On June 23, 2023, the Supreme Court of the United States (SCOTUS) settled a split among lower Circuit Courts of Appeal and ruled that litigation in federal district trial courts is automatically stayed when a party appeals the denial of a motion to compel arbitration. The 5-4 ruling in the case Coinbase, Inc. v. Bielski, reversed the Ninth Circuit and backed cryptocurrency exchange Coinbase in its argument that it should not have had to move forward with discovery in California district court while it challenged the district court’s denial of Coinbase’s motion to compel arbitration.
The background is that Coinbase stores cryptocurrency for account holders in digital wallets and plaintiff Abraham Bielski (“Bielski”) created an account with Coinbase and set up a digital wallet on the platform in 2021. Bielski was later scammed out of $31,000 after he shared his login credentials to his Coinbase account with the scammer. Bielski alleged that he sought assistance from Coinbase through its live chat function and customer service hotline, but a bot responded to his inquiries, instead of a live person. Bielski then wrote two letters to Coinbase’s San Francisco office, seeking a response from a human representative, but instead received an automated letter. Bielski sued Coinbase for violating the “Electric Funds Transfer Act,” and sought to represent a class of similarly situated individuals.
In the federal District Court for the Northern District of California, Coinbase moved to compel arbitration in accordance with the parties’ arbitration agreement. The Federal Arbitration Act (FAA) provides that an agreement to submit a dispute to arbitration “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In addition, Section 16(a) of the FAA allows parties to appeal certain orders, interlocutory orders, and final decisions, including a denial of a motion to compel arbitration. The district court found certain provisions of the parties’ arbitration agreement unconscionable because of their onerous conditions and lack of mutuality. Thus, the district court denied Coinbase’s motion to compel arbitration. Coinbase appealed to the Ninth Circuit Court of Appeal. The Ninth Circuit’s rule was that the appeal of a denial of a motion to compel arbitration does not trigger an automatic stay of proceedings pending appeal. As such, Coinbase moved the district court to stay the litigation proceedings pending appeal.
The district court used a four-factor sliding scale test to determine whether to stay proceedings. The court found that, while the appeal raises a serious legal question, Coinbase would suffer no irreparable injury absent a stay. The court, however, found that a stay would cause irreparable harm to Bielski and contravene the prevailing public interest in a speedy resolution. Thus, the district court denied the motion to stay the proceedings because it found that the factors counseling against a stay outweighed the presence of a serious legal question. Coinbase appealed to the Ninth Circuit to stay proceedings pending appeal. The Ninth Circuit affirmed the district court and denied the motion to stay proceedings. Coinbase appealed to SCOTUS, which granted certiorari on December 9, 2022, and oral arguments were heard on March 21, 2023.
SCOTUS was asked to consider whether an appeal of an order denying a motion to compel arbitration automatically strips the district court of its jurisdiction to continue the litigation on the merits of the case pending the results of the appeal. There has been a longstanding split in the U.S. Circuit Courts of Appeal, as the Third, Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits have all held that district courts are deprived of jurisdiction in this situation, while the Second, Fifth, and Ninth Circuits have held the opposite. Coinbase focused its argument on the “Divestiture Rule,” which holds that the district court is divested of jurisdiction pending an appeal of a motion to compel arbitration. Bielski argued that the traditional “discretionary test” applies, which grants the district court the discretion to grant or deny a stay of the proceedings until the appeal is resolved.
In an unusual 5-4 lineup, the majority opinion was written by Justice Brett Kavanaugh, with Justice Clarence Thomas joining the three liberal justices in dissent. The opinion focused on the fact that while Section 16(a) of the FAA does not say whether district court proceedings must be stayed pending resolution of an appeal of trial court rulings, Congress enacted the provision against “a clear background principle prescribed by this Court’s precedents” that an appeal “divests the district court of its control over those aspects of the case involved in the appeal,” citing to Griggs v. Provident Consumer Discount Co., 459 U. S. 56, 58. The opinion held that “the Griggs principle resolves this case because the question on appeal is whether the case belongs in arbitration or instead in the district court, the entire case is essentially ‘involved in the appeal,’ again citing Griggs, at pg. 58.
The opinion pointed to the fact that the majority of the Circuit Courts of Appeal have ruled this way, as well as leading treatises, and that “the common practice of staying district court proceedings during the pendency of an interlocutory appeal taken under §16(a) reflects common sense” because “if the district court could move forward with pre-trial and trial proceedings while the appeal on arbitrability was ongoing, then many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be lost—even if the court of appeals later concluded that the case actually had belonged in arbitration all along. Absent a stay, parties could also be forced to settle to avoid the district court proceedings (including discovery and trial) they contracted to avoid through arbitration.” The SCOTUS opinion found Bielski’s arguments to overcome the “Griggs principle” unpersuasive, pointing to the Courts of Appeals having “robust tools to prevent unwarranted delay and deter frivolous interlocutory appeals that an automatic stay might otherwise encourage.” The majority also noted that Congress included explicit “stay” requirements in two other statutory provisions, but not in the FAA, and concluded that its decision “does not create a special, arbitration-preferring procedural rule, but simply subjects arbitrability appeals to the same stay principles that courts apply in other analogous contexts where an interlocutory appeal is authorized.”
The SCOTUS ruling in Coinbase is a victory for proponents of arbitration provisions, who argue that discretionary stays give plaintiffs undue leverage in pressuring defendants to settle and that the high costs of litigation, followed by arbitration, pressure defendants to settle regardless of the merits of the arbitrability question. TALG will advise its clients of the implications of this ruling, and we invite you to contact us with any questions.