The United States Courts of Appeals have for years been split over the issue of whether, when a district court denies a motion to compel arbitration, the case should be automatically stayed if the party requesting arbitration takes an interlocutory appeal from the order denying arbitration. Six circuit courts hold that as a matter of judicial economy in a hierarchical judiciary, there should ordinarily be an automatic stay of further district court proceedings after a party files a notice of appeal. Three circuit courts take the contrary view, holding the party pursuing an interlocutory appeal must apply for a discretionary stay under the Federal Rules of Civil Procedure and meet the burden of proof imposed by that procedure to obtain a stay.
Section 3 of the Federal Arbitration Act (FAA) makes clear that when a motion to compel arbitration under Section 4 is granted, the court should “stay the trial of the action until such arbitration has been had in accordance with the terms of the [arbitral] agreement............................................... ”
Plainly, the FAA mandates a stay of an action in the district court if a motion to compel arbitration is granted. From 1925 until 1988, the FAA did not allow a party to take an interlocutory appeal from an order denying a motion to compel arbitration.
In 1988, Congress amended the FAA, adding § 16(a). Congress provided for the first time that interlocutory appeals could be taken from orders denying a motion to compel arbitration. But unlike orders granting arbitration under § 4, Congress did not extend the automatic stay provision in FAA § 3 to interlocutory appeals taken under § 16 from an order denying a motion to compel arbitration.
In 1997, the Seventh Circuit held for the first time that a district court should automatically stay a case if the party appealed from an order denying a motion to compel arbitration. The Seventh Circuit’s decision was predicated on the Supreme Court’s decision in Griggs v. Provident Consumer Disc. Co., which held that an appeal “divests the district court of its control over those aspects of the case involved in the appeal.” Griggs held that filing of a notice of appeal was an event of “jurisdictional significance.” However, the Supreme Court has since made clear that “[o]nly Congress may determine a lower court’s subject matter jurisdiction.” Griggs thus articulates a “judge-made rule” that is “designed to promote judicial economy and avoid the confusion and inefficiency that might flow from putting the same issue before two courts at the same time.” Under this rule of judicial procedural order, districts courts should not continue to address any aspects of the case that are under consideration by the court of appeals by virtue of a party filing of a notice of appeal.
The Third, Fourth, Tenth, Eleventh and District of Columbia Circuits have also adopted a procedural policy of halting district court proceedings indefinitely when a party appeals an order declining to compel arbitration. The Second, Fifth and Ninth Circuits, however, have declined to follow this approach of granting automatic stays. Instead, they require a party to file an application under the Federal Rules of Civil Procedure to obtain a discretionary stay of the case pending the outcome of the interlocutory appeal. Granting such stays rests in the sound discretion of the district court, and is subject to a showing of irreparable harm and a probability of success on the merits.
After this circuit split festered for years, the Supreme Court on December 9, 2022 granted a joint petition for certiorari filed by Coinbase, Inc. in two class action cases arising from the Ninth Circuit. In those cases, Coinbase’s motions to compel arbitration were denied.
Further, its motions to stay the class action litigation pending appeal were denied by both the district court and the Ninth Circuit.
The Coinbase cases involved two distinctly different matters that differ substantially on the gateway question of arbitrability. Coinbase operates an online currency and crypto-currency exchange platform. Coinbase, Inc. v. Bielski involves a situation where Bielski allowed a scammer to remotely access and take control of his computer operating system. The scammer accessed Bielski’s Coinbase account, stealing more than $30,000. Bielski sought help from Coinbase in attempting to recover the stolen money, but Coinbase took no steps to remedy or investigate the fraud. Bielski alleges Coinbase’s refusal to remedy the fraud on its platform violated the Electronic Funds Transfer Act (EFTA), 15 U.S.C. §§ 1693 et seq. and Regulation E of its implementing regulations, 12 C.F.R. §§ 1005.1-1005.20. Bielski further alleges that Coinbase has failed to comply with its obligations under the EFTA for many other customers.
Bielski thus filed a class action suit for himself and similarly situated victims.
Coinbase moved to compel arbitration based on the arbitration clause in its User Agreement. The arbitration clause provides in relevant part as follows:
8.3 Arbitration: Waiver of Clause Action. If we cannot resolve the dispute through the Formal Complaint Process, you and we agree that any dispute arising out of or relating to this Agreement or the Coinbase Services, including, without limitation, federal and state statutory claims, common law claims, and those based in contract, tort, fraud, misrepresentation, or any other legal theory, shall be resolved through binding arbitration, on an individual basis, (the
Arbitration Agreement”). * * * * Arbitration shall be conducted in accordance with the American Arbitration Association’s rules for arbitration of consumer-related disputes (accessible at https://www.adr.org/sites/default/files/Consumer%20Rules.pdf).
The arbitration provision delegated to the arbitrator, rather than the court, any issues of arbitrability. The delegation provision of the arbitration agreement provides in relevant part:
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.
Finally, the Arbitration Agreement contained a class action waiver.
CLASS ACTION WAIVER: TO THE EXTENT PERMISSIBLE BY LAW, ALL CLAIMS MUST BE BROUGHT IN A PARTY’S INDIVIDUAL CAPACITY, AND NOT AS A PLAINTIFF OR CLASS MEMBER IN ANY PURPORTED CLASS, COLLECTIVE ACTION, OR REPRESENTATIVE PROCEEDING (COLLECTIVELY “CLASS ACTION WAIVER”). THE ARBITRATOR MAY NOT CONSOLIDATE MORE THAN ONE PERSONS’S CLAIMS OR ENGAGE IN ANY CLASS ARBITRATION. YOU ACKNOWLEDGE THAT, BY AGREEING TO THESE TERMS, YOU AND COINBASE ARE EACH WAIVING THE RIGHT TO A TRIAL BY JURY AND THE RIGHT TO PARTICIPATE IN A CLASS ACTION.
Coinbase moved to compel arbitration under this arbitration agreement. The district court recognized the delegation clause assigned to the arbitrator, not the court, the authority to decide gateway issues such as the “enforceability, revocability, scope, or validity of the Arbitration Agreement.” Nevertheless, Coinbase asserts the district court “maintained that because the delegation clause referred to disputes arising out of the ‘Arbitration Agreement,’ the delegation clause ‘incorporated’ the broader arbitration agreement, and thus its enforceability depended on ‘backtracking through the nested provisions ‘of the overarching arbitration agreement and assessing whether the itself was invalid.’” Accordingly, the district court decided it could decide the enforceability of the Arbitration Agreement despite the delegation provision giving that authority (in the first instance) to the arbitrator.
The district court found the User Agreement was in violation of California law and unconscionable and could not be enforced. Among other things, the district court found the contract lacked mutuality by: (1) imposing a burdensome and unnecessary pre-arbitration dispute-resolution procedure on consumers, but not on Coinbase, and (2) requiring users but not Coinbase to arbitrate disputes subject to the clause.
Coinbase filed a notice of appeal to the Ninth Circuit contesting the district court’s order denying arbitration. Then Coinbase filed a motion to stay the district court proceedings pending appeal. The district court denied the motion, finding it would prejudice Bielski by delaying proceedings in the case. Coinbase then sought a stay in the Ninth Circuit, arguing the Ninth Circuit’s prior decision in Britton was erroneously decided and suggesting reconsideration of that decision. The Ninth Circuit denied the motion, leading Coinbase to file its Petition for a Writ of Certiorari to the Supreme Court.
The four plaintiffs in Suski allege that Coinbase operated an illegal cryptocurrency lottery by falsely representing to customers that they needed to purchase $100 worth of cryptocurrency to be entered into a “sweepstakes” to win up to $300,000. The plaintiffs allege Coinbase’s sweepstakes violated California consumer protection laws. Coinbase moved to compel arbitration, relying on its Users Agreement.
The Suski case differs significantly from the Bielski case because Coinbase and its sweepstake partner created sweepstake rules that arguably supersede the User Agreement with respect to the forum for dispute resolution. The contract with the sweepstake rules contained no arbitration provision and further provided in relevant part:
THE CALIFORNIA COURTS (STATE AND FEDERAL) SHALL HAVE SOLE JURISDICTION OF ANY CONTROVERSIES REGARDING THE PROMOTION AND THE LAWS OF THE STATE OF CALIFORNIA SHALL GOVERN THE PROMOTION.
Relying on the choice of venue provision in the Sweepstakes Agreement and the lack of an arbitration provision in that document, which arguably supersedes the User Agreement, the district court denied Coinbase’s motion to compel arbitration. Coinbase filed a notice of appeal to the Ninth Circuit, and moved to stay the litigation in the district court pending appeal. The district court denied the motion to stay. Coinbase then filed a motion in the Ninth Circuit seeking a stay pending appeal. Coinbase also requested, to the extent necessary, that the Ninth Circuit sua sponte undertake an en banc reconsideration of its Britton decision, which decades old precedent would bar the requested stay. The Ninth Circuit denied the motion and refused to reconsider Britton en banc.
As if these cases needed any other twists and turns, Bielski filed a motion in the Supreme Court on March 1, 2023 suggesting the Suski case was moot and should be dismissed.
Coinbase’s appeal to the Ninth Circuit challenging the district court’s denial of Coinbase’s motion to compel arbitration in the Suski case was denied, and the Ninth Circuit also denied Coinbase’s motion for a rehearing en banc. Bielski therefore argues that since the appeal is resolved, there can be no stay “pending” a completed appeal. According, Bielski argues his case alone should proceed to the scheduled March 21, 2023 oral argument in the Supreme Court.
Bielski further argues that since the Ninth Circuit panel hearing the Bielski case advised at oral argument that it would defer submission of the case for a decision to avoid interference with the Supreme Court hearing. As such, there was no possibility of mootness occurring in Bielski. As such, there were no grounds for the Supreme Court to proceed to hear the Suski matter under the “evading review” exception to mootness.
Coinbase, Bielski and Suski start their arguments based on a textual analysis of the FAA. They all assert that the correct interpretation of the law is clear from the plain wording of the statute. One hint that this argument is wrong is that 9 circuit courts have interpreted the text of the statute, and they are split 6-3. In the view of the ADR Committee, there is nothing particularly complicated about the relevant text of the FAA. The problem is that the text alone simply does not resolve the issue.
When it added § 16(a) to the FAA, Congress was silent on issue of stays pending interlocutory appeals from orders declining arbitration. Coinbase argues that Congress legislated against the judicial backdrop of the Supreme Court’s decision in Griggs, which applied the doctrine of divestiture. Under Griggs a district court is “divested” of jurisdiction over the subject matter of an interlocutory appeal once a notice of appeal is filed. The purpose of this rule is to avoid interference with the jurisdiction of the appeals court, as two courts cannot exercise jurisdiction over the same order or judgment at the same time.
Coinbase asserts that Congress did not address stays when it adopted FAA § 16(a) because Congress knew Griggs divestiture would stay all proceedings related to an order denying arbitration once a notice of appeal was filed. Unless Congress wanted to prevent an automatic stay, it did not need to address the stay issue. In support of its position, Coinbase points to other examples in the JIAJA legislation where Congress in fact added language barring stays pending an interlocutory appeal.
Bielski argues, by contrast, that FAA § 16(a) should be interpreted in light of FAA § 3, where Congress expressly required a stay of proceedings following an order granting arbitration. Since § 3 was not amended to include stays for interlocutory appeals under § 16(a), and §16(a) did not itself authorize such stays, Bielski contends that the FAA provides no statutory basis for a stay.
Bielski also downplays the scope of the circuit split over the Supreme Court’s decision in Griggs. Bielski argues that all 9 circuit courts involved in the circuit split have addressed
Griggs and reflected on the extent to which the doctrine of divestiture should apply. Bielski argues that only the Second, Fifth and Ninth Circuits have correctly adopted a narrow reading of the divestiture doctrine. Bielski asserts that divestiture only applies to those aspects of the case involved in the district court’s decision to deny the arbitration. Because Bielski argues that denial of a motion to compel arbitration merely decides the forum where the case will be tried, it is a procedural decision that does not implicate the merits of the case. As such, filing of an appeal to challenge a judge’s refusal to compel arbitration does not divest the district court’s authority to proceed with discovery on the merits of the case.
All the parties appear to acknowledge that the doctrine of divestiture must be considered in the absence of a clear congressional command authorizing or prohibiting a stay. To the extent that the issue resolves around the application of the doctrine of divestiture, what Congress intended in 1988 when the JIAJA amended § 16(a) FAA seem less important. The doctrine of divestiture is judge-made law intended to facilitate orderly processing of interlocutory appeals. It is intended prevent two courts from examining the same judgment at the same time. There is no compelling argument that congressional silence in the JIAJA in 1988 somehow “codified” or “froze” the doctrine of divestiture as it existed in 1988. Nor is there a compelling argument that Congress intended to bar further development of that judge-made doctrine through later judge- made precedent.
The more relevant inquiry may be whether Bielski is correct that, under the law of divestiture, the question of arbitrability vel non is a completely procedural issue related merely to the forum (i.e., arbitration versus court litigation) where a dispute is adjudicated. But the Supreme Court’s construction (arguably re-construction) of the FAA in the last dozen years arguably contradicts this procedural versus merits distinction. The Supreme Court has effectively insulated arbitration as a forum from collective or class dispute resolution. Beginning with AT&T Mobility and continuing through the decision in Viking River Cruises last year, “arbitration” means bilateral, one-on-one arbitration save for unequivocal evidence appearing on the face of the arbitral agreement that the parties consented to class arbitration. The Supreme Court has made arbitration the forum where parties go to resolve their disputes without participating class action litigation. The Ninth Circuit’s track record invoking state unconscionability law to void the use of arbitral agreements suggests Bielski’s arguments seeking to separate the question of procedure/forum from merits may face some tough sledding in the Supreme Court.
The Supreme Court’s recent precedents virtually commingle the procedural selection of an arbitral forum with the substantive rights of the parties to prescribe the rules in arbitration for resolving the merits of their disputes. The Supreme Court has held parties to arbitration agreement have a “near absolute” right to include and enforce waivers of collective or class adjudication in their arbitration agreements. Further, last term the Supreme Court held states cannot impose mandatory joinder rules to force parties to engage in collective or class arbitration resolution of disputes. In the face of this existing precedent, it will be interesting to see whether the Supreme Court believes Griggs divestiture draws such a bright line between procedural and merits issues such that parties must undergo class action merits discovery while waiting for appellate review of a district court decision that (1) invalidates the delegation of authority to arbitrators to decide gateway issues; (2) invalidates a waiver of class adjudication; and (3) invalidates a separate contractual requirement for all disputes be resolved solely through bilateral arbitration.
