Key takeaways
- For crypto asset platforms, establishing an enforceable arbitration clause in their terms of service is of paramount importance. Given that the number of user and collaborator disputes are on the rise in this asset class, platforms need a workable and predictable framework to resolve them.
- However, an arbitration agreement might be unenforceable where it is seen as not properly incorporated into the terms of service, or incompatible with local statute providing for litigation of such disputes.
- In this case, the Southern District of New York rejected both grounds put forth by a user of a crypto asset platform who sought to circumvent arbitration.
- The court found the arbitration agreement, within the terms of service linked on the platform’s sign-up page, was sufficiently conspicuous, and acknowledged the existence of legislation permitting class action litigation for securities claims.
- The case serves as a useful reminder to platform operators about the importance of fully incorporating terms of service into their platforms.
Facts
In 2020, the plaintiff (Hastings) opened three accounts with the crypto asset platform Nifty Gateway, managed by the defendants, Nifty Gateway LLC and the Gemini Trust Company (collectively Nifty).
At that time, the Nifty Gateway Terms & Conditions (Terms) contained an arbitration agreement requiring users to arbitrate disputes, including disputes concerning “any product sold or distributed through” the platform, with Nifty Gateway.
The agreement also contained a “delegation clause” expressly providing that the arbitrator shall have exclusive authority to determine the scope and enforceability of the arbitration agreement and resolve any dispute related to its interpretation, applicability, enforceability, formation and voidability.
The Terms were brought to the user’s attention in a modified “click wrap” agreement. The account creation page required prospective users to provide their name, email, username and password, and click a “Sign Up” button, to complete the account-creation process. Below this “Sign Up” button was a hyperlink to the Terms and a statement that “By signing up, you agree to the Term[s] and Conditions and Privacy Policy."
Between February and April 2021, Hastings purchased non-fungible tokens (NFTs) from Nifty Gateway. There followed the well-publicised market crash in which the value of crypto assets fell dramatically. In December 2022, Hastings brought a putative class action against Nifty, alleging that Nifty Gateway violated federal securities law by selling NFTs on its platform.
In March 2023, Nifty moved to compel arbitration and stay the action pending the outcome of arbitration under the Federal Arbitration Act.
Decision
Judge Torres in the U.S. District Court for the Southern District of New York granted the motion compelling arbitration.
The court considered four issues: first, whether a valid contract was formed; second, whether this had given rise to a binding contract between the parties; third, whether Nifty had delegated to an arbitrator the question of arbitrability; and fourth, whether the motion should be denied based on Congress’s intent that such questions should be litigated, as expressed in the Private Securities Litigation Reform Act (PSLRA).
On the first question, the court found that Nifty had satisfied its burden to produce proof of the arbitration agreement. Nifty had provided a declaration from its chief technology officer, who had reviewed Nifty Gateway’s source code dating back to February 2020, and testified on that basis as to what users, including Hastings, saw and could do at the relevant time.
On the second question, the court found the agreement constituted a binding contract between the parties. The test was whether Nifty Gateway’s account creation page contained “reasonably conspicuous” notice of the arbitration agreement, which the court found it did. The hyperlink to the Terms was sufficiently clear and the arbitration agreement itself was sufficiently prominent within the Terms themselves. Hastings had unambiguously assented when creating his three Nifty Gateway accounts.
On the third question, the court found that the parties had clearly and unmistakably agreed to delegate to an arbitrator the issue of arbitrability, and that the delegation clause clearly and unmistakably provided for the exclusive authority of the arbitrator.
Finally, on the fourth question, the court denied Hastings’ argument that the motion to compel ought to be dismissed as contrary to Congress’s intent in enacting the PSLRA in order to guarantee investors “the ability to litigate securities claims on a classwide basis in federal court”. As the PSLRA does not mention arbitration, the court declined to intuit a statutory preemption over the parties’ agreement where one did not explicitly exist.
Conclusion
Crypto asset platforms frequently incorporate arbitration agreements into their terms of service as a means of providing themselves and users with a mechanism for resolving disputes that is flexible, confidential and independent. These agreements serve to establish a structured process outside of traditional court systems, aiming to streamline conflict resolution within the platform’s ecosystem.
However, the effectiveness of these arbitration agreements can be challenged, as evidenced by the scenario outlined in this case. Despite the presence of such agreements, there is a possibility that local courts may refuse to honour them, potentially leading to legal complications, expense and uncertainty for platform operators and users alike.
To mitigate this risk and ensure a smoother dispute resolution process, crypto asset platforms should proactively take steps to establish a robust and predictable framework for handling conflicts. This involves not only implementing arbitration agreements but also ensuring that the terms of service containing these agreements are fully integrated and easily accessible within the platform. By doing so, platform operators can ensure a more predictable and cost-effective dispute resolution process.
Client Alert 2024-070