This past month, the California District Court issued a request to compel arbitration of various claims of customers of the cryptocurrency exchange platform, Coinbase Global, Inc. Delegation of Authority Clause Transferring Claims to Arbitrate to Arbitrator. (Donovan v. Coinbase Global, Inc., No. 22-02826 (ND Cal. Jan. 6, 2023). As with some electronic contract disputes, it turns on whether the user has adequate notice of the terms and consent to such terms (a determination that often involves examining a site or application’s screen display and whether the user could reasonably be notified of termination). (a transaction binds the user to the terms of service), the account holders in this case did not dispute that they agreed to the user agreement, but instead argued that the arbitration provision and representation clauses were unconscionable and unenforceable.
In May 2022, a Coinbase account holder filed various claims against the defendants for certain misleading statements and actions related to the stablecoin (JPY), dubbed “the first regulated digital JPY” and offered by co-defendant GMO. -Z.com Trust Co., Inc. (“GMO-Z”) (previously granted a Conditional BitLicense by the New York Department of Financial Services). GYEN opened for trading on Coinbase in November 2021 but has experienced price fluctuations, causing financial losses for investors and prompting claims against the defendants.
In response, Coinbase moved to compel arbitration of the claims, and in a recent decision, a California district court ruled that Coinbase’s user agreement represented arbitration claims, granting Coinbase’s motion; However, Coinbase’s non-user agreement co-defendant and stablecoin issuer GMO-Z failed to seek arbitration under the agreement, and the court rejected the argument that the agreement extends such rights to a signatory. (Donovan v. Coinbase Global, Inc.No. 22-02826 (ND Cal. Jan. 6, 2023).
The issue before the court is whether there is sufficient evidence that the parties submitted the arbitrable claims to the arbitrator. Because arbitration must first be determined, the court will generally not be held liable by plaintiffs who claim that the arbitration agreement is unenforceable. The Coinbase User Agreement includes a proxy clause that delegates arbitration claims to the arbitrator: “The arbitrator shall have exclusive jurisdiction to resolve any dispute, including, without limitation, disputes arising out of the interpretation or application of the arbitration agreement, the applicability, invalidity, scope, or validity of the arbitration agreement or the arbitration agreement.” including any section…” The court also stated that the User Agreement incorporated the American Arbitration Association’s (“AAA”) rules, which gave the arbitrator “jurisdiction in his own discretion.” Therefore, based on the above, the court stated that the parties “agreed to arbitrate” unless the agency clause is illegal, as the plaintiffs argued, or if any other relevant contractual defense is invoked, the court will enforce it. Delegation clause.
Both sides have argued for procedural unconstitutionality: the plaintiffs argued that the user agreement was a recently amended contract and that the delegation clause was buried in long text and not clearly invoked when users agreed. to revised terms; Coinbase stated that when the terms are updated, users are notified and review the terms before continuing to use Coinbase, and users are free to opt out of the terms and consult its help page on how to close their account and move their funds elsewhere. The court agreed with Coinbase that, in general, Coinbase was not the only option for cryptocurrency services and although Coinbase did not clearly state the amendment to the delegation clause to users in a pop-up box, the provision in the User Agreement was labeled “expressly” in bold print. The court stated that the plaintiffs failed to show unconscionability. Therefore, the court held that the representation provision was enforceable and the plaintiffs’ arguments in arbitration were referred to the arbitrator.
Until co-defendant GMO-Z’s separate petition to compel arbitration, the court rejected the argument that Coinbase was arbitrating their claim against GMO-Z under the doctrine of equitable estoppel. The court held that under California law, a non-signatory may compel arbitration under the doctrine of equitable estoppel if a plaintiff’s claim against the non-signatory is “based on the same facts and are not separable in nature” as the signatory. Here, the court said, the user agreement contained “clear-cut” language indicating an intent to resolve disputes between the signatories (specifically, Article 1.1 of the Arbitration Agreement states, “Pursuant to the terms of this Arbitration Agreement, You and Coinbase agree…”) (emphasis added). As such, GMO-Z’s motion to compel arbitration was denied, but the court, in its discretion, stayed all proceedings pending resolution of Coinbase’s arbitration.
The decision of the court in Donovan The case illustrates why online entities and marketplaces, including digital asset services and crypto exchanges, take great care in drafting terms of use and user policies. Any platform or application can handle thousands or even millions of transactions, and especially in the current challenging crypto winter, it is inevitable that a customer will suffer unexpected losses due to transactions involving third-party digital assets. Therefore, such services typically rely on disclaimers, limitations of liability and, in this case, a carefully worded arbitration clause.
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