Ninth Circuit Reverses Dismissal in Coinbase Case, Reinforces Arbitration Requirements

Overview of the Case and Ruling

In a recent ruling in Woody v. Coinbase, U.S. Court of Appeals for the Ninth Circuit ruled in favor of Coinbase Global Inc. in a class action case exceeding $5 million. The ruling clarified the precedent set by the Supreme Court in Forrest v. Spizzirri, establishing that when a party requests a stay in a dispute subject to arbitration, the district court has no discretion to deny it. The Court of Appeals vacated a lower court's dismissal and mandated a stay pending arbitration. This case involved plaintiffs Dallas Woody and Peter Hrehorovich, who alleged claims against Coinbase Global, Inc., its subsidiary Coinbase, Inc., and CEO Brian Armstrong.

The plaintiffs accused Coinbase of failing to distribute certain digital currency units (DCUs) known as Songbird (SGB) and Flare (FLR), which were part of a promised airdrop for holders of XRP. They argued that Coinbase misled users into keeping their XRP on its platform by repeatedly affirming participation in the airdrop. The failure to deliver the airdropped tokens, which were distributed by Flare Network, formed the basis for claims of breach of fiduciary duty, conversion, and violations of California’s Unfair Competition Law. Complaint can be accessed here.

The district court originally compelled arbitration but dismissed the case, which the plaintiffs appealed. The Ninth Circuit ruled that under Section 3 of the Federal Arbitration Act (FAA), when a dispute is subject to arbitration, the court must issue a stay if requested by either party, rather than dismissing the case. This decision followed the Supreme Court's recent clarification that stays in arbitration cases are mandatory. As a result, the Ninth Circuit reversed the dismissal and remanded the case for the issuance of a stay pending arbitration. Ninth Circuit ruling can be accessed here.

Despite Coinbase’s failure to file a timely cross-appeal, the Ninth Circuit exercised its discretion to address the stay issue, emphasizing the importance of justice and noting that there would be no prejudice from correcting the error. The appellate court also declined to consider the plaintiffs' challenge to the arbitration order, as the FAA limits appeals of certain arbitration-related decisions until after the arbitration has concluded​.

A Victory for Coinbase

Although a dismissal would have been preferable, the Ninth Circuit’s decision still benefits Coinbase by enforcing its arbitration agreement, which was its original goal. The decision strengthens Coinbase’s position in future cases by clarifying the mandatory nature of stays under the FAA. This precedent benefits Coinbase by supporting its ability to enforce arbitration clauses in other consumer disputes. Moving the case to arbitration helps Coinbase avoid prolonged and public litigation, maintaining control over the customer dispute process. This ruling sets a favorable precedent for enforcing similar arbitration clauses in future cases, likely supporting Coinbase’s broader strategy to resolve disputes privately and efficiently.

The Power and Prevalence of Arbitration Clauses in General

The Federal Arbitration Act was originally designed to create a more efficient mechanism for resolving disputes, particularly within the business community. However, as Katherine Stone discusses in Arbitration: From Sacred Cow to Golden Calf, the scope of the FAA has expanded significantly since the 1980s due to judicial interpretations.[i] Today, arbitration clauses are commonly included in contracts across industries, from employment to financial services, often accompanied by class action waivers that further limit access to court litigation. Over 56% of American workers are now bound by such clauses, impacting their ability to pursue collective claims and justice​.

Arbitration's Double-Edged Nature

While arbitration can be quicker and less formal than traditional court processes, it is not without limitations, especially for individual plaintiffs and consumers. It is not always quicker either. Some of the critical drawbacks include:

1. Limited Discovery: Unlike court litigation, arbitration often offers fewer opportunities to gather evidence, making it harder for individuals to prove their claims.
2. Fewer Procedural Protections: Arbitrators are not bound by the same procedural safeguards as judges, which can disadvantage less powerful parties.
3. Lack of Transparency: Arbitration proceedings are typically private, meaning that broader issues of regulatory compliance or consumer protection may not come to light.
4. Costs: Plaintiffs are required to front the costs of arbitration unlike in a court proceeding and this can be a bar for plaintiffs in pursuing their claims.

Implications for Crypto and Fintech Clients

This ruling is particularly significant for clients involved in the cryptocurrency and financial technology sectors, where arbitration clauses are pervasive. Understanding how these clauses work and how they can limit court access can be crucial for businesses and consumers alike. For companies like Coinbase, these clauses can shield them from public litigation and lengthy court battles. For users, however, arbitration can restrict their ability to pursue claims fully, especially in cases that might involve broader regulatory or compliance issues.

Conclusion

The Ninth Circuit’s decision in Woody v. Coinbase underscores the importance of understanding arbitration clauses in financial services agreements. Most customer agreements between clients and brokerage firms and training platforms contain arbitration agreements, While arbitration can offer an efficient resolution path, it can also complicate access to justice and limit transparency. As legal frameworks around arbitration continue to evolve, it is essential for both businesses and consumers to navigate these clauses carefully.

If you would like to understand how arbitration clauses affect your rights or business strategies, please reach out to attorney R. Tamara de Silva for guidance.