have a right to pause litigation — an issue left unclear, under federal statutes.
"It is a huge benefit to you to be able to take an interlocutory appeal, right?" Justice Neil Gorsuch told Katyal, Coinbase's lawyer.
An interlocutory appeal, which Coinbase requested in the cases before the court, allows a party to ask for appellate review of the trial court's decision while that trial court is still handling the underlying dispute.
"Why is it unreasonable to think that Congress thought that was enough?" Chief Justice John Roberts asked.
Zavareei argued the law's silence means there is no automatic pause for litigation. In an interview with Yahoo Finance, Zavareei said Coinbase is using its arbitration clause as a delay tactic.
"They want delay on top of delay," he said, adding that both the trial court and circuit court had already found the arbitration terms unenforceable.
"There are risks associated with slowing down the litigation," Zavareei said during oral arguments. "That's very real pressure. Look at this case, where Coinbase, the entire cryptocurrency market is collapsing under our feet and other exchanges, competitors with Coinbase, are going bankrupt left and right. And we've got a client who lost $30,000."
Zavareei acknowledged that in some cases a litigation pause could be appropriate, such as when an arbitration agreement specifically calls for limited discovery.
Multiple justices expressed concern that Coinbase and similarly situated parties could be coerced into settling class-action cases like the ones before the court.
"If the district court discovery goes forward...that is going to coerce massive settlements," Justice Brett Kavanaugh said. "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."
Coinbase argues that it shouldn’t have to defend litigation in district court while it's waiting on an appellate court to rule on objections to override its arbitration mandate. Doing so, it says, would fly in the face of Congress’ “clear intent” in adopting the 1925 Federal Arbitration Act to efficiently move parties out of court and into arbitration, and a 1988 amendment that permits parties to appeal court decisions that override mandatory arbitration agreements.
“Allowing district court proceedings to march on—through discovery, potential class proceedings, and even a trial— while the arbitrability question is resolved on appeal improperly permits the district court to retain jurisdiction over the core issue on appeal,” Coinbase wrote in its petition to the high court.
Like most, if not all Coinbase customers, Bielski and the Suski plaintiffs signed user agreements specifying that “any dispute” between them and the exchange must be resolved through arbitration, not through the U.S. court system.
Bielski sued to invalidate his agreement after hackers stole approximately $31,000 from his Coinbase account and the exchange allegedly declined to help him recover the funds. Coinbase argues that any dispute brought by Bielski must be resolved solely through arbitration. The company says the funds were stolen when Bielski granted an imposter PayPal representative remote access to his computer.
In allowing the case to go forward, a federal district court held Coinbases’ user agreement “unconscionable” under California law, and in turn invalidated the arbitration clause within it.
Coinbase argues that the district court had no right to decide whether or not the agreement itself was enforceable, because language in the agreement specified that, “[a]ll” questions about the enforceability of the agreement “shall be decided by an arbitrator.”
Suski is among a group of former Coinbase users who joined the platform in 2021 and signed its user agreement to take part in its 2021 “Dogecoin Sweepstakes,” a promotion that offered a chance to win dogecoin (DOGE-USD) cryptocurrency prizes. The group sued Coinbase alleging that the contest was illegal under California law.
The district court declined to send the matter to arbitration, ruling that a forum selection clause in the sweepstakes terms — a clause mandating that disputes must be handled in a particular jurisdiction — superseded the arbitration clause in its user agreement.
Yahoo Finance requested comment from Coinbase and will update this story with a response if one is received.
The 9th Circuit’s decisions force Coinbase to “simultaneously…defend itself from putative class actions in the district courts and pursue its interlocutory appeals in the Ninth Circuit,” the company said in its petition to the Supreme Court.
The court is expected to rule in the case by July before the end of its current term.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.