Crypto Exchange Obtains Favorable Decision in Claims Arbitration Over Alleged Trading Losses | Proskauer – Blockchain and the law

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Last month, a California district court granted a motion to compel arbitration of various customer claims of the cryptocurrency exchange platform, Coinbase Global, Inc. (“Coinbase”), finding that the Coinbase User Agreement, which contains a broad arbitration provision, including a delegation clause that delegates matters of arbitrability to the arbitrator. (Donovan v. Coinbase Global, Inc., No. 22-02826 (ND Cal. Jan. 6, 2023)). Unlike some electronic contract disputes, which depend on whether the user has been sufficiently informed of the terms and has expressed consent to those terms (a decision that often involves a review of the on-screen display of a site or an application and if the user is reasonably informed that the completion of a transaction will bind the user to the terms of use), the account holders in this case did not dispute that they had accepted the user agreement, they instead argued that the arbitration clause and delegation clauses were invalid and unenforceable.

In May 2022, a putative group of Coinbase account holders filed various claims against defendants regarding certain allegedly misleading statements and subsequent actions taken with respect to a stablecoin (GYEN), billed as “the first digital JPY Regulated” and offered by co-defendant GMO-Z.com Trust Co., Inc. (“GMO-Z”) (which had previously been granted a conditional BitLicense by the New York Department of Financial Services). GYEN opened on Coinbase in November 2021, but suffered fluctuations in value, allegedly causing financial loss to investors and prompting lawsuits from defendants.

In response, Coinbase decided to compel arbitration of the claims, and in a recent decision, a California district court upheld Coinbase’s motion, ruling that the Coinbase User Agreement delegated arbitrability issues to the referee; however, co-defendant and stablecoin issuer GMO-Z, not a party to the Coinbase User Agreement, failed to seek arbitration under the agreement, with the court rejecting the argument as per which the agreement extended those rights to a non-signatory. (Donovan v. Coinbase Global, Inc., No. 22-02826 (ND Cal. Jan. 6, 2023)).

The question before the court was whether there was sufficient evidence that the parties had delegated arbitrability issues to the arbitrator. Since arbitrability must be determined first, the court fails to reach the plaintiffs’ claims that the arbitration agreement as a whole is inadmissible. The Coinbase User Agreement includes a delegation clause that delegates matters of arbitrability to the arbitrator: “The arbitrator shall have exclusive authority to resolve any dispute, including, without limitation, disputes arising out of or relating to the interpretation or application of the arbitration agreement, including the enforceability, revocability, scope or validity of the arbitration agreement or any part of the arbitration agreement…. The court also noted that the User Agreement incorporates the rules of the American Arbitration Association (“AAA”), which grant the arbitrator “the authority to adjudicate on his or her own jurisdiction”. that, based on the foregoing, the parties “have agreed to arbitrate arbitrability” and that unless the tribunal finds the delegation clause to be inadmissible, as claimed by the plaintiffs, or subject to other applicable contractual defense, the court applies would be the delegation clause.

The two parties advanced conflicting arguments on the issue of procedural unfairness: the plaintiffs argued that the user agreement was a recently amended contract of adhesion and that the delegation clause was buried in a long text and n was not explicitly mentioned in a popup when users agreed. on the amended terms; Coinbase countered that when the terms changed, users were alerted and asked to review the terms before continuing to use Coinbase and that users were free to reject the terms and visit the help page for instructions on how to close. their account and move their funds elsewhere. The court agreed with Coinbase, finding that, overall, Coinbase was not the only option for cryptocurrency services and that while Coinbase’s changes to the delegation clause were not explicitly spelled out in a pop-up for users, the provision of the User Agreement was “clearly labeled” in bold type. The court also found that the plaintiffs had failed to demonstrate substantial unfairness. Accordingly, the court ruled that the delegation provision was binding and that challenges to the plaintiffs’ arbitrability were delegated to the arbitrator.

With respect to the co-defendant, GMO-Z’s separate motion to compel arbitration, the court rejected his argument that the plaintiffs were required to arbitrate their claims against GMO-Z pursuant to the arbitration agreement. Coinbase arbitration under the doctrine of equitable estoppel. The court noted that under California law, a non-signatory may impose arbitration under the doctrine of equitable estoppel when a plaintiff’s claims against the non-signatory are “based on the same facts and are intrinsically inseparable” from those against a signatory. Here, according to the court, the User Agreement contained “clear” language showing an intent to arbitrate disputes between the signatories only (specifically, Section 1.1 of the Arbitration Agreement states: “Subject to of the terms of this agreement to arbitrate, you and Coinbase agree…”) (emphasis added). As such, GMO-Z’s motion to compel arbitration was denied, but the court, at its discretion, stayed all proceedings pending resolution of the Coinbase arbitration.

The court ruling in the Donovan case shows why online entities and marketplaces, including digital asset services and crypto exchanges, take great care in drafting terms of service and user policies . Any platform or application can process thousands or even millions of transactions and it is inevitable, especially in today’s harsh crypto winter, that a customer will experience unexpected losses due to transactions involving third-party digital assets. . Thus, these services are usually based on disclaimers, limitations of liability and, in this case, a carefully drafted arbitration clause.

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