Civil Action 1:22-CV-3250-TWT
OPINION AND ORDER
THOMAS W. THRASH, JR., UNITED STATES DISTRICT JUDGE
This is a putative class action case. It is before the Court on the Plaintiffs' Motion to Appoint Receiver [Doc. 23], the Defendants' Motion to Compel Arbitration [Doc. 61], the Defendants' Motions to Strike [Docs. 66, 105], and the Defendants' Amended Motion to Compel Arbitration [Doc. 80]. For the reasons set forth below, the Defendants' Amended Motion to Compel Arbitration [Doc. 80] is GRANTED. The Plaintiffs' Motion to Appoint Receiver [Doc. 23], the Defendants' Motion to Compel Arbitration [Doc. 61], and the Defendants' Motions to Strike [Docs. 66, 105] are DENIED as moot.
This case arises from the Plaintiff George Kattula's alleged use of the Defendants Coinbase Global, Inc. and Coinbase Inc.'s cryptocurrency exchange platform. He claims that Coinbase regularly fails to safeguard user accounts and timely respond to user support requests, resulting in the deprivation of access to accounts and the loss of account holdings. (Am. Compl. ¶¶ 1, 6-7). Kattula seeks damages and equitable relief on behalf of himself and others similarly situated for their sustained losses. (Id. ¶ 10). He also seeks declaratory relief of unenforceability as to the class action waiver provision of Coinbase's standard User Agreement and of unconscionability as to its mandatory arbitration and delegation clause provisions. (Id.). Kattula now moves to appoint a receiver to examine certain Coinbase accounts, and Coinbase moves to compel arbitration and to strike various declarations of the Plaintiffs.
II. Legal Standard
The Federal Arbitration Act (“FAA”) “embodies a liberal federal policy favoring arbitration agreements.” Caley v. Gulfstream Aerospace Corp., 428 F.3d 1359, 1367 (11th Cir. 2005) (quotation marks omitted). Section 2 of the Act provides in relevant part:
A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract ....9 U.S.C. § 2. On a motion to compel arbitration, a court undertakes a two-step inquiry to determine (1) whether the parties agreed to arbitrate the dispute in question and, if they did, (2) whether legal constraints external to their agreement forecloses arbitration. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985). Courts apply state contract law to questions regarding the validity, revocability, and enforceability of arbitration agreements. See Caley, 428 F.3d at 1368. An arbitration clause may be unenforceable for the same reasons as any other contract, such as fraud or unconscionability. See Mitsubishi, 473 U.S. at 627. Or there may be statutory barriers to arbitration, such as a congressional intention to adjudicate certain substantive rights solely in a judicial forum. See id. at 628. When an arbitration agreement clears both prongs of the FAA test, a court must either stay or dismiss the lawsuit and compel arbitration. See Lambert v. Austin Ind., 544 F.3d 1192, 1195 (11th Cir. 2008).
The Coinbase User Agreements provide that California law governs the present dispute. (Br. in Supp. of Defs.' Am. Mot. to Compel, at 8 n.7).
Coinbase argues that its standard User Agreements require arbitration of the Plaintiffs' claims and that the User Agreements' arbitration provisions deprive the Court of subject matter jurisdiction. (Br. in Supp. of Defs.' Am. Mot. to Compel, at 1). The Plaintiffs argue, in response, that Coinbase fails to show the existence of an arbitration agreement applicable to each Plaintiff and that the arbitration provisions and their delegation clauses are both substantively and procedurally unconscionable. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 1-2). In reply, Coinbase claims that the present case is an “easy call” because enforceable arbitration agreements bind all the Plaintiffs, delegate the issue of arbitrability to the arbitrator, and require arbitration of their claims. (Reply Br. in Supp. of Defs.' Am. Mot. to Compel, at 1). The Court first addresses the existence of an arbitration agreement applicable to all Plaintiffs and then considers the issue of unconscionability.
A. Existence of Arbitration Agreements as to All Plaintiffs
As a preliminary matter, Coinbase claims that a person seeking to use its platform cannot do so without first creating a Coinbase account, which requires accepting the terms of its User Agreement. (Br. in Supp. of Defs.' Am. Mot. to Compel, at 3). The Plaintiffs do not appear to dispute this specific claim, but they do contend that Coinbase has failed to show which User Agreement applies to which Plaintiff. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 1). Several iterations of Coinbase's User Agreements are applicable to the present case. Coinbase provides the relevant excerpts for its mandatory arbitration and delegation clause provisions in its 2022 and 2020 User Agreements. (Br. in Supp. of Defs.' Am. Mot. to Compel, at 5-8). Both versions of the User Agreement (1) mandate arbitration of disputes between the parties arising from the consumer's access to or use of the Coinbase platform and (2) delegate authority to the arbitrator to decide threshold questions of enforceability. (See, e.g., Doc. 62-1, App. 5, §§ 1.1, 1.3, 1.6; Doc. 62-4, § 8.3).
The Plaintiffs offer several reasons for why Coinbase fails to establish the existence of arbitration agreements applicable to them. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 22-25). First, they contend that Coinbase fails to show the formation of a contract with certain Plaintiffs because it “fails to verify a user's identify before allowing access to a Coinbase account.” (Id. at 22-23 (citing Bennett Decl. ¶ 6, Doc. 84, and Waheed Decl. ¶ 5, Doc. 90)). The Plaintiffs Bennett and Waheed declare that their counsel informed them that Coinbase claims a device in Denmark and California, respectively, accepted an updated User Agreement on their behalf in 2022 but that neither Plaintiff used their Coinbase account in those locations. (Bennett Decl. ¶ 6, Doc. 84; Waheed Decl. ¶ 5, Doc. 90). Aside from the fact that declarations must be based on personal knowledge (and not information from a declarant's attorney), Exceptional Mktg. Grp., Inc. v. Jones, 749 F.Supp.2d 1352, 1358 (N.D.Ga. 2010), the Court finds no plausible evidence contradicting that these Plaintiffs accepted the original terms of their User Agreements when they created their Coinbase accounts, which included the contested arbitration provisions here. (See Jankowski Decl., Doc. 78, at 10-12, 20 (citing Docs. 78-7, 78-25)).
The Plaintiffs also argue that Coinbase cannot show a binding User Agreement as to the Plaintiff Luis Rodriguez because the existence of such an agreement is based “upon information and belief.” (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 23 (citing Jankowski Decl., at 24)). The Court finds that the evidence supports Coinbase's position that Rodriguez was bound by the 2014 User Agreement because he opened his first account in December 2014 and that he was also bound by the 2021 User Agreement after opening a second account, which contained the mandatory arbitration and delegation clause provisions that govern the present case. (Reply Br. in Supp. of Defs.' Am. Mot. to Compel, at 4 n.4, 5 n.5; see also Jankowski Decl., Doc. 78, at 2425 (citing Docs. 78-34, 78-35)).
The Plaintiffs next claim that the arbitration provisions are illusory and therefore unenforceable against the eight Plaintiffs from Texas and Ohio because Coinbase could avoid its promise to arbitrate by amending the clauses altogether. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 23-24). The Court again agrees with Coinbase that “a unilateral modification provision does not, standing alone, render a contract illusory.” (Reply Br. in Supp. of Defs.' Am. Mot. to Compel, at 9 n. 11 (citing Eiess v. USAA Fed. Sav. Bank, 404 F.Supp.3d 1240, 1250-51 (N.D. Cal. 2019)). Thus, the Plaintiffs cannot avoid arbitration of their claims on this asserted ground.
Finally, the Plaintiffs argue that compelling arbitration here is improper because no arbitration agreements exist that cover the Coinbase Wallet. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 24-25). Coinbase claims that the Plaintiffs' Coinbase Wallet arguments are unavailing because each Plaintiff has a Coinbase account and therefore entered into a Coinbase User Agreement. (Reply Br. in Supp. of Defs.' Am. Mot. to Compel, at 4 n.3). Coinbase also notes that the company that distributes Coinbase Wallet is not a party to the case. The Court agrees that the distinction between Coinbase and Coinbase Wallet is immaterial to the present motion. Thus, the Court finds that Coinbase has cleared its first hurdle to show that the parties agreed to arbitrate the present dispute.
The doctrine of “unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 486 (Ct. App. 1982) (alteration and citation omitted).
California courts analyze contract provisions for both procedural and substantive unconscionability. In California, the prevailing view is that procedural unconscionability and substantive unconscionability need not both be present to the same degree: Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation in proportion to the greater harshness or unreasonableness of the substantive terms themselves. In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1280 (9th Cir. 2006) (quotation marks, alterations, and citations omitted). The burden to show unconscionability falls on the party resisting arbitration. Donovan v. Coinbase Glob., Inc., 2023 WL 2124776, *3 (N.D. Cal. Jan. 6, 2023). Generally, courts enforce delegation clauses of arbitration agreements, absent a showing of unconscionability or some other applicable defense. Id.
The U.S. District Court for the Northern District of California has concluded in several cases that the arbitration provisions and delegation clauses of Coinbase's User Agreements are not unconscionable. See, e.g., Pearl v. Coinbase Glob., Inc., 2023 WL 1769190, at *6-7 (N.D. Cal. Feb. 3, 2023) (finding no procedural or substantive unconscionability in the arbitration provision's delegation clause of the 2022 Coinbase User Agreement); Donovan, 2023 WL 2124776, *3-5 (same); Alfia v. Coinbase Glob., Inc., 2022 WL 3205036, at *3-4 (N.D. Cal. July 22, 2022) (same as to the 2017 Coinbase User Agreement). Regarding procedural unconscionability, those courts have reasoned that although the relative bargaining power favored Coinbase, nothing suggested that Coinbase was the plaintiffs' only option for cryptocurrency services. Alfia, 2022 WL 3205036, at *4; Pearl, 2023 WL 1769190, at *7; Donovan 2023 WL 2124776, at *4. Regarding substantive unconscionability, one of the California district courts noted that “where a plaintiff's unconscionability challenge is directed not to the delegation provision specifically, but, rather, to the arbitration agreement as a whole, the Court must enforce the delegation provision and leave such challenges for the arbitrator.” Pearl, 2023 WL 1769190, at *7 (quotation marks, alterations, and citations omitted).
In contrast, the Northern District of California in Bielski v. Coinbase, Inc. found that both the delegation clause and the arbitration provision of Coinbase's 2021 User Agreement were substantively and procedurally unconscionable. Bielski v. Coinbase, Inc., 2022 WL 1062049, at *6 (N.D. Cal. Apr. 8, 2022), appeal docketed, No. 22-15566 (9th Cir. Apr. 18, 2022). The court determined that the delegation clause lacked mutuality and therefore was substantively unconscionable because it imposed no burden on Coinbase to arbitrate any disputes it maintained against the user. Id. at *2-6. And the court also found that the dispute resolution process prior to arbitration was broad enough to constitute the requisite surprise to the average consumer that would support a showing of procedural unconscionability. Id. at *6. Finally, the Court determined that the broader arbitration agreement was unconscionable for the same reasons as the delegation clause. Id.
The Supreme Court recently held that the district court in Bielski improperly denied Coinbase's motion to stay the district court proceedings pending the appeal of the arbitrability issue. See Coinbase, Inc. v. Bielski, No. 22-105, 2023 WL 4138983, at *7 (U.S. June 23, 2023).
Coinbase contends that the Court should follow the lead of other courts that have enforced arbitration agreements, over unconscionability arguments from plaintiffs, in similar suits against Coinbase. (Br. in Supp. of Defs.' Am. Mot. to Compel, at 18). In response, the Plaintiffs rely primarily on Bielski in support of their position that delegation clauses and arbitration provisions of Coinbase's User Agreements are both substantively and procedurally unconscionable. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 3). Coinbase distinguishes Bielski on the ground that the 2021 version of the User Agreement was at issue there, unlike the 2022 and 2020 versions at issue here. (Reply Br. in Supp. of Defs.' Am. Mot. to Compel, at 11).
Beginning with the delegation clause, the User Agreements clearly contemplate that the arbitrator will decide issues of enforceability. (See Doc. 62-1, App. 5, § 1.6, Doc. 62-4, § 8.3); see also Pearl, 2023 WL 1769190, at *3; Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015). The Plaintiffs argue that the delegation clauses do not apply because their challenges to the User Agreements were not delegated to the arbitrator, citing various carve-outs to the delegation clauses. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 17). But the Court agrees with Coinbase that whether the Plaintiffs' claims fall within the plain language of the exceptions to the delegation clauses is a question for the arbitrator. (Reply Br. in Supp. of Defs.' Am. Mot. to Compel, at 4 (quoting Pearl, 2023 WL 1769190, at *8)); SteppeChange LLC v. VEON Ltd., 354 F.Supp.3d 1033, 1044 (N.D. Cal. 2018) (“Numerous courts in this circuit have found that despite a carveout, the question of arbitrability, even on the subject of what has been carved out, must be decided by the arbitrator.”). Because the delegation clauses apply to the Plaintiffs' claims, the next question is whether the delegation clauses are unconscionable.
The Plaintiffs challenge the delegation clauses of Coinbase's User Agreements as being unconscionable for the same reasons as the arbitration provisions. They argue that the delegation clauses “are standardized contracts of adhesion, presenting terms in inconspicuous font, buried in lengthy text.” (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 19). They lament the tedious nature of the “sham dispute resolution process,” arguing that to challenge the delegation clauses requires “amicably” engaging with the “abusive and untrustworthy” Coinbase Support to complete an online form and then waiting 45 business days for a resolution. (Id. at 19-20). The Court agrees with Coinbase that the Plaintiffs appear to confuse procedural and substantive unconscionability here. (See Br. in Supp. of Defs.' Am. Mot. to Compel, at 20 n.11). Their qualms with the dispute resolution process pertain to the substance of the User Agreements, not the parties' procedural assent to the User Agreements. L.A. Unified Sch. Dist. v. Casasola, 187 Cal.App.4th 189, 212 (2010) (“Procedural unconscionability focuses on the making of the agreement.” (citation omitted)). Because the Plaintiffs rely on their arguments pertaining to the arbitration provisions as a whole in support of their arguments pertaining to the delegation clauses, the Court will consider those arguments before concluding whether the delegation clauses are procedurally or substantively unconscionable.
The Plaintiffs claim that the arbitration provisions are procedurally unconscionable because Coinbase has unilaterally amended them (allegedly without notice), because they are buried in the appendices of the agreements, because Coinbase “held user accounts hostage until [users] accepted a new arbitration agreement,” and because Coinbase's multi-step dispute resolution process would surprise the average consumer. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 3-6). Then, they claim that the arbitration provisions are substantively unconscionable for eight distinct reasons, including that the preconditions to arbitration are one-sided and onerous, that the provisions exempt claims by Coinbase, and that the provisions preclude an award of damages by the arbitrator against Coinbase. (Id. at 6-15).
Beginning with procedural unconscionability, the Plaintiffs claim that the User Agreements are unfairly surprising because the arbitration provision appears in the fifth appendix. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 4). But the 2022 User Agreement conspicuously discloses the existence of the arbitration agreement on the first page and directs users to that appendix. (See Doc. 62-1; see also Doc. 62-4, at 3 (calling out the Arbitration and Wavier of Class Action provisions in Section 8.2 of the 2020 User Agreement)). The Plaintiffs also argue that Bielski requires a finding that the dispute resolution process is unconscionable because “such a broad prohibition on access to formal resolution procedures would surprise the average consumer for this type of service.” (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 6 (quoting Bielski, 2022 WL 1062049, at *6)). The Court agrees with Coinbase that the Plaintiffs have not carried their burden to show oppression or surprise due to unequal bargaining power that would support a material finding of procedural unconscionability. (Reply Br. in Supp. of Defs.' Am. Mot. to Compel, at 7-11). Rather, the Court finds “a minimal degree of procedural unconscionability arising from the adhesive nature” of the 2022 and 2020 User Agreements. Alfia, 2022 WL 3205036, at 4 (“While the relative bargaining power between the parties favors [Coinbase] and the User Agreement[s] w[ere] presented on a take-it-or-leave-it basis, nothing in the record suggests that Coinbase was [the Plaintiffs'] only option for cryptocurrency services.”).
Turning to the issue of substantive unconscionability, the Plaintiffs contend that the arbitration provisions lack “even a modicum of bilaterality” because they condition the arbitrator's jurisdiction on exhaustion of a “one-sided” dispute resolution process. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 6 (quoting Bielski, 2022 WL 1062049, at *2)). But “a requirement that internal grievance procedures be exhausted before proceeding to arbitration is both reasonable and laudable in an agreement containing a mutual obligation to arbitrate.” Serpa v. Cal. Sur. Investigations, Inc., 215 Cal.App.4th 695, 710 (2013). The Plaintiffs further argue that the arbitration provisions lack mutuality and are therefore substantively unconscionable because they do not require Coinbase to arbitrate its claims against users. (Pls.' Resp. Br. in Opp'n to Defs.' Am. Mot. to Compel, at 11 (quoting Bielski, 2022 WL 1062049, at *4)).
The arbitration provision in the 2022 User Agreement is considerably different than that of the 2020 and 2021 User Agreements, the latter of which the court found unconscionable in Bielski. (Compare Doc. 62-1, App. 5, § 1.1, with Doc. 62-4, §§ 8.2-8.3, and Doc. 62-3, §§ 8.2-8.3). Notably, the 2022 User Agreement does not precondition arbitration on resolution of the dispute through the “Formal Complaint Process,” (Doc. 62-1, App. 5, § 1.1), as the court in Bielskifound that the 2021 version did. Bielski, 2022 WL 1062049, at *3-4 (“The plain language of the informal and formal complaint procedures prior to arbitration only contemplates complaints raised by the consumer, not by Coinbase.”) Rather, the 2022 version provides that all disputes between the user and Coinbase “will be resolved by binding arbitration,” with two limited, mutual exceptions. Therefore, the arbitration provision of the 2022 User Agreement does not lack mutuality.
Coinbase claims that “[a]ll but nine of the Plaintiffs with verified accounts affirmatively accepted [the 2022 User Agreement] that contained a broad arbitration clause” and that even the nine other Plaintiffs “who did not accept the 2022 UA remain subject to earlier UAs accepted at account creation, as well as subsequent versions of the UA accepted by their continued use of the Coinbase platform.” (Br. in Supp. of Defs.' Am. Mot. to Compel, at 5). Those nine other Plaintiffs are therefore bound by arbitration language of earlier Coinbase User Agreements, similar to that of the 2021 User Agreement found unconscionable in Bielski. But the court finds that Alfia is a more appropriate resolution of the issue of unconscionability as to Coinbase's earlier User Agreements. Accordingly, the Court concludes that the Plaintiffs have failed to carry their burden to show that the arbitration provisions or delegation clauses of Coinbase's User Agreements are unconscionable. Because the Plaintiffs and Coinbase have effectively delegated the issue of arbitrability to the arbitrator and because neither the arbitration provisions nor the delegation clauses are unconscionable, the Defendants' Amended Motion to Compel Arbitration should be granted.
The Plaintiffs' remaining unconscionability arguments, including those pertaining to the limitation of liability, attorneys' fees, and amendments clauses, are also unavailing. (See Reply Br. in Supp. of Defs.' Am. Mot. to Compel, at 13-15).
For the foregoing reasons, the Defendants' Amended Motion to Compel Arbitration [Doc. 80] is GRANTED. The Plaintiffs' Motion to Appoint Receiver [Doc. 23], the Defendants' Motion to Compel Arbitration [Doc. 61], and the Defendants' Motions to Strike [Docs. 66, 105] are DENIED as moot. This matter is hereby STAYED until further order of the Court. The Clerk is DIRECTED to close this case administratively.