Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023)

The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, analyzing a recent decision of interest:

SUMMARY

In Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023) (“Coinbase”), the United States Supreme Court (the “Supreme Court”) reversed the rulings of the Ninth Circuit Court of Appeals (the “Ninth Circuit”) and District Court, holding that an interlocutory appeal of a ruling denying a motion for arbitration under § 16 of the Federal Arbitration Act (the “FAA”) stays the entire underlying litigation rather than being subject to the traditional federal discretionary stay analysis for appeals. 

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FACTS

Coinbase operates a currency exchange that deals not only in traditional (“fiat”) currencies such as dollars and yen, but also crypto currencies.  It is a large, well-funded company.  Customers store their crypto currency investments in “digital wallets” maintained by Coinbase.  These digital wallet arrangements have attracted fraudulent practices.  Coinbase’s customer agreement provides for arbitration of any disputes in very broad and somewhat vague terms.    

Bielski was a crypto currency customer of Coinbase.  A third party gained access to Bielski’s digital wallet and drained the account of over $30,000 worth of the currency.  Upon discovering the theft, Bielski alleged, he undertook repeated initiatives through Coinbase’s official customer service channels to get Coinbase’s help in remedying the theft.  However, Bielski’s efforts were futile, being met in essence with nothing but canned online responses.  Frustrated, Bielski brought a class action in the District Court alleging Coinbase’s violations of the Electronic Funds Transfer Act and the related Regulation E. 

Relying on the customer agreement’s arbitration provisions and Section 2 of the FAA, Petitioner Coinbase moved the District Court to enforce the arbitration provisions.  Section 2 of the FAA provides that an agreement to arbitrate a dispute “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  The District Court denied the motion.  In turn, § 16 of the FAA provides for interlocutory appeal of a decision on arbitration.  Coinbase brought such an appeal to the Ninth Circuit and moved the District Court to stay the litigation in the meantime.  Its fundamental argument in favor of a stay was that the appeal in essence deprives the District Court of jurisdiction, much as would an appeal of a ruling on standing, qualified immunity or other dispositive motion.  The District Court denied the stay.  Coinbase appealed the denial to the Ninth Circuit, which also denied a stay.  Coinbase then sought a writ of certiorari from the Supreme Court on the issue of the stay.  The Supreme Court granted the writ in December 2022.  In doing so, it stated:

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?

In a 5-4 decision, the Supreme Court, relying principally on Griggs v. Provident Consumer Disc. Co., 459 U.S. 56 (1982) (per curiam) (Griggs), reversed the rulings.  Justice Jackson wrote a lengthy, carefully-reasoned dissenting opinion in which two other Justices joined in full; Justice Thomas joined in all segments of the dissent save Part I of the five.  

REASONING

The Legal Backdrop Below.  Six Circuit Courts of Appeal have held that the litigation is automatically stayed on an interlocutory appeal of the denial of an arbitration motion, but three, including the Ninth Circuit, have ruled that it is not necessarily abated.  Typical of the majority rule is the decision in Bradford-Scott Data Corp. v. Physician Comput. Network, Inc., 128 F.3d 504, 506 (7th Cir. 1997), holding that a stay pending appeal is required because the basic issue of an arbitration motion is whether the matter can proceed in the district court at all rather than a discrete issue that might arise in the litigation wherever it is finally ajudicated. 

By contrast, the Ninth Circuit, joined by two other Circuit Courts, previously has ruled that denying a motion to compel arbitration does not automatically stay the underlying litigation.  Britton v. Co-op Banking Group, 916 F.2d 1405, 1412 (9th Cir. 1990).  Rather, the imposition of a stay pending appeal should be judged by the usual standards for a stay pending appeal: (1) Coinbase’s likelihood of success on the merits or having raised “serious legal questions”; (2) whether denial of a stay will irreparably harm Coinbase; (3) whether a stay will “substantially injure Bielski; and (4) consideration of the public interest.  Niken v. Holder, 556 U.S. 418, 426 (2009); Leiva-Perez v. Holder, 640 F.3d 962, 964 (9th Cir. 2011). 

The District Court had found that the appeal did implicate serious legal issues, however they may turn out.  But it resolved the other three factors in Bielski’s favor.  That Coinbase might have to spend money in the litigation was not a concern, in part because what happened in the ligation (such as discovery) probably could be used in the arbitration if ordered.  In any case, case law holds that “mere legal expenses” are generally not irreparable harm.  By contrast, Bielski will suffer significantly given his limited resources and what is likely to be the prolonged unremedied substantial loss he has experienced if he must wait for a resolution of the interlocutory appeal even to begin to address the merits.  Finally, the strong federal policy favoring arbitration (as reflected in the FAA) does not by itself determine the public interest issue; weighing in Bielski’s favor is the federal policy favoring speedy and inexpensive resolution of litigation.  The Ninth Circuit basically agreed.  (Notably, the activity in the District Court during the appeal had been limited to essentially procedural matters.  In fact, the parties agreed to a stay of class discovery pending disposition of the appeal.) 

The Opinion.  The heart of the majority’s ruling is that “an appeal ‘divests the district court of its control over those aspects of the case involved in the appeal.  Griggs, 459 U.S. 56,a 58 (1982) (per curiam).’”  The majority contends that an appeal of arbitrabililty puts at issue whether the whole case (and, presumably therefore, by suction all its issues) belongs in the District Court or in arbitration, and therefore, Griggs applies.  To this fundamental proposition the opinion adds various blends of statutory and policy arguments. 

The dissent contests the majority’s broad view of Griggs and its alleged benefits.  It points out that on its facts Griggs does not stand for the espansive principle the majority ascribes to it.  The dissent says that “Griggs stands for a modest proposition . . . ˘[that] two courts should avoid exercising control over the same order or judgment simultaneously.”  This avoids their “step[ping] on each other’s toes.”  But in Coinbase, by continuing the case during the interlocutory appeal, the parties and District Court would not be proceeding on the identical issue that is on appeal, so there is no risk of conflicting contemporary rulings by the trial court and appellate court.  Thus, the minority concludes, Griggs simply is inapplicable to Coinbase

The majority claims that it is Congress’s practice to legislate expressly when it does not want an appeal to stay proceedings, but it did not do so in § 16.  Thus, Congress did want an arbitration appeal to stay the trial court proceedings.  With citations to various statutes, the minority points out this simply is not so.  Congress has no overall practice of whether expressly to provide for or preclude a stay, or to say nothing at all. 

The majority refers to policy considerations to bolster its conclusion, some of which have appeared in the Circuit Court majority decisions or federal practice treatises.  It observes that if the appeal is sustained but litigation in the trial court has continued in the meantime, the party seeking arbitration will have been deprived of the benefits of the streamlined procedures of arbitration, perhaps being forced in the meantime into an unfavorable settlement to avoid the prospect of substantial duplicative costs, in effect being extorted to settle.  The opinion adds:  “That potential for coercion is especially pronounced in class actions, where the possibility of colossal liability can lead to what Judge Friendly called ‘blackmail settlements.’ H. Friendly, Federal Jurisdiction:  A General View 120 (1973).” By the same token, trial court proceedings during what proves to be a successful interlocutory appeal of an order denying arbitration will be a waste of precious judicial resources. 

Here, the minority makes the obvious point that parties seeking arbitration just as often use it to force their opponents out of a case or at least into an unfavorable settlement because they can prolong the time and cost for their opponents to litigate to a result.  Indeed, using arbitration to avoid the risks of a class action by making plaintiffs proceed individually is a well-known tactic.  And as far as judicial resources are concerned, the trial courts have the power to regulate continuing proceedings before them to minimize that problem pending an arbitration appeal.  On top of that, the parties themselves have the power to address that potential problem by an agreement between them, as happened in Coinbase itself.  On these issue of procedural rationality and fairness, the minority points out that not only does the standard test for whether to grant a stay give the trial court the power to consider the parties’ respective interests, but the equity practice underlying the granting of a stay enables the trial court to fashion rules for proceeding in a fair and efficient way while the appeal is pending.  In other words, the general jurisprudence for granting stays pending appeal is generally adequate to address the procedural issues the majority raises. 

AUTHOR’S COMMENTS

Overall, both sides of the issue in Coinbase are credible.  But the majority’s arguments are soft around the edges.  The minority demolishes its claim for Griggs.  That, of course, does not by itself settle the matter.  But the minority’s counter arguments to the rest of the majority’s theories, including its analysis of majority’s statutory genetics, make the debate at best a stalemate for the majority.  This focuses the question of why the standard judicial test for whether grant a stay pending appeal combined with a trial court’s equity power to fashion procedures to ameliorate the risks of eschewing a stay are inadequate to the issue in Coinbase.  The majority never addresses that central question.  And no fundamental flaw in those judicial powers being obvious, alone pointed out by the majority, the author submits the better result would have been to rule against Coinbase.As the law now stands, Coinbase favors parties with deep pockets and parties facing claims of widespread liability who face counterparties with limited resources and the need for a prompt remedy.  In this regard, Coinbase will fertilize appeals of the denial of frivolous arbitration motions, hardly a conservation of judicial resources.

One issue that neither of the parties nor any of the courts seem to address is what is the status of decisions made by the trial court pending the appeal if the matter ultimately is sent to arbitration?  Are the arbitrators bound by those decisions or do they get to make them de novo?

This review was written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group.  Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.