Pearl v. Coinbase Global, Inc.

Background

Coinbase operates a website through which customers can buy and sell digital assets. Before using Coinbase’s platform or services, prospective users must create an account and agree to Coinbase’s User Agreement and Privacy Policy.

The plaintiffs were Coinbase customers who invested in TerraUSD. They alleged that Coinbase misled consumers by promoting and categorizing TerraUSD as a “stablecoin” pegged to the United States dollar at a one-to-one rate, even though TerraUSD was not backed by actual United States dollars or other tangible assets held in reserve. They alleged that misrepresentations and omissions about TerraUSD’s stability and lack of collateralization caused them losses when the currency collapsed.

The plaintiffs asserted six state-law claims, individually and on behalf of a proposed class: negligence, negligence per se, negligent misrepresentation, violations of California’s Unfair Competition Law, violations of California’s False Advertising Law, and violations of California’s Consumer Legal Remedies Act.

Motion to Compel Arbitration

Coinbase moved to compel arbitration and stay the lawsuit while arbitration proceeded. The Federal Arbitration Act generally requires courts to enforce valid arbitration agreements. Courts ordinarily decide whether an arbitration agreement exists and covers the dispute, but the parties may clearly and unmistakably agree to assign those threshold questions to an arbitrator.

The arbitration agreement appeared in Appendix 5 to Coinbase’s 2022 User Agreement. It stated that disputes relating to the plaintiffs’ access to or use of Coinbase’s services, the Coinbase website, products, or the User Agreement would be resolved through binding arbitration rather than in court. The agreement also included exceptions for certain small-claims and intellectual-property lawsuits.

A separate “Authority of the Arbitrator” provision gave the arbitrator exclusive authority to resolve disputes about the arbitration agreement’s interpretation, enforceability, revocability, scope, and validity. It listed four exceptions involving the class-relief waiver, arbitration-fee disputes, conditions required before arbitration, and which version of the arbitration agreement applied.

Delegation Provision

The court held that the delegation provision clearly and unmistakably assigned arbitrability questions to the arbitrator. The court relied on the provision’s language giving the arbitrator exclusive authority over disputes concerning the arbitration agreement’s enforceability, scope, and validity. The agreement’s incorporation of American Arbitration Association rules also supported that conclusion because those rules assign arbitrability questions to the arbitrator.

The plaintiffs argued that the number and complexity of the delegation provision’s exceptions made it ambiguous. The court rejected that argument. It concluded that the agreement’s exceptions were distinguishable and did not create a conflict that prevented the delegation provision from being understood.

Unconscionability

The plaintiffs argued that the delegation provision was procedurally and substantively unconscionable. Procedural unconscionability concerns oppression or surprise, such as unequal bargaining power, lack of meaningful choice, or hidden contract terms. Substantive unconscionability concerns terms that are excessively harsh or one-sided.

The court found, at most, a minimal degree of procedural unconscionability. It recognized that the User Agreement was presented on a take-it-or-leave-it basis and that Coinbase had greater bargaining power. But the record did not show that Coinbase was the plaintiffs’ only option for cryptocurrency services. The court also noted that Coinbase notified users of the User Agreement update, directed them to review and accept the updated terms, and sent an email identifying changes to the arbitration agreement. The delegation provision was labeled “Authority of the Arbitrator” in bold print.

The court rejected the plaintiffs’ substantive-unconscionability arguments concerning the provisions allowing either party to have a court decide certain arbitration-fee and pre-arbitration-condition disputes. The court found nothing unfairly one-sided about giving both parties equal access to a court for those issues, even if one party might be more likely to use that access. The court also stated that challenges directed at the arbitration agreement as a whole, rather than specifically at the delegation provision, must be decided by the arbitrator.

Whether the Exceptions Applied

The plaintiffs argued that their challenges to the agreement’s batch-arbitration and formal-complaint provisions fell within exceptions that reserved certain issues for a court. The court held that whether those challenges were actually carved out of the delegation provision was itself a question about the provision’s scope. Under the agreement’s language, that question belonged to the arbitrator.

Disposition

The court concluded that the plaintiffs had not shown that the delegation provision was unenforceable or that their unconscionability challenges were proper for resolution by the court at that stage. The court granted Coinbase’s motion to compel arbitration and stayed the action pending completion of arbitration. The opinion did not decide the merits of the plaintiffs’ allegations concerning TerraUSD or Coinbase’s conduct.