Coinbase, Inc. v. Bielski

Issues

Is a district court deprived of jurisdiction to proceed with litigation pending appeal when a non-frivolous appeal is filed in response to a denial of a motion to compel arbitration?

Oral argument:

March 21, 2023

Court below:

United States Court of Appeals for the Ninth Circuit

This case asks the Supreme Court 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. 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, Inc. argues that the “Divestiture Rule” applies here—the district court is divested of jurisdiction pending an appeal of a motion to compel arbitration. Abraham Bielski counters 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. This case touches on important questions regarding judicial economy, economic efficiency, and the treatment of arbitration agreements in relation to other contracts.

Questions as Framed for the Court by the Parties

Whether a non-frivolous appeal of the denial of a motion to compel arbitration ousts a district court’s jurisdiction to proceed with litigation pending appeal.

Facts

Coinbase, Inc. (“Coinbase”) is a cryptocurrency exchange platform, which stores cryptocurrency for account holders in digital wallets. Bielski v. Coinbase, Inc. at 1. Abraham Bielski (“Bielski”) created an account with Coinbase and set up a digital wallet on the platform in 2021. Id. at 2.

Later that year, Bielski received a call from a scammer purporting to be a PayPal representative, and Bielski shared his login credentials to his Coinbase account with the scammer. Id. The scammer subsequently transferred $31,039.06 out of Bielski's Coinbase account. Id.

Bielski alleges that he sought assistance from Coinbase through its live chat function and customer service hotline. Id. However, Bielski alleges that a bot responded to his inquiries, instead of a live person, on both the live chat and the hotline. Id. Bielski then wrote two letters to Coinbase's San Francisco office, seeking a response from a human representative, but instead received an automated letter. Id. at 3.

Bielski sued Coinbase for violating the Electronic Funds Transfer Act, also known as Regulation E. Id. at 1-3. Bielski seeks to represent a class of similarly situated individuals. Id. at 1, 3. The class has not yet been certified. Id.

In the District Court for the Northern District of California, Coinbase moved to compel arbitration in accordance with the parties’ arbitration agreement. Id. 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.” Id. 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. Id.

The district court found the delegation and arbitration clauses of the parties’ arbitration agreement unconscionable because of their onerous conditions and lack of mutuality. Id. at 1. Thus, the district court denied Coinbase's motion to compel arbitration. Id. at 12.

Coinbase appealed to the Ninth Circuit. Bielski at 1. In the Ninth Circuit, the appeal of a denial of a motion to compel arbitration does not trigger an automatic stay of proceedings pending appeal. Instead, Coinbase moved the district court to stay proceedings pending appeal.

The district court used a four-factor sliding scale test to determine whether to stay proceedings. Bielski at 2. The court found that, while the appeal raises a serious legal question, Coinbase would suffer no irreparable injury absent a stay. Id. at 2. The court, however, found that a stay would cause irreparable harm to Bielski and contravene the prevailing public interest in a speedy resolution. Id. at 2-3. Thus, the 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. Id. at 3. Coinbase appealed to the Ninth Circuit to stay proceedings pending appeal. Bielski v. Coinbase, Inc. at 1. The Ninth Circuit affirmed the district court and denied the motion to stay proceedings. Id.

Coinbase appealed to the Supreme Court. The Supreme Court granted certiorari on December 9, 2022. The Supreme Court consolidated Coinbase, Inc. v. Bielski with Coinbase, Inc. v. Suski.

Analysis

DIVESTITURE RULE

Coinbase argues that § 16(a) of the Federal Arbitration Act (“FAA”) works within the background default Divestiture Rule, which divests district courts of the authority to continue to hear litigation on a matter that is implicated by an interlocutory appeal such as a threshold denial of a motion to compel arbitration. Brief for Petitioner, Coinbase, Inc., at 20, 25. Coinbase asserts that the Divestiture Rule effectively transfers jurisdiction to hear a case from the district court to the court of appeals when the appeal would decide issues that would be litigated at the district court level. Id. at 20-21. Coinbase clarifies that the district court would retain jurisdiction and “authority [only] over matters not [implicated by] the appeal.” Id. at 21. Further, Coinbase contends that in the context of the default Divestiture Rule, when a party appeals a denial of a motion to compel arbitration under § 16(a), the district court loses authority to proceed with the litigation until the appeal is resolved. Id. at 20. Coinbase posits that an appeal of the obligation to arbitrate implicates the entire case because, if the motion to compel arbitration were granted on appeal, the same issues that would be litigated at the district court level would instead be decided through arbitration. Id. at 22. Therefore, applying this rule, Coinbase reasons that once the district court denied its motion to compel arbitration and Coinbase appealed under § 16(a), the Divestiture Rule required a stay on the litigation pending the decision on appeal. See id. at 20.

Bielski counters that the Divestiture Rule is not the default rule and instead the district court has the power to grant a stay of proceedings at its own discretion. See Brief for Respondent, Abraham Bielski, at 17-18. Bielski contends that the applicable background law that acts as context to § 16(a) is the rule of discretionary stays, allowing the district court discretion to make the decision to grant a stay and that the Divestiture Rule is an exception to this rule is inapplicable in this case. Id. at 17-18, 24. Bielski clarifies that the language of Congressional statutes granting mandatory stays pending appeal offer the obligatory stay as the exception, not the rule. Id. at 20-22. Further, Bielski posits that the discretionary default is reflected in the judicial precedent pre-existing § 16, including at the Supreme Court level where, in Marrese v. American Academy of Orthopedic Surgeons, “Justice O’Connor wrote that…an interlocutory appeal [does not necessarily] ‘transfer jurisdiction [and authority] over the…case [from the district court] to the court of appeals.”’ Id. at 23. Moreover, Bielski argues that even if the Divestiture Rule were the applicable default rule, it would still only apply where the merits and subject of the appeal are inseparable, which is not the case here. Id. at 27-28. Bielski elaborates that “when a party appeals the denial of [a] motion to compel arbitration,” the subject of the appeal is limited to whether a dispute must be taken to arbitration, which involves an alternative avenue of resolving the case, and not the merits of the case, which is a separate issue. Id. at 28.

TRADITIONAL DISCRETIONARY TEST

Coinbase argues that the discretionary test for stays pending appeal does not displace the Divestiture Rule. Brief for Petitioner, at 45-46. Coinbase posits that the discretionary test offers inadequate protection for parties while their appeals of denials of motions to arbitrate are pending. Id. Coinbase clarifies that discretionary stays are inadequate on their own because, if they were sufficiently effective, there would be no need to require mandatory stays, which Congress has done in numerous statutes and which courts have done through the Divestiture Rule. Id. at 46. Moreover, Coinbase contends that the factors of the discretionary test systematically underestimate the burden on the party seeking the stay because courts do not consider the burden of continuing to litigate as an irreparable injury. Id. According to Coinbase, this is exactly the injury the party seeks to avoid by requesting a stay. Id. Further, Coinbase argues that district courts are unlikely to grant discretionary stays pending the appeal of a decision that the same district court made because the court is unlikely to think it erred. Id. at 47.

Bielski counters that the traditional discretionary test for stays of proceedings pending appeal does apply when a party appeals the denial of a motion to compel arbitration under § 16(a). Brief for Respondent, at 39. Bielski notes that “the traditional [discretionary] test [balances] four factors: (1) [the] likelihood of success on the merits, (2) the prospect of irreparable injury absent a stay, (3) the balance of the equities, and (4) the public interest.” Id. Bielski argues that this traditional balancing test allows courts to take into consideration the particular facts and circumstances in each case, which leads to flexible and individualized decision-making by the district court. Id. at 47. Bielski adds that this balancing test also includes ample “procedural protections for [parties attempting] to compel arbitration” because the greater the potential for harm, the more likely the balancing test will weigh in favor of granting a stay of proceedings. Id. According to Bielski, the discretionary balancing test is the default rule that compliments § 16(a), and it offers appropriate protections for parties while avoiding the rigid and non-bespoke nature of a required stay obligated by the Divestiture Rule. Id. at 47-48.

STATUTORY INTERPRETATION

Coinbase argues that the canons of statutory interpretation indicate that § 16(a) appeals require a mandatory stay of proceedings at the district court level because the structure of the FAA lends itself to a mandatory stay. Brief of Petitioner, at 27. Coinbase specifies that in allowing interlocutory appeals, § 16(a) creates an exception to the Final Judgment Rule, which requires a final decision before appeal, indicating that Congress believes that deciding whether arbitration is required is such an important question that it must be answered before the litigation can go forward. Id. at 27-29. Further, Coinbase posits that the structure of § 16 reflects a congressional policy to favor arbitration, a policy that would supports a mandatory stay of proceedings. Id. at 29-30. Coinbase argues that this policy favoring arbitration is evidenced by the fact that, while § 16(a) provides an unqualified right to an interlocutory appeal of an order denying a motion to compel arbitration, § 16(b) does not provide authority to appeal orders granting a motion to compel arbitration. Id. Moreover, Coinbase argues that not mandating a stay for § 16(a) appeals would make the FAA incongruous, since § 3 of the FAA includes a mandatory stay upon the request of a party when a motion to compel arbitration is granted. Id.

Bielski counters that statutory interpretation favors discretionary rather than mandatory stays in response to a § 16(a) appeal because of the plain meaning of the text. Brief for Respondent, at 9-10. Bielski contends that the actual text of § 16(a) allows for the immediate appeal of a denial of a motion to compel arbitration, but does not explicitly create an obligation for the district court to stay its proceedings. Id. According to Bielski, the absence of such a requirement on the face of the statute indicates that § 16(a) calls for discretionary stays rather than mandatory ones. Id. Moreover, Bielski argues that the explicit requirement of staying proceedings at the request of a party after granting a motion to compel arbitration in § 3 indicates that § 16(a) does not require mandatory stays. Id. at 10. Bielski clarifies that the mandatory stay provision of § 3 was in place before Congress enacted § 16, indicating that Congress knew how to make an explicit requirement of a stay of proceedings and specifically chose not to create such a requirement in § 16. Id. at 10-11. Further, Bielski points out that § 16 makes explicit reference to the mandatory stay of § 3 in § 16(a)(1)(A) and § 16(b)(1), indicating that Congress intended to not mandate an obligatory stay in other § 16(a) appeals, such as the appeal of a denial of a motion to compel arbitration. Id. at 11.

Discussion

JUDICIAL ECONOMY AND EFFICIENCY

Washington Legal Foundation (“WLF”), in support of Coinbase, asserts that the benefit of arbitration, its efficiency, cannot be realized unless litigation is stayed. Brief of Amicus Curiae Washington Legal Foundation, in Support of Petitioner at 10. WLF argues it is wasteful to proceed with discovery, motion practice, and trial in the face of an ultimately successful appeal. Id. at 11. Furthermore, WLF argues that discretionary stays would hurt and destabilize business relations. Id. at 17, 18. Similarly, the Chamber of Commerce and the NFIB Legal Center, in support of Coinbase, asserts that automatic stays pending appeal reduce duplicative and wasteful proceedings. Brief of Amici Curiae The Chamber of Commerce of the United States of America and the National Federation of Independent Business Small Business Legal Center, in Support of Petitioner at 22.

The Civil Justice Association of California, in support of Coinbase, argues for a mandatory stay because of a bright-line rule’s simplicity and administrability. Brief of Amicus Curiae Civil Justice Association of California, in Support of Petitioner at 18. Lastly, the Retail Litigation Center, in support of Coinbase, posits that discretionary stays cause a greater “clog” of questionable class actions in federal courts. Brief of Amicus Curiae Retail Litigation Center, in Support of Petitioner at 24. According to the Retail Litigation Center, the costs of litigation are ultimately passed onto consumers in the form of higher prices. Id. at 22.

In contrast, the American Association for Justice (“AAJ”), in support of Bielski, argues that automatic stays impair judicial economy. Brief of Amicus Curiae American Association for Justice, in Support of Respondent at 19. AAJ asserts that judicial economy is better served by giving district court judges discretion over their dockets. Id. Further, AAJ claims that discretionary stars are not inefficient because the district court may only continue with aspects of the case that were not appealed. Id. at 15. According to AAJ, automatic stays risk long delays in litigation. Id. at 18. AAJ asserts that discretion over whether to grant a stay of proceedings allows district courts to promote efficiency by allowing only certain proceedings to continue and protecting evidence that is at risk of being lost. Id.

Public Justice, in support of Bielski, posits that the discretionary stay approach allows district court judges to assess prejudice to all parties and the risk of claim preclusion. Brief of Amicus Curiae Public Justice, in Support of Respondent at 14. Moreover, Public Justice argues that the decision to stay proceedings pending appeal should be fact dependent. Id. at 7. The Constitutional Accountability Center, in support of Bielski, argues that some matters, or “pretrial proceedings,” can be litigated at the same time as an appeal to avoid “abusive delay[s].” Brief of Amicus Curiae Constitutional Accountability Center, in Support of Respondent at 14.

THE RIGHT TO ARBITRATE AND PRESSURE TO SETTLE

The National Retail Federation, in support of Coinbase, argues that discretionary stays give plaintiffs undue leverage in pressuring defendants to settle. Brief of Amicus Curiae National Retail Federation, in Support of Petitioner at 19. In particular, the National Retail Federation asserts that the high costs of litigation, followed by arbitration, will pressure defendants to settle regardless of the merits of the arbitrability question. Id. The National Retail Federation argues that, in effect, discretionary stays would prevent defendants from both exercising their right to arbitrate and receiving the substantive protections of the FAA. Id. at 9, 19. Likewise, the Chamber of Commerce and the NFIB Legal Center also assert that automatic stays discourage parties from trying to pursue arbitrable claims in federal court. Brief of The Chamber of Commerce and the NFIB Legal Center at 23.

In contrast, Public Justice, in support of Bielski, argues that the discretionary approach adequately upholds the FAA’s substantive protections and right to arbitrate. Brief of Public Justice at 14. Moreover, Public Justice asserts that an automatic stay would disadvantage “non-arbitrating parties in multi-party litigation and bind[] them to the timeline of an arbitration proceeding which they did not consent.” Id. at 13. Accordingly, Public Justice contends that ruling for Bielski would enable “districts courts…to grant stays that cover only the parties…that actually agreed to a contract containing a potentially applicable arbitration clause.” Id. at 14. In addition, Public Justice argues that discretionary stays can still allow for expedited proceedings even if a stay is not implemented. Id. at 15. According to Public Justice, this is because there is overlap in the preparation for arbitration and litigation regarding the merits of a case. Id. For instance, Public Justice contends that discovery in preparation for litigation can substitute for or advance the discovery process for arbitration. Id.