In re BAM Trading Services Inc. Securities Litigation

Background

Jeffrey Lockhart brought a proposed securities class action against BAM Trading Services Inc. and its CEO, Brian Shroder, after the May 2022 collapse of UST, an algorithmic stablecoin. The complaint alleged violations of state and federal securities laws. Lockhart began using BAM’s platform in December 2020 and first purchased UST through the platform in April 2022.

To use BAM’s platform, users had to indicate consent to BAM’s Terms of Use. The October 2020 Terms of Use applied when Lockhart opened his account. They included a class-action waiver and an arbitration provision requiring disputes arising from or relating to the Terms of Use to be resolved through individual binding arbitration. The provision stated that arbitration would be conducted under the rules of the American Arbitration Association (AAA).

Defendants moved to compel arbitration. After considering briefing, oral argument, and supplemental briefing following relevant Ninth Circuit decisions, the court granted the motion.

Agreement to Arbitrate

At oral argument, Lockhart agreed that Defendants had provided sufficient evidence that he consented to the October 2020 Terms of Use. The court therefore found that the parties formed an agreement to arbitrate.

Who Decides Arbitrability

The court explained that questions about “arbitrability”—whether a valid arbitration agreement exists and whether it covers a particular dispute—normally belong to the court. The parties may instead assign those questions to an arbitrator if they clearly and unmistakably agree to do so.

The arbitration provision incorporated the AAA rules. Relying on Ninth Circuit precedent and decisions from other courts, the court held that this incorporation clearly and unmistakably assigned arbitrability questions to the arbitrator. The court rejected Lockhart’s arguments that the provision was unclear because the Terms of Use did not attach the AAA rules or identify a particular set of AAA rules. The court also rejected the argument that incorporation of the rules could not delegate arbitrability because Lockhart was an unsophisticated consumer. The court noted that Lockhart had described himself as an experienced cryptocurrency investor and had alleged significant UST purchases, but its ruling stated more broadly that incorporation of the AAA rules could establish delegation regardless of the parties’ sophistication.

Unconscionability

The court then considered whether the delegation provision was unconscionable under California law. Unconscionability generally requires both procedural unfairness—such as oppression or surprise in how the contract was made—and substantive unfairness, meaning overly harsh or one-sided terms. California applies a sliding scale between the two.

The court found only a low degree of procedural unconscionability. It treated the online Terms of Use as an adhesive, or take-it-or-leave-it, contract, but found that the pre-arbitration complaint process was not mandatory and was not unusually burdensome. The court also held that the failure to attach the AAA rules or identify a particular version did not itself establish procedural unconscionability.

The court rejected Lockhart’s substantive-unconscionability arguments concerning lack of mutuality, the pre-arbitration process, unilateral modification of the Terms of Use, arbitration costs, and the limitation-of-liability provision. It held that the AAA rules and fee schedule governed arbitration costs. Under the AAA Consumer Rules Fee Schedule discussed by the court, the only fee Lockhart would bear was a $205 filing fee, which was less than the court filing fee identified in the opinion. The court also held that Lockhart had not shown how the limitation-of-liability provision made the separate delegation provision unconscionable. Because Lockhart showed at most low procedural unconscionability and did not show the required level of substantive unconscionability, the delegation provision remained enforceable.

Brian Shroder’s Ability to Invoke the Agreement

Brian Shroder was not a party to the Terms of Use. The court nevertheless held that he could invoke the arbitration agreement as to the claims against him.

Under an agency theory, the court held that an agent may enforce an arbitration agreement signed by the agent’s principal when the claims arise from the agreement. The court relied on Lockhart’s allegations that Shroder was a control person over Binance U.S., had authority to direct its management and activities, and participated in or aided the alleged securities-law violations. The court found that the claims against Shroder were connected to the Terms of Use because they involved BAM’s alleged operation of exchanges, UST sales, and transaction fees governed by those Terms.

The court also held, alternatively, that equitable estoppel applied. That doctrine can prevent a party from relying on a contract’s benefits while avoiding its arbitration requirement. The court found that Lockhart’s claims against Shroder relied on and were intertwined with the Terms of Use because the transactions and transaction fees at issue occurred under those Terms.

Stay and Disposition

Because all claims were subject to arbitration, Defendants argued that the case should be dismissed rather than stayed. The court exercised its discretion to stay the action pending arbitration.

Judge Jacquelyn Scott Corley ordered that Defendants’ motion to compel arbitration, Docket No. 40, was granted. The action was stayed pending arbitration, and the parties were ordered to jointly update the court in writing about the arbitration’s status by December 1, 2024.