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October 24, 2022

Stroock Client Alert

By: Stephen J. Newman, Ali Fesharaki

Plaintiff David Suski filed a proposed class action against Coinbase and a marketing firm it hired, Marden-Kane, based on claims that the cryptocurrency exchange’s marketing for a sweepstakes deceived customers. The lawsuit—which is pending in the U.S. District Court for the Northern District of California—concerns the “Dogecoin Sweepstakes” Coinbase launched last summer, which offered prizes worth up to $1.2 million in Dogecoin, or DOGE (the popular cryptocurrency named after an Internet meme). The class-action complaint alleges that Coinbase and Marden-Kane designed the sweepstakes’ marketing materials to mislead and confuse Coinbase users as to whether they could participate in the Dogecoin Sweepstakes for free, making them believe they had to buy or sell at least $100 in Dogecoin to enter, even though they could enter also by mailing in an index card with their name, contact information and date of birth. The proposed class of Coinbase users assert claims against Coinbase and its marketing firm for violations of California’s False Advertising Law, Cal. Bus. & Prof. Code § 17500, et seq. (“FAL”), California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200, et seq. (“UCL”) and California’s Consumer Legal Remedies Act, Cal. Civ. Code §1750, et seq. (“CLRA”).

Coinbase and Marden-Kane challenged the class complaint by moving the district court (i) to compel individual arbitration per the arbitration clause in the Coinbase User Agreement or, alternatively, (2) to dismiss the complaint for failure to state a claim. The district court denied Coinbase’s motion to compel arbitration under its User Agreement because the terms and conditions of the Dogecoin Sweepstakes—which users agreed to after opening Coinbase accounts—contained a forum selection clause designating California courts as the exclusive forum for all sweepstake-related disputes and therefore conflicted with the arbitration clause in the User Agreement. The court determined that the terms of the subsequent sweepstakes contract control such that the forum selection clause supersedes the arbitration clause in the User Agreement. The district court denied Marden-Kane’s arbitration motion as well, holding that the marketing firm was not a party to the Coinbase User Agreement and therefore could not enforce its arbitration provision.

Although it allowed the case to remain in court, the district court did partially grant the motion to dismiss and trimmed the claims that could proceed. Of note, the district court dismissed Plaintiff’s claim under the CLRA, which prohibits certain “unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer.” Given the CLRA’s definition of goods—“tangible chattels bought or leased for use primarily for personal, family, or household purposes”—and services—“work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods”—the district court concluded that DOGE is an “intangible good” outside the scope of the CLRA (similar to life insurance contracts and mortgage loans) and that Coinbase’s facilitation of trading in cryptocurrency was an “ancillary” service related to the cryptocurrency itself (similar to the ancillary services associated with servicing home loans).

Coinbase thereafter appealed the order denying its arbitration motion and requested a stay of the district court proceedings pending the appeal. The district court denied Coinbase’s stay request, reasoning that Coinbase was unlikely to prevail on appeal. Coinbase then asked the Ninth Circuit Court of Appeal to reconsider its requested stay of the district court proceedings and to adopt the automatic stay followed by the Third, Fourth, Seventh, Tenth, Eleventh and D.C. Circuits. In the Ninth, Second and Fifth Circuits, district court litigation is not automatically stayed pending a nonfrivolous appeal on arbitrability (though, a district court may still order a discretionary stay ). The Ninth Circuit rejected Coinbase’s request, prompting Coinbase’s petition to the U.S. Supreme Court to resolve the 6-3 Circuit split over whether appealing an order denying arbitration divests the district court of jurisdiction such that the district court proceedings must be stayed pending appeal.

The issue of whether litigation should automatically be stayed pending appeal of an arbitration denial is particularly of interest to class action litigants. For defendants, absent a stay, businesses denied arbitration in putative class actions are forced to incur significant expense on class discovery, class certification briefing and experts as they appeal the arbitration denial—only to have this time and money wasted if the appeal is successful and the case is ordered to individual arbitration. Coinbase argues that the approach adopted by the minority Circuits (including the Second and Ninth Circuits, which have relatively active class action dockets) effectively nullifies arbitration agreements during the duration of the appeal and deprives businesses of the benefits thereof—namely, an inexpensive and expeditious means of resolving individual disputes. Plaintiffs, on the other hand, may be disadvantaged by the automatic stay as they would be forced to hold off on pursuing their claims as they wait for a decision on the arbitration appeal (which can sometimes take more than a year). Plaintiffs opposing the automatic stay argue that delay risks subjecting them to loss of witnesses and tangible evidence.

Plaintiff Suski’s response to Coinbase’s petition is due by October 31, 2022. The issues presented in this case are important to businesses and consumers generally, not simply those engaged in crypto transactions, and we will continue to monitor it for new developments.

The case is Suski et al. v. Coinbase Inc. et al., Case No. 3:21-cv-04539, U.S. District Court for the Northern District of California.

October 24, 2022

Stroock Client Alert

By: Stephen J. Newman, Ali Fesharaki

Plaintiff David Suski filed a proposed class action against Coinbase and a marketing firm it hired, Marden-Kane, based on claims that the cryptocurrency exchange’s marketing for a sweepstakes deceived customers. The lawsuit—which is pending in the U.S. District Court for the Northern District of California—concerns the “Dogecoin Sweepstakes” Coinbase launched last summer, which offered prizes worth up to $1.2 million in Dogecoin, or DOGE (the popular cryptocurrency named after an Internet meme). The class-action complaint alleges that Coinbase and Marden-Kane designed the sweepstakes’ marketing materials to mislead and confuse Coinbase users as to whether they could participate in the Dogecoin Sweepstakes for free, making them believe they had to buy or sell at least $100 in Dogecoin to enter, even though they could enter also by mailing in an index card with their name, contact information and date of birth. The proposed class of Coinbase users assert claims against Coinbase and its marketing firm for violations of California’s False Advertising Law, Cal. Bus. & Prof. Code § 17500, et seq. (“FAL”), California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200, et seq. (“UCL”) and California’s Consumer Legal Remedies Act, Cal. Civ. Code §1750, et seq. (“CLRA”).

Coinbase and Marden-Kane challenged the class complaint by moving the district court (i) to compel individual arbitration per the arbitration clause in the Coinbase User Agreement or, alternatively, (2) to dismiss the complaint for failure to state a claim. The district court denied Coinbase’s motion to compel arbitration under its User Agreement because the terms and conditions of the Dogecoin Sweepstakes—which users agreed to after opening Coinbase accounts—contained a forum selection clause designating California courts as the exclusive forum for all sweepstake-related disputes and therefore conflicted with the arbitration clause in the User Agreement. The court determined that the terms of the subsequent sweepstakes contract control such that the forum selection clause supersedes the arbitration clause in the User Agreement. The district court denied Marden-Kane’s arbitration motion as well, holding that the marketing firm was not a party to the Coinbase User Agreement and therefore could not enforce its arbitration provision.

Although it allowed the case to remain in court, the district court did partially grant the motion to dismiss and trimmed the claims that could proceed. Of note, the district court dismissed Plaintiff’s claim under the CLRA, which prohibits certain “unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer.” Given the CLRA’s definition of goods—“tangible chattels bought or leased for use primarily for personal, family, or household purposes”—and services—“work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods”—the district court concluded that DOGE is an “intangible good” outside the scope of the CLRA (similar to life insurance contracts and mortgage loans) and that Coinbase’s facilitation of trading in cryptocurrency was an “ancillary” service related to the cryptocurrency itself (similar to the ancillary services associated with servicing home loans).

Coinbase thereafter appealed the order denying its arbitration motion and requested a stay of the district court proceedings pending the appeal. The district court denied Coinbase’s stay request, reasoning that Coinbase was unlikely to prevail on appeal. Coinbase then asked the Ninth Circuit Court of Appeal to reconsider its requested stay of the district court proceedings and to adopt the automatic stay followed by the Third, Fourth, Seventh, Tenth, Eleventh and D.C. Circuits. In the Ninth, Second and Fifth Circuits, district court litigation is not automatically stayed pending a nonfrivolous appeal on arbitrability (though, a district court may still order a discretionary stay ). The Ninth Circuit rejected Coinbase’s request, prompting Coinbase’s petition to the U.S. Supreme Court to resolve the 6-3 Circuit split over whether appealing an order denying arbitration divests the district court of jurisdiction such that the district court proceedings must be stayed pending appeal.

The issue of whether litigation should automatically be stayed pending appeal of an arbitration denial is particularly of interest to class action litigants. For defendants, absent a stay, businesses denied arbitration in putative class actions are forced to incur significant expense on class discovery, class certification briefing and experts as they appeal the arbitration denial—only to have this time and money wasted if the appeal is successful and the case is ordered to individual arbitration. Coinbase argues that the approach adopted by the minority Circuits (including the Second and Ninth Circuits, which have relatively active class action dockets) effectively nullifies arbitration agreements during the duration of the appeal and deprives businesses of the benefits thereof—namely, an inexpensive and expeditious means of resolving individual disputes. Plaintiffs, on the other hand, may be disadvantaged by the automatic stay as they would be forced to hold off on pursuing their claims as they wait for a decision on the arbitration appeal (which can sometimes take more than a year). Plaintiffs opposing the automatic stay argue that delay risks subjecting them to loss of witnesses and tangible evidence.

Plaintiff Suski’s response to Coinbase’s petition is due by October 31, 2022. The issues presented in this case are important to businesses and consumers generally, not simply those engaged in crypto transactions, and we will continue to monitor it for new developments.

The case is Suski et al. v. Coinbase Inc. et al., Case No. 3:21-cv-04539, U.S. District Court for the Northern District of California.