The Supreme Court will hear argument this Tuesday March 21 in Coinbase, Inc. v. Bielski, in which the issue centers on appeals of district court rulings denying motions to compel arbitration.
The Federal Arbitration Act generally
enforces arbitration agreements, and it does so not with the usual remedy for
breach of contract, which is money damages, but with a stronger remedy—specific
performance. The Federal Arbitration Act does this by instructing district
courts to grant motions to stay litigation and compel arbitration of claims the
parties agreed to arbitrate.[1]
In further support of arbitration is the
Federal Arbitration Act’s appeals structure. FAA § 16 makes immediately
appealable district court orders denying motions to compel arbitration,[2] but not orders
granting them.[3] So, if the
district court rules for arbitration, the parties go to arbitration,
instead of appealing the district court’s pro-arbitration ruling to the circuit
court. But if the district court rules against arbitration, then the
party seeking arbitration is entitled to an interlocutory appeal to ask the
circuit court to reverse the district court’s anti-arbitration ruling, and thus
to compel arbitration. So, the party seeking arbitration can get the dispute to
arbitration by winning at either district or appellate court, but the
party opposing arbitration has to win at both courts if the
pro-arbitration side appeals.
All that is established by statute, while
the question in this Supreme Court case, Coinbase, Inc. v. Bielski, is
narrower. It’s a question about staying the district court pending
appeal. If the district court rules against arbitration and the party seeking
arbitration exercises its right to an interlocutory appeal, may the district
court proceed on other issues in the case while that appeal about arbitration
is pending; or is the district court automatically stayed with respect to the
entire case pending appeal? That’s the question the Supreme Court has set for argument
on March 21.
In this case, Coinbase, Inc. v.
Bielski, the plaintiff Bielski sued Coinbase for violations of the
Electronic Funds Transfer Act.[4] Coinbase then moved to stay the
litigation and compel arbitration pursuant to the arbitration clause in the
Coinbase User Agreement that Bielski had signed. However, the district court
denied Coinbase’s motion to compel arbitration because the district court held
that the arbitration agreement was unconscionable.[5]
Coinbase filed an
interlocutory appeal to the Ninth Circuit requesting a stay of the district
court proceedings pending that appeal, and Coinbase asked the district court to stay its proceedings
pending the resolution of that appeal. The district court denied Coinbase’s
motion for a stay pending appeal because, it said, Bielski “would suffer if
forced to wait for a remedy” on Bielski’s underlying suit about the Funds
Transfer Act.[6]
The Ninth Circuit also refused
Coinbase’s request for a stay of the district court pending appeal,[7]
so Coinbase petitioned the Supreme Court. Coinbase asks the Supreme Court to
decide whether “a non-frivolous
appeal of the denial of a motion to compel arbitration oust[s] a district
court’s jurisdiction to proceed with litigation pending appeal.”[8]
Or as Bielski puts it, the question before the Supreme Court is whether “an
interlocutory appeal of a denial of a motion to compel arbitration … require[s]
an automatic stay of all district court proceedings pending appeal?”[9]
The federal
circuit courts have split on this question, with the Second and Fifth Circuits
joining the Ninth. These three circuits hold that an appeal of the district
court’s refusal to compel arbitration does not automatically stay the
district court pending appeal.
But most
circuits hold to the contrary. The Third,
Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits hold that
appeal of a district court’s refusal to compel arbitration does divest
the district court of jurisdiction pending appeal.
When we look
at the two sides of this circuit split, we can see it arising in the 1990s in a
pretty familiar way, which is the progressive or anti-arbitration position is first
taken by the Ninth Circuit out on the Left Coast, while the conservative or pro-arbitration
position is first taken by the Seventh Circuit in an opinion by Judge Frank
Easterbrook—who by the way was my Civil Procedure professor at the University
of Chicago.
Part of the
context for this circuit split is the general
rule in federal court that “[t]he filing of a notice of appeal . . . divests
the district court of its control over those aspects of the case involved in
the appeal.” That’s a quote from the Supreme Court’s 1982 decision in Griggs v. Provident Consumer
Discount Co.[10] So, in
that Griggs framework, the question in this Coinbase case is
whether appeal of a denied motion to compel arbitration divests the district
court of the non-arbitration merits of the case (about the Funds Transfer Act) while the circuit court is deciding
whether to affirm or reverse the district court’s refusal to compel
arbitration.
In one
sense, the alleged violation of the Funds Transfer Act is not involved in the
appeal because the appeal is just about whether to enforce the arbitration
agreement. But in another sense, any litigation of the Funds Transfer Act claim or any other
claim, even just taking a deposition or other discovery, would be the district
court exercising control over aspects of the case involved in the appeal—because
everything in litigation is involved in the appeal of whether the case
will be resolved by litigation or arbitration. For example, maybe arbitration
will have narrower discovery than litigation would, so an arbitrator would not
order a deposition that the district court would order.
The Ninth Circuit takes the first of those views. It said
not everything involved in the case is involved in the appeal of refusing to
compel arbitration, and the contrary rule urged by [defendants] would allow a
defendant to stall a trial simply by bringing a frivolous motion to compel
arbitration.”[11]
The Ninth Circuit said,
The system
created by the Federal Arbitration Act allows the district court to evaluate
the merits of [a motion for arbitration], and if, for instance, the court finds
that the motion presents a substantial question, to stay the proceedings
pending an appeal from its refusal to compel arbitration.[12]
In other
words, the Ninth Circuit says, whether to stay pending appeal is a proper
subject for the exercise of discretion by the trial court.
In contrast, most circuit courts to have considered the
issue hold that a nonfrivolous appeal from a district court order denying
arbitration automatically divests the district court of jurisdiction of the
case pending appeal. In other words, the
interlocutory appeal stays litigation in district court until the Court of Appeals
resolves the appeal.
This view traces back
at least to Judge Easterbrook’s 1997 opinion, which says that denying such a stay would "largely
defeat[] the point of the appeal."[13] Which
is to decide if the case will be litigated or arbitrated--before incurring the
costs of starting the litigation or arbitration. As the Eleventh Circuit said
in support of this view, whether the case will be litigated or arbitrated is a
“threshold issue” that should be resolved first. Or as the Tenth Circuit said,
also in support of this Easterbrook view, failing to grant a stay pending
appeal would deny the defendant’s "legal entitlement to avoidance of
litigation" if it turns out the defendant had that entitlement to
arbitrate, which we won’t know until the circuit court rules.
So, we can see the issue in this Coinbase
case as a policy question of which kind of errors should courts make. Should
courts make plaintiffs wait to litigate until after an appeal that affirms the
district court’s ruling that the plaintiff has a right to litigate rather than
arbitrate? Or should courts make defendants litigate until an appeal reverses
the district court’s erroneous ruling that the plaintiff has to litigate
instead of arbitrate?
As to statutory text, Bielski’s brief
in the Supreme Court points out that if Congress enacting FAA § 16 had wanted
to require a stay pending appeal, it could have done so. It knew how to do so,
because FAA § 3 expressly requires stays of litigation pending arbitration, so
“Congress's silence regarding stays in Section 16 is deafening,” Bielski’s
brief says.
In contrast, Coinbase’s brief says “in
enacting this [FAA § 16] text, Congress legislated against the backdrop of the
divestiture rule,” that Griggs rule I mentioned earlier, which provides
that district courts are divested of authority to proceed with matters
implicated by the appeal. Congress's creation of an immediate arbitrability
appeal right ensured that district courts would be divested of authority to
proceed to the merits while the appeal proceeds.” And Coinbase quotes Judge
Easterbrook’s opinion for the Seventh Circuit, saying the “divestiture rule ‘is
fundamental to a hierarchical judiciary.’ It ‘fosters judicial economy’ and
guards against ‘confusion and inefficiency that would result if two courts’
purported to exercise jurisdiction over related matters simultaneously.”
Thanks to Shane Creason for excellent research assistance.
Greg Stohr of Bloomberg News discusses the crypto side of this case.
[1] 9
U.S.C. §§ 3, 4.
[2] 9
U.S.C. § 16(a)(1)(A) (B) (stating that “[a]n appeal may be taken from . . . an
order . . . refusing a stay of any action under section 3 of this title” and an
order “denying a petition under section 4 of this title to order arbitration to
proceed.”); id. § 16(a)(1)(C) (stating that “[a]n appeal may be taken from . .
. an order . . . denying an application under section 206 of this title to compel
[international] arbitration”);
[3] 9
U.S.C. § 16(b) (denying interlocutory appeals of “an interlocutory order . . .
granting a stay of any action under section 3 [or] . . . directing arbitration
to proceed under section 4 of this title.”)
[4]
Bielski v. Coinbase, Inc., No. C 21-07478 WHA, 2022 WL 1062049, at *1 (N.D.
Cal. Apr. 8, 2022).
[5]
More specifically, the district court said the arbitration agreement’s
delegation clause and “unilaterality” throughout the arbitration provisions
permeated the whole with unconscionability. Id. at 6-7. Consequently, the court
concluded that it could not sever the unconscionable terms and denied
Coinbase’s motion. Id. at 7-8.
[6] Joint
Petition for Writ of Certiorari, Coinbase, Inc., Petitioner, v. Abraham Bielski, Respondent;
Coinbase, Inc., Petitioner, v. David Suski, et al., Respondents., 2022 WL
3107708 (U.S.), 8 (“district court recognized ‘that reasonable minds may
differ over’ its refusal to compel arbitration, but it nonetheless decided that
a stay was unwarranted because ‘Coinbase is a large company,’ while ‘Bielski is
a single individual,’ and he ‘would suffer if forced to wait for a remedy.’”)
[7]
Bielski v. Coinbase, Inc., No. 22-15566, 2022 WL 3095991, at *1 (9th Cir. July
11, 2022); See also Suski v. Coinbase, Inc., No. 22-15209, 2022 WL 3099846, at
*1 (9th Cir. May 27, 2022).
[8] Joint
Petition for Writ of Certiorari, Coinbase, Inc., Petitioner, v. Abraham Bielski, Respondent;
Coinbase, Inc., Petitioner, v. David Suski, et al., Respondents., 2022 WL
3107708 (U.S.), cert. granted, 143 S. Ct. 521 (2022).
[9]
Brief for Respondent Abraham Bielski. https://www.supremecourt.gov/DocketPDF/22/22-105/255161/20230221122108808_22-105%20bs.pdf
[10]
459 U.S. 56, 58 (1982).
[11] Britton v. Co-op Banking Grp., 916 F.2d 1405, 1412 (9th Cir. 1990)
[12]
Id. (citations omitted).
[13] Bradford-Scott Data Corp. v. Physician Comput. Network, Inc., 128 F.3d 504, 505(7th Cir. 1997).
