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U.S. Supreme Court Decides Coinbase II and Promulgates a New Arbitrability Rule Applicable to Multiple, Conflicting Contracts

June 11th, 2024 Application to Compel Arbitration, Application to Stay Litigation, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Challenging Arbitration Agreements, Clear and Unmistakable Rule, Enforcing Arbitration Agreements, Equal Footing Principle, Existence of Arbitration Agreement, FAA Chapter 1, FAA Section 2, Federal Arbitration Act Enforcement Litigation Procedure, First Options Reverse Presumption of Arbitrability, First Principle - Consent not Coercion, Forum Selection Agreements, Gateway Disputes, Gateway Questions, International Institute for Conflict Prevention and Resolution (CPR), Motion to Compel Arbitration, Professor Angela Downes, Richard D. Faulkner, Russ Bleemer, Section 2, Separability, Severability, Substantive Arbitrability, United States Court of Appeals for the Ninth Circuit, United States Supreme Court 1 Comment » By Philip J. Loree Jr.

Introduction

 

Coinbase II - Dogecoin Photo

Coinbase, Inc. v. Suski, 602 U.S. ___ (2024) (“Coinbase II”), which the U.S. Supreme Court (“SCOTUS”) decided on May 23, 2024, was the last of the three arbitration-law cases SCOTUS heard and decided this 2023 Term. Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of the International Institute for Conflict Prevention and Resolution (CPR) (“CPR Alternatives”), recently interviewed University of North Texas-Dallas College of Law Professor Angela Downes; arbitrator, mediator, arbitration-law attorney, and former judge, Richard D. Faulkner; and the author about Coinbase II, and the other two cases, Bissonnette v. LePage Bakeries Park St.LLC, 601 U.S. 246 (2024), and Smith v. Spizzirri, 601 U.S. ___ (2024). (See posts here and interview here.) Russ also interviewed Angela, Rick, and the author about Coinbase II back when SCOTUS granted certiorari to hear it, an interview you can view here (see also post, here).

Coinbase II concerned the allocation of power between courts and arbitrators in a situation in which agreements with conflicting dispute-resolution provisions cover or appear to cover some or all of the same, disputed subject matter. The general principles and rules of arbitrability, as applied to the facts,  did not clearly answer the question of who gets to decide whether the parties’ merits dispute was arbitrable, and so the Court created a new rule of arbitrability: “where. . . parties have agreed to two contracts—one sending arbitrability disputes to arbitration and the other either explicitly or implicitly sending arbitrability disputes to the courts—a court must decide which contract governs.” Coinbase II, slip op. at 8. Applying the new rule to the facts, the Court concluded “that a court, not an arbitrator must decide whether the [Coinbase II] parties’ first agreement was superseded by their second.” Slip op. at 8.

Coinbase II: Background

Petitioner Coinbase, Inc. (“Coinbase”) is a cryptocurrency exchange platform and David Suski and other respondents are Coinbase users, who have Coinbase accounts.

There are two contracts at issue. The first is the Coinbase User Agreement (the “User Agreement”), which contains what the User Agreement calls the “Arbitration Agreement.” The Arbitration Agreement contains a delegation provision (the “Delegation Provision”), which, like other such provisions, delegates arbitrability disputes to an arbitrator:

This Arbitration Agreement includes, without limitation, disputes arising out of or related to the interpretation or application of the Arbitration Agreement, including the enforceability, revocability, scope, or validity of the Arbitration Agreement or any portion of the Arbitration Agreement. All such matters shall be decided by an arbitrator and not by a court or judge.

Slip op. at 2 (emphasis added by Court)

The Court said it would not of heard the case were the User Agreement the only contract at issue because “the Arbitration Agreement quite clearly sends to arbitration disputes between Coinbase and its users, including disputes about arbitrability.” Slip op. at 2.

But the parties also entered into an additional contract, a Coinbase-sponsored sweepstakes for a chance to win Dogecoin cryptocurrency. By entering into the sweepstakes they bound themselves to follow the sweepstakes “Official Rules.”

This second contract, the Official Rules, had no arbitration clause, and instead contained a forum selection clause that provided for resolution of disputes by California-based courts:

The California courts (state and federal) shall have sole jurisdiction of any controversies regarding the [sweepstakes] promotion and the laws of the state of California shall govern the promotion. Each entrant waives any and all objections to jurisdiction and venue in those courts for any reason and hereby submits to the jurisdiction of those courts.

After conclusion of the sweepstakes, the Respondents filed a lawsuit in the United States District Court for the Northern District of California, alleging violations of California’s False Advertising Law, Unfair Competition Law, and Consumer Legal Remedies Act. Coinbase responded with a motion to compel arbitration, citing the Arbitration Agreement contained in the User Agreement, including the Delegation Provision.

The district court denied the motion to compel, reasoning “that deciding which contract governed was a question for the court; that the User Agreement’s arbitration provision conflicted with the forum selection clause in the Official Rules; and that, under California contract law, the Official Rules superseded the User Agreement.” Slip op. at 3. The district court concluded “that the Official Rules’ forum selection clause controlled, so the parties’ sweepstakes-related dispute was not subject to arbitration.” Slip op. at 3.

An appeal followed and the Ninth Circuit affirmed. The Court “granted certiorari to answer the question of who—a judge or an arbitrator—should decide whether a subsequent contract supersedes an earlier arbitration agreement that contains a delegation clause.” Slip op. at 3 (citation omitted).

Coinbase II: Discussion

The Court began its analysis by invoking arbitration’s “first principle,” that is, “[a]rbitration is simply a matter of consent.” Slip op. at 4 (citations and quotations omitted). As in “any arbitration dispute,” said the Court, “the first question” “must be: What have these parties agreed to?” Slip op. at 4.

Multiple Levels of Agreements and Three Orders of Disputes

 To answer that question the Court explained that “parties can form multiple levels of agreements concerning arbitration.” Slip op. at 4. The “basic level” is an agreement to arbitrate the merits of the parties’ dispute. On another level,  parties can “‘agree. . . that an arbitrator, rather than a court, will resolve threshold arbitrability questions as well as underlying merits disputes.” Slip op. at 4 (quoting Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. 63, 65 (2019)).

An agreement to submit arbitrability disputes to arbitration, i.e., a delegation agreement, “‘is’” said the Court, “‘simply an additional antecedent agreement. . . . and the FAA operates on this additional agreement just as it does any other.’” Slip op. at 4 (quoting Rent-a-Center, West, Inc. v. Jackson, 561 U.S. 63, 70 (2010)).

The existence of these two different types of agreements —i.e., an agreement to arbitrate the merits of the parties’ disputes versus an agreement to arbitrate not only the merits but also arbitrability—generates “different kinds of disputes.” Slip op. at 4-5.

The Court proceeded to discuss three types of arbitrability disputes, each of which was referred to in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-43 (1995). A “first-order” dispute, the Court explained, is one about the merits, “the resolution of which depends on the applicable law and relevant facts.” Slip op. at 5.

A “second-order” dispute is whether the parties’ merits dispute is arbitrable, i.e., “‘whether they agreed to arbitrate the merits’. . . .” Slip op. at 5 (quoting First Options, 514 U.S. at 942.)

A “third-order” dispute is “‘who should have the primary power to decide the second matter[,]’” i.e., who, as between court and arbitrator, gets to decide arbitrability questions. Slip op. at 5 (quoting First Options, 514 U.S. at 942).

Like first-order disputes, second- and third-order disputes are “matters of consent[,]” which “‘turn[] upon what the parties agreed about [those] matter[s].’” Slip op. at 5 (quoting First Options, 514 U.S. at 943) (emphasis deleted)).

The Court explained that the reason for differentiating between first-order (merits) and second-order (arbitrability) disputes arises from the presumption that courts, not arbitrators, decide arbitrability disputes. Parties who have not agreed to arbitrate a dispute are generally entitled to a judicial resolution of the dispute, the Court explained. See slip op. at 5. In the case of an agreement to arbitrate arbitrability, SCOTUS accordingly requires courts to determine whether “there is clear and unmistakable evidence that” the parties agreed to submit questions of arbitrability to arbitration. Slip op. at 5 (citations and quotations omitted). “‘[B]efore referring a dispute to arbitrator,’” including a dispute over arbitrability, “‘the court [thus] determines whether a valid arbitration agreement exists.’” Slip op. at 5 (quoting Henry Schein, 586 U.S. at 69).

Coinbase II: A Fourth-Order Dispute

After reviewing the three “layers of arbitration disputes”—merits, arbitrability, and who decides arbitrability—the Court said that “[t]his case involves a fourth: What happens if parties have multiple agreements that conflict as to the third-order question of who decides arbitrability?” Slip op. at 5. The answer to this question, the Court explained, also turns on “traditional contract principles. . . .” Slip op. At 5.

Coinbase’s position, said the Court, was that “the User Agreement’s delegation clause controls.” Slip op. at 5-6. The Respondents argued that the “Official Rule’s forum selection clause superseded” the User Agreement’s delegation provision. Slip op. at 6.

“If,” explained the Court, “the User Agreement’s delegation clause was meant to govern all agreements moving forward, then the parties agreed to arbitrate all subsequent arbitrability disputes.” Slip op. at 6. But if, as Respondents argued, “the Official Rules’ forum selection clause superseded the User Agreement’s delegation clause, then the parties meant to send sweepstakes disputes—including those over arbitrability—to California courts.” Slip op. at 6.

Therefore, explained the Court, “the question whether these parties agreed to arbitrate arbitrability can be answered only by determining which contract applies[,]” that is, “the substance of the parties’ supersession dispute is whether there is an agreement to arbitrate.” Slip op. at 6 (citation and quotation omitted).

Focusing in on the conflict between the forum selection and delegation clauses, the question concerns whether the parties agreed to arbitrate a dispute, a question that “must be answered by a court.” Slip op. at 6.

Court Nixes Coinbase’s Arguments

The Court rejected Coinbase’s arguments for revisiting the “Ninth Circuit’s bottom-line conclusion.” Slip op. at 6. The first was Coinbase’s argument based on the doctrine of “severability” (a/k/a separability).

Under that doctrine, “‘an arbitration [or delegation] provision is severable from the remainder of the contract,’” and “‘unless the challenge is to the arbitration [or delegation] clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.’” Slip op. at 6-7 (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-446 (2006); parenthetical material added by Court).

According to Coinbase, the “Ninth Circuit should have isolated the User Agreement’s delegation provision and considered only arguments specific to  that provision.” Slip op. at 7.

The Court addressed and rejected this argument by assuming without deciding that the severability doctrine was in play. The Court acknowledged that “the severability principle establishes that a party seeking to avoid arbitration must directly challenge the arbitration or delegation clause, not just the contract as a whole.” Slip op. at 7. But that does not mean a party must direct its challenge solely to the delegation or arbitration clause. Slip op. at 7. Courts are required to decide challenges that apply equally to both the container contract and the arbitration or delegation agreement. Slip op. at 7 (citing Rent-a-Center, 561 U.S. at 71).

“Arbitration and delegation agreements[,]” explained the Court, “are simply contracts, and, normally, if a party says that a contract is invalid, the court must address that argument before deciding the merits of the contract dispute. So too here.” Quoting Rent-a-Center, the Court said “‘[i]f a party challenges the validity. . . of the precise agreement to arbitrate at issue, the federal court must consider the challenge before ordering compliance with that [arbitration] agreement.’” Slip op. at 7 (quoting Rent-a-Center, 561 U.S. at 71; emphasis added by Court).

The Court rejected Respondent’s California-law-based argument that the Ninth Circuit erred by holding that the forum selection provision superseded the delegation agreement. Slip op. at 7-8. The Court declined to consider that argument because it was “outside the scope of the question presented.” Slip op. at 8. The Court said it “took this case to decide whether, under the FAA, a court or an arbitrator decides which of the two contractual provisions controls[,]” not “to consider auxiliary questions” concerning the application of state law. Slip op. at 8.

Finally, the Court rejected the argument that its decision “invite[s] chaos” by “facilitating” delegation-clause challenges. The Court explained that in a case where the parties have entered into a single contract containing arbitration and delegation provisions all disputes about arbitrability will be sent to arbitration. Slip at 8. It is only “where. . . parties have agreed to two contracts—one sending arbitrability disputes to arbitration, and the other either explicitly or implicitly sending arbitrability disputes to the courts—a court must decide which contract governs.” Slip op. at 8; emphasis in original.

A different approach, the Court explained, would “impermissibly elevate [a delegation provision] over other forms of contract.” Slip op. at 8 (citing and quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967); citation omitted; cleaned up).

Justice Gorsuch’s Concurring Opinion

Associate Justice Neil M. Gorsuch wrote a concurring opinion emphasizing the Court’s opinion “recognizes—and stresses—that arbitration is a matter of contract and parties can agree by contract that an arbitrator, rather than a court will resolve threshold arbitrability questions as well as underlying merits disputes.” Coinbase II (Gorsuch, J. concurring) (“Gorsuch Concurrence”), slip op. at 2 (citations and quotations omitted). The Court’s opinion, Justice Gorsuch said, “does not endorse the reasoning” of the Ninth Circuit, “let alone its state contract law analysis of the parties’ agreements.” Id. It merely “reaffirms well-established principles about the primacy of the parties’ agreements when it comes to arbitration, and the Ninth Circuit’s ‘bottom-line conclusion’ that a court had to decide whether and to what extent the parties” agreed to arbitrate arbitrability. Id.

To illustrate his understanding of the limited scope of the opinion, he posited a hypothetical delegation provision that he said would likely require a court to conclude that the delegation agreement, not the forum selection clause, governed:

Sometimes, a court may conclude that the parties’ agreements are best read as leaving for the court the task of resolving the arbitrability of the dispute at hand. But sometimes, the parties’ agreements may be best read as vesting that power in an arbitrator. Just imagine a master contract providing that ‘all disputes arising out of or related to this or future agreements between the parties, including questions concerning whether a dispute should be routed to arbitration, shall be decided by an arbitrator.’ Absent some later amendment, a provision like that would seem to require a court to step aside.

Slip op. at 1-2 (citations omitted).

Some Takeaways. . . .

Identifying what outcome made the most sense in Coinbase II was not particularly difficult but charting to that outcome an analytical path most in line with the FAA was a challenge. That is why the author thinks the Court opted to resolve the case by creating a new FAA arbitrability rule rather than arriving at its conclusion solely by interpreting and extrapolating on the rules articulated in First Options and Rent-a-Center. The Court’s approach, the author thinks, makes good sense, and will probably aid in resolution of future disputes involving multiple agreements where at least one is or contains a delegation agreement.

The same conclusion could have been reached under the First Options but some difficult questions would have had to be addressed, and it is unclear whether the resulting decision would have provided the kind of clear—and preferably simple—guidance that is required to reduce meaningfully the frequency of FAA litigation in multi-agreement disputes involving a delegation provision.

For example, consistent with Rent-a-Center, a delegation provision is a separate, antecedent agreement to arbitrate arbitrability.  561 U.S. at 70. Consistent with that framework, one could argue the delegation provision is a standalone agreement, with no relation to the forum selection provision in the Official Rules.

That antecedent agreement, the argument would go, clearly and unmistakably authorizes an arbitrator to determine whether the parties agreed to arbitrate disputes arising out of their sweepstakes-related dispute, without regard to the existence of the conflicting, forum selection provision. That forum selection provision would be deemed to be a consideration relevant only to the arbitrator’s decision on the merits of the arbitrability question, and to have no bearing on the question whether the parties clearly and unmistakably agreed to arbitrate arbitrability. No consideration would be given to whether the existence of the forum selection provision either displaced the delegation provision or rendered the scope or application of the delegation provision unclear.

A counter-argument, and one that would ensure a judicial resolution of the arbitrability dispute would be that: (a) the court must determine whether the parties clearly and unmistakably agreed to arbitrate arbitrability; and (b) the existence of the conflicting dispute resolution provisions in the User Agreement and the Official Rules precludes any finding that the parties clearly and unmistakably agreed to arbitrate that dispute.

From an analytical perspective, this approach is closely related to the one the Court adopted in Coinbase II, except that the Court took a helpful step further and created a more-or-less bright-line rule that could be applied to future cases involving multiple agreements containing conflicting dispute resolution clauses. Otherwise, courts would have to perform a potentially complex “clear and unmistakable” analysis anew each time a case arose involving multiple conflicting agreements and one or more delegation provisions.

An additional takeaway can be derived from Associate Justice Gorsuch’s concurring opinion. The hypothetical arbitration and delegation provision Justice Gorsuch discussed provided that it would apply to “all disputes arising out of or related to this or future agreements between the parties. . . .”

For all intents and purposes this hypothetical would constitute what Professor David Horton has referred to as an “infinite arbitration clause,” i.e., an agreement to “mandate arbitration for all disputes between any related party in perpetuity.” David Horton, Infinite Arbitration Clauses, 168 U. Pa. L. Rev. 633, 633 (2019-2020). That is all the more so because the hypothetical clause is not only an agreement to arbitrate merits issues, but also a delegation provision.

Professor Horton thoroughly discusses the problems associated with “infinite arbitration clauses,” their coupling with delegation provisions, and the challenges such infinite arbitration agreements present to the Courts. See id. While those problems are outside the scope of this post, it would not surprise the author if companies begin to draft arbitration and delegation provisions along the lines of (and perhaps even broader than) Justice Gorsuch’s proposed clause.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, or  arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related, and other, matters.

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 Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

 

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One Response to “U.S. Supreme Court Decides Coinbase II and Promulgates a New Arbitrability Rule Applicable to Multiple, Conflicting Contracts”

  1. […] agreed to arbitrate the disputes at issue. (For information concerning arbitrability, see  here, here, and […]