The Coinbase case involves a joint petition for writ of certiorari that could have a major impact on motions to compel arbitration under the Federal Arbitration Act (FAA). Coinbase, Inc. v. Bielski, Case No. 22-105 (oral argument Mar. 21, 2023, in the Supreme Court of the United States). It raises an important issue – must a party seeking the right to arbitrate on appeal continue to defend trial proceedings in district court, no matter the impact?
Section 16(a) of the FAA, added in 1988, provides that when a motion to compel arbitration is denied by a district court, the moving party can immediately bring an interlocutory appeal. Typically, 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). Petitioners argued that “[w]hen . . . the issue on appeal is whether a case should proceed at all in court or . . . in arbitration, the entirety of the federal district court case is involved in the appeal.” (Joint Petition at 3.)
But three circuits require the party seeking arbitration on appeal also to continue its defense of the case in the district court. That expensive approach can effectively eliminate the right to arbitrate and its economic benefits, especially in a putative class action case. The appellate courts are divided (6 to 3) in their approach to the issue. The question presented to the Supreme Court in the Coinbase joint petition 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? (Emphasis added.)
In the Bielski and Suski cases, the Ninth Circuit held that Petitioner Coinbase, Inc., was required to defend two ongoing putative class action cases in district court despite attempting to pursue the right to arbitrate the related disputes before the Ninth Circuit.
Coinbase is a major United States cryptocurrency exchange platform that allows users to purchase, sell and make transactions in a variety of digital currencies. Those creating a Coinbase account must agree to the terms and conditions in its User Agreement. The Agreement provides that “any dispute” between the users and Coinbase will be remedied by arbitration. The Agreement also has a delegation clause, requiring the parties “to arbitrate threshold issues concerning the arbitration agreement,” “whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.” The Agreement further provides that “[a]ll such matters shall be decided by an arbitrator and not by a court or judge.”
The joint petition arises from two cases in which California district courts refused to compel arbitration involving the Coinbase User Agreement. In both cases, Coinbase appealed the refusal to arbitrate to the Ninth Circuit pursuant to Section 16(a) of the FAA. The district court and Ninth Circuit in the cases declined to stay the district court action pending appeal. This required Coinbase to simultaneously defend putative class actions in the district courts and seek appellate review in the Ninth Circuit.
The Ninth Circuit’s position on the divestiture issue was premised on its 1990 decision in Britton v. Co-Op Banking Grp., 916 F.2d 1405 (9th Cir. 1990). And the dated Britton decision seemed to arise from policy-driven differences with Section 16(a) and avoiding “frivolous” appeals that were crafted to “stall a trial.” Britton, 916 F.2d at 1412.
The Supreme Court, however, has rejected arguments based on avoiding frivolous appeals in other contexts. See Anderson LLP v. Carlisle, 556 U.S. 624, 627 (2009). The Brief For Petitioner argued that there was no evidence that Coinbase’s appeals were frivolous or that such appeals were “more common in the six circuits that have for two decades or more required divestiture pending arbitrability appeals.” (Petitioner’s Brief at 50-51.)
Coinbase’s brief concluded with the assertion that “[s]peculative concern over frivolous appeals that have never actually come to pass cannot justify refusing to abide by ordinary divestiture principles.” (Petitioner’s Brief at 52.)
The Impact of Coinbase’s Attempt To Secure a Stay Pending Review
The history of the Coinbase case is a procedural morass. Coinbase sought to compel arbitration of Bielski’s claims premised on the Coinbase User Agreement. The district court denied that motion, which Coinbase then appealed. (Case No. 22-15566.) Coinbase next moved the district court for a stay during the arbitrability appeal – which the district court also denied.
Coinbase then sought a stay from the Ninth Circuit of the district court proceedings during the arbitrability appeal. Again, the Ninth Circuit denied that motion for stay of the lower court proceedings.
Then two days after Coinbase filed its initial brief in the Ninth Circuit, it filed a petition for certiorari before the Supreme Court. The petition sought Supreme Court review of the Britton rule. Thereafter, on Dec. 4, 2022, the appellate court set oral argument on Coinbase’s appeal for Feb. 14, 2023. And, on Dec. 9, 2022, the Supreme Court granted Coinbase’s certiorari petition. As one might imagine, Coinbase requested that the Ninth Circuit hold the appeal until the Supreme Court’s decision in Coinbase, Inc. v. Bielski (No. 22-105) was issued. Once again, the motion to hold the Ninth Circuit appeal in abeyance was denied. (Doc. Entry 74.) When oral argument took place in the appellate court, Circuit Judge Eric D. Miller told the parties that while the panel opposed delaying oral argument, they would wait to issue an opinion in the appeal until the Supreme Court ruled. This continuing motion practice without resolution lends credence to Coinbase’s contentions before the Supreme Court.
Must a party simultaneously pursue an appeal of the denial of the right to arbitrate and defend the substance of the claims in district court?
As Coinbase argues in its brief:
Under a straightforward application of this divestiture rule, when the issue on appeal is whether a case should proceed in court or arbitration, the entirety of the district court case is involved in the appeal. The whole point of the appeal is to determine whether a federal court has authority over the dispute. 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. It nullifies the right to an interlocutory appeal for the many months or longer it takes for the appellate process to run its course. (Brief For Petitioner at 2.) (Emphasis added.)
Amicus National Retail Federation supported Coinbase in describing the detrimental impact of the Ninth Circuit position. Its brief declared:
[T]he defendant is just as irreparably harmed if the district court purports to limit its role to presiding over discovery. Discovery under court rules usurps the province of the arbitrators to manage discovery. (Amicus Brief at 26.)
* * *
Similarly, allowing wide-ranging discovery under court rules ‘would cut against the efficiency and cost-saving purposes of arbitration.’ The deadweight loss is especially pernicious if classwide discovery is permitted, which would be irrelevant in an individual arbitration.” (Citations eliminated.) Id.
But a number of groups and organizations disagree. According to the American Association for Justice, it is “concerned that Coinbase’s theory effectively ‘invest[s],’ without any textual basis, a ‘special arbitration-preferring’ rule that does not apply to other kinds of forum-selection clauses. Such a special rule would invite defendants to file interlocutory appeals to strategically delay proceedings.” (Amicus Brief at 1.) (Citation eliminated.)
So, while Coinbase has strong arguments and many advocates supporting its position, there are those on the other side. Much opposition stems from the perceived ability of the pro-arbitration advocates to call a halt to the case in district court. Yet, without a stay, the economic benefit of arbitration could be lost forever. That position is supported by the majority of federal circuits.
Takeaways from the Supreme Court Oral Argument
While the justices’ questions during oral argument are not definitive evidence of their views, they do provide insight into their areas of concern. Many of those areas surfaced during the argument, and it is worthwhile to review them.
Counsel for the Petitioner Coinbase, Neal K. Katyal, began the oral argument with the statement:
“The parties agree on a lot, notably that the divestiture rule of Griggs is the law. The filing of a notice of appeal divests the district court of its control over those aspects of the case involved in the appeal. The only question today is whether district court proceedings are aspects of the case involved in the appeal.” (Transcript at 3.)
But the justices’ questions revealed that the analysis wasn’t that easy. During the questioning, Justice Thomas asked, “Does it follow automatically that when you have an interlocutory appeal, there’s an automatic stay?”
Mr. Katyal responded, “So, in general it’s not that there’s an automatic stay. It follows that the divestiture rule applies, and then it depends on the particular context.” (Transcript at 6.)
In response to questions from Justice Sotomayor, Mr. Katyal explained that “the background rule of Congress, 11 separate times going back to 1891, is, when they want to abrogate a stay, an automatic stay, they say so.” (Transcript at 11.)
Justice Kagan then commented, “Well, I don’t understand why that’s true. I mean, you’re suggesting that every time Congress wants an immediate appeal, it also wants an automatic stay. But Congress might well say what we want is an immediate appeal and a discretionary stay regime.” (Transcript at 13.)
Chief Justice Roberts directly questioned the scope of Section 16(a): “[I]t is a huge benefit to be able to take an interlocutory appeal, right? Why is it unreasonable to think that Congress thought that was enough? * * * They gave you the most valuable right they could have. * * * Why isn’t that enough?”
Mr. Katyal responded, “I think because the background rule at the time was always that there would be an automatic stay and the divestiture would apply in circumstances like this. [T]hat’s why you have these 11 statutes which my friend can’t explain what they’re about.” (Transcript at 17.)
Yet, Justice Kagan continued to question the impact of the statute: “I can understand you’d prefer everything to stop while the appellate court is dealing with the arbitrability issue, but the district court is not any longer dealing with the arbitrability issue, so the two can go their merry way . . . * * * You can get a discretionary stay. But, otherwise, . . . you’ve gotten a pretty valuable thing. You just haven’t gotten the whole ball of wax.” (Transcript at 19.)
Moreover, Justice Kagan declared, “I’m not raising policy concerns. 16(a) does not say what you want it to say. It just doesn’t.” (Transcript at 20.)
Mr. Katyal responded to further substantive inquiries by Justice Jackson, explaining, “[I]f Congress doesn’t think it follows that an automatic stay comes from an interlocutory appeal, they say precisely that. And this isn’t just some made-up position. This is not just the position of the majority of the circuits. It’s what the two main federal treatises . . . both say is the consequence of the Griggs divestiture rule.” (Transcript at 24.)
Justice Kavanaugh also pressed counsel for Respondent Hassan Zavareei on the “coerced settlement” impact of not having a stay. Mr. Zavareei responded, “[W]hat you’re looking at now are policy concerns . . . and policy concerns that could have been addressed by Congress when – they were concerned about these policy concerns.” (Transcript at 70.)
So, depending on a longtime procedure not articulated in the statutory language caused a number of justices to question its application.
So, does the interlocutory appeal of the denial of a motion to compel arbitration stay the matter? The oral argument in Coinbase revealed that the historic consequences of interlocutory appeal language did not immediately satisfy all the justices.