Today, we're going to talk about the scintillating area of arbitration and the Supreme Court's recent decision in a case called Coinbase v. Suski, and in the interest of full disclosure, Coinbase is a Paul, Weiss client though we did not work on this particular case. Joining me today to talk about the Coinbase decision is my colleague, Will Marks. And Will, to put it mildly, this is a pretty complicated area of law. So, can we start with some background on the legal principles governing this case?
But the parties can agree to delegate those sorts of questions to an arbitrator by adopting a delegation provision in their arbitration agreement. The question before the court in Coinbase concerned one of these arbitration agreements with a delegation provision.
William Marks: Well, the plaintiffs were users of Coinbase's cryptocurrency platform, and when they created their accounts with Coinbase, they agreed to Coinbase's user agreement. That agreement contained an arbitration agreement with a delegation provision. Later, however, the plaintiffs entered into a sweepstakes with Coinbase where they could win a certain type of cryptocurrency. Now that sweepstakes was governed by certain official rules. Those rules themselves didn't contain an arbitration agreement, instead, they included a form selection clause providing that California courts had sole jurisdiction to resolve any disputes regarding the sweepstakes.
Kannon Shanmugam: So, Will, how did this case end up in the Supreme Court?
William Marks: After the sweepstakes ended, the plaintiffs filed a class action against Coinbase, alleging that the sweepstakes violated various California laws. Coinbase moved to compel arbitration under the user agreement. Plaintiffs resisted arbitration, arguing that the official rules of the sweepstakes superseded the arbitration agreement, meaning that there's no obligation to arbitrate. In response, Coinbase argued that because of the delegation provision in the user agreement, an arbitrator rather than a court had to decide which of the two contracts governed.
The District Court disagreed with Coinbase and ultimately declined to compel arbitration, and the Ninth Circuit affirmed. The Supreme Court then granted review to decide whether a court or an arbitrator should determine whether a subsequent contract supersedes an earlier arbitration agreement that contains a delegation provision.
Kannon Shanmugam: So, this was a unanimous decision from the Supreme Court. So, Will, what did the court decide, or rather, who gets to decide?
William Marks: Now the court held that in this instance, a court and not an arbitrator decides which of the contracts governs.
Kannon Shanmugam: And how did the court get to that conclusion?
William Marks: The court began by noting that arbitration is really just a matter of contract. So, the first question in any arbitration dispute is, what have the parties agreed to? The court explained that under its precedents, courts typically assumed that the parties did not delegate questions of arbitrability to the arbitrator and that courts decide whether a particular dispute is subject to arbitration.
And that question, whether the dispute is subject to arbitration, is quintessentially the question that's being asked, when there is an asserted conflict between a delegation provision in an earlier contract and a later contract that does not require arbitration at all. Determining which contract governs determines the answer to the question of whether the parties agreed to arbitrate their dispute.
After determining that, the question for the court became whether there was any special reason that the conflict between the particular Coinbase contracts at issue should be decided by an arbitrator, despite the default rule the court had just recognized.
Kannon Shanmugam: So, what did the court say about that?
William Marks: Coinbase had invoked what is known as the severability principle for arbitration agreements, and this requires a brief detour into an obscure corner of arbitration law. Under the severability principle, a party generally cannot avoid arbitration by arguing that the broader contract in which the arbitration agreement is situated is for some reason invalid. Rather, the party has to make an argument specific to some problem with the arbitration agreement itself. At that point, a court will decide whether the arbitration agreement is enforceable rather than sending everything to the arbitrator.
Now, that same principle applies to delegation provisions. It's not enough just to challenge the broader contract or even the arbitration agreement. Rather, a party resisting arbitration has to challenge the delegation provisions specifically. Now, Coinbase relied on that principle to argue that the plaintiff's argument concerning the conflict between the two contracts was not sufficiently specific to the delegation provision. Instead, that argument applied both to the broader contract and to the arbitration agreement equally as the delegation provision.
The court disagreed with Coinbase's argument on this front. The court explained that because the issue of the conflicting contracts applied equally to the delegation provision as to all other parts of the contract, and because the plaintiffs had specifically challenged the delegation provision, the severability principle was satisfied, and a court needed to resolve the question about the conflicting contracts.
Kannon Shanmugam: So, these arbitration decisions can often be fairly complicated, but they're also often pretty practically significant. What are the implications of this decision?
William Marks: The key takeaway is that if a business wants to ensure arbitration of disputes, including questions of arbitrability, they need to exercise extra caution if they have multiple contracts with a counterparty. If one contract contains an arbitration agreement and another later one doesn't, a court is going to determine which contract governs, even if the business went to the trouble of including a delegation provision in their arbitration agreement.
One potential way to avoid the problem of a court deciding that issue is to include language in your subsequent contracts incorporating the earlier arbitration agreement. Another possible method is to include language in the initial arbitration agreement, making clear that the agreement and its delegation provision apply to all future disputes, including disputes under subsequent contracts that may themselves lack any arbitration agreement.
Kannon Shanmugam: Great. Well, thank you, Will, for helping us to understand this decision. And if you have any questions about the decision, please feel free to reach out either to Will or to me. For more information about Paul, Weiss's Supreme Court and Appellate Litigation Practice, please visit us at our website, paulweiss.com. And please subscribe to “Court Briefs” wherever you listen to your podcasts. Until next time, thank you for joining us and take care.
