A cryptocurrency exchange recently achieved a major legal victory. With a favorable ruling in an arbitration case pertaining to allegations of substantial trading losses. Moreover, the exchange had been accused of issuing faulty transactions. These faulty transactions led to the purported losses and sought to clear its name through the arbitration process.
This past month, a district court in California granted a motion to compel arbitration. Evenmore, the arbitration of various claims made against Coinbase Global, Inc. The ruling was in response to customers of the cryptocurrency exchange platform who alleged trading losses. (Donovan v. Coinbase Global, Inc., No. 22-02826 (N.D. Cal. Jan. 6, 2023)).
Unlike some other electronic contract disputes that hinge on whether the user had adequate notice of the terms of service and consented to them (which often involves an examination of a site or app’s screen display and determining if the user was reasonably presented with a notice that completing a transaction would bind them to the agreement), the account holders, in this case, did not dispute that they had agreed to Coinbase’s User Agreement; rather, they argued that its arbitration provision and delegation clauses were unconscionable and unenforceable.
The court was presented with the question of whether there was sufficient evidence. In order to demonstrate that both parties agreed to delegate any questions regarding arbitrability to an arbitrator. As part of its consideration, the court examined the Coinbase User Agreement. The agreement contained a clause specifically delegating such questions to an arbitrator. This clause stated that the arbitrator would have exclusive authority to resolve disputes relating 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”
Furthermore, since this agreement incorporated the American Arbitration Association (AAA) rules into itself. And also it gave the arbitrator “the power to rule on his or her own jurisdiction”.
On this basis, it was determined by the court that both parties had indeed “agreed to arbitrate arbitrability”. And thus unless there were applicable contract defenses such as unconscionability raised by Plaintiffs or other reasons for invalidation.
The Plaintiffs argued that the User Agreement was an adhesion contract. Moreso, the contract had recently been amended. And that the delegation clause was buried within the lengthy text and not explicitly featured in a pop-up box when users agreed to the amended terms.
Coinbase maintained that when the terms were altered, users were warned and asked to review them before continuing to use Coinbase. Along with the option of rejecting them and consulting the Help page on how to move their funds elsewhere.
Ultimately, the court sided with Coinbase. It determined that Coinbase was not the only choice for cryptocurrency services, and even though its amendments to the delegation clause were not set out in a pop-up box for users, it was “clearly labeled” in bold print in the User Agreement. Moreover, it found that the Plaintiffs failed to demonstrate substantive unconscionability. Thus, it ruled that the delegation provision was enforceable and that the Plaintiffs’ objections to arbitrability should be referred to an arbitrator.
Court’s Decision Highlights How Crucial to Draft Term of Use and Policies
The recent court’s decision in the Donovan case highlights just how crucial it is for digital asset services and crypto exchanges. To draft their terms of use and user policies with extreme care. Digital entities and marketplaces process thousands, if not millions, of transactions every day. Therefore, it is inevitable that customers might experience unexpected losses due to third-party digital asset transactions.
To protect themselves from such potential losses, many of these services rely on disclaimers, limitations of liability, and arbitration clauses – the latter being particularly relevant in this case. By carefully wording the arbitration clause, these platforms can ensure that any disputes arising from such transactions are handled quickly and efficiently.
