Background

The Coinbase decision arose out of two conflicting contracts to which Coinbase users had to agree to participate in a sweepstakes that Coinbase was running for users of Coinbase’s cryptocurrency trading platform. The first contract was a user agreement that governed how customers used their Coinbase accounts (User Agreement). The second contract governed the terms of the sweepstakes contest that Coinbase was running, whereby user entrants could win cryptocurrency prizes (Sweepstakes Agreement).

The User Agreement contained an arbitration clause that had a delegation provision which provided that all disputes relating to the arbitration clause had to be “decided by an arbitrator and not by a court or judge.” Under the Court precedent, clear delegation provisions of that nature require arbitrators to decide arbitrability disputes, and not courts.

Unlike the User Agreement, the Sweepstakes Agreement did not contain an arbitration clause, but instead contained a judicial forum selection clause stating that disputes related to the Sweepstakes Agreement would be decided in California courts, which would have sole jurisdiction over those disputes.

Accordingly, while the User Agreement stated that disputes related to that agreement had to be arbitrated, and that disputes related to the arbitration clause itself also had to be arbitrated, the Sweepstakes Agreement said that disputes related to the sweepstakes could only be resolved in California courts.

After the sweepstakes concluded, a number of Coinbase users filed a class action lawsuit in a federal trial court in California, alleging a slew of violations that supposedly arose from the sweepstakes itself. In response, Coinbase moved to compel arbitration pursuant to the User Agreement and its arbitration clause. The users argued that they could not be compelled to arbitrate, because the Sweepstakes Agreement did not contain an arbitration clause, and Coinbase responded by arguing that the dispute was governed by the User Agreement’s arbitration clause, which required all threshold arbitrability questions to be decided by an arbitrator pursuant to the delegation provision.

The federal trial court rejected Coinbase’s arguments, denied the motion to compel, and retained judicial jurisdiction over the dispute. In rejecting the motion to compel, the trial court reasoned that: (1) the Sweepstakes Agreement controlled disputes that concerned the sweepstakes; (2) the judicial forum selection clause in the Sweepstakes Agreement superseded the arbitration clause found in the User Agreement; (3) the delegation provision found in the User Agreement’s arbitration clause was irrelevant, because the dispute was not arbitrable; and (4) the court was therefore entitled to decide all threshold jurisdictional issues.

U.S. Supreme Court holds that courts - not arbitrators - must resolve the conflict in those situations

Coinbase appealed the trial court decision to a federal appellate court, which upheld the trial court’s decision. Following that ruling, Coinbase appealed to the the Court, which unanimously decided that it is the court, not an arbitrator, who must determine whether a subsequent contract that conflicts with a prior one supersedes an earlier arbitration agreement with a delegation clause, especially when the claims arise from the contract that does not contain the arbitration clause.

In clear deference to party autonomy and the parties’ right to contract, the Court first asked, “what have these parties agreed to?” Slip op. at 4. Further, in deference to its longstanding rule that parties must only arbitrate those disputes they agreed to arbitrate, the Court then stated that “[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and unmistakabl[e] evidence that they did so.’” Slip op. at 5 (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986) (emphasis added)). The Court then agreed that because the later Sweepstakes Agreement contained a judicial forum selection clause, and the claims at issue arose out of the sweepstakes, the parties were not obligated to arbitrate those disputes. As the disputes were not subject to any arbitration provision, the court was not required to follow the delegation clause found in the User Agreement’s arbitration clause, which was a threshold issue the court was free to decide.

Notably, the Court rejected the argument that the Ninth Circuit should have severed the challenge to the delegation clause from the challenge to the arbitration provision under the same contract on grounds that the severability principle does not prevent parties from challenging both an arbitration provision and a delegation provision where, as here, a challenge applies equally to the whole contract.

The Court also rejected Coinbase’s argument that affirming the Ninth Circuit’s ruling will invite a flood of delegation clause challenges. The Court reiterated that the decision applies to instances where parties enter two contracts – one that sends disputes to arbitration, and another that either implicitly or explicitly sends disputes to the courts – and a court must determine which of those contracts governs.

Impact of the Coinbase decision

At first blush, Coinbase seems unremarkable, because it is a narrow ruling that addresses a fact-specific scenario about conflicting contract provisions. The Coinbase ruling is significant, however, because the issue of how to address conflicting jurisdictional provisions in related contracts frequently arises, and not just in consumer cases, but in complex cases as well. Accordingly, the clearest lesson the Coinbase decision teaches is that parties must be extremely clear about their intentions when drafting dispute resolution provisions and must ensure that those provisions are consistent across agreements.

The Coinbase decision does not, however, address how the Court might treat the “incorporation” rule, which broadly holds that parties have expressed a clear intent to have arbitrators – and not courts – decide threshold arbitrability issues where they contractually agree to arbitrate under rules that enshrine competence-competence. Every federal appellate court that has considered the issue has upheld the incorporation rule, and while there is no reason to assume that the Court would not do the same, obtaining a definitive answer will be difficult, as the Court procedural rules generally require appellate conflicts to take up issues. Accordingly, while parties can currently rely on the incorporation rule, those wishing for greater certitude should expressly state that the arbitrators are entitled to decide all issues of arbitrability.

Conclusion

The Coinbase decision reinforces the need to not only draft arbitration clauses clearly, but to ensure that related contracts are consistent, because if they are, U.S. courts will readily enforce them pursuant to their terms, particularly if that means immediately compelling arbitration. Accordingly, while parties that draft clear and consistent arbitration clauses can rely upon U.S. courts to enforce those decisions, they should be prepared for potential satellite litigation and unintended outcomes where they do not.

Client Alert 2024-121