A June 23 Supreme Court ruling in Coinbase creates yet another impediment to consumer litigation—that even when a consumer defeats an arbitration requirement, if the defendant then pursues an interlocutory appeal of that ruling, discovery and all other aspects of the case are automatically put on hold until that appeal is resolved. This article, after briefly examining the Coinbase ruling, sets out five approaches to avoid Coinbase’s worst consequences.
The Supreme Court Ruling
On June 23, a divided Supreme Court in Coinbase, Inc. v. Bielski, 2023 WL 4138983 (U.S. June 23, 2023), added yet another roadblock to consumer litigation. In 1988 Congress amended the Federal Arbitration Act (FAA) to provide that a defendant has a right to file an interlocutory appeal if a federal district court denies the defendant’s motion to compel arbitration. See 9 U.S.C. § 16(a) (hereafter FAA § 16(a)).
The Supreme Court has just interpreted FAA § 16(a) so that when the defendant files such an interlocutory appeal, the federal district court has no discretion, but must halt all proceedings in the case until the appeal is resolved. This of course will significantly delay discovery and other aspects of the case, and hand the defendant a powerful tool in any settlement negotiations, even where it is likely that the court of appeals will uphold the district court’s ruling as to the arbitration requirement. To make matters even more difficult, the Supreme Court in an earlier case indicated that an interlocutory appeal under the FAA is a matter of right even if the underlying request for arbitration was frivolous (though the usual procedures for dismissing a frivolous appeal and sanctioning the appellant would still apply). Arthur Andersen L.L.P. v. Carlisle, 556 U.S. 624, 628–29 (2009).
Prior to the Supreme Court’s Coinbase ruling, the Second, Fifth and Ninth Circuits had given the district courts discretion on how to handle proceedings while the interlocutory appeal from denial of arbitration was being decided. The Third, Fourth, Seventh, Tenth, Eleventh and D.C. Circuits had come to the opposite conclusion, that an appeal strips the district court of jurisdiction, and the litigation must be stayed until the appeal is resolved. Other circuits had not yet ruled on the issue.
This article suggests five approaches consumer litigants can take to avoid or ameliorate the effect of this club the Supreme Court in Coinbase has handed corporate defendants:
- Keep the case in state court;
- Consider the options the Supreme Court suggested in Coinbase, including summary affirmance;
- Determine if the arbitration requirement is clearly inapplicable to certain parties or claims;
- Check to see if FAA §§ 3 or 4 was never invoked or properly invoked;
- Call the defendant’s bluff and initiate arbitration.
1. Avoid Coinbase by Bringing the Case in State Court
Many practitioners are now filing consumer claims in state court, even if they are based on federal statutes. Another NCLC article examines the benefits of this strategy. The Coinbase ruling is yet one more reason consumers may fare better in state court.
Coinbase applies only to federal court litigation and has little or no impact on state court procedures. Coinbase interprets FAA § 16(a), which allows for an interlocutory appeal where a court fails to enforce an arbitration provision after the defendant’s motion under FAA §§ 3 or 4. Although, by their very language, FAA §§ 3 and 4 only apply to actions in federal court.
Where a state court denies the enforceability of an arbitration provision, the nature of an interlocutory appeal and whether the litigation is halted pending that appeal are matters of a state’s own appellate procedure and are not controlled by Coinbase.
Thirty-five states and the District of Columbia follow either the 1955 Uniform Arbitration Act or the 2000 Revised Uniform Arbitration Act, which both provide that an appeal may be had from a denial of a motion to compel arbitration and must be taken as from an order in a civil action. See Revised Uniform Arbitration Act § 28. In other words, in at least thirty-six jurisdictions, the nature of an interlocutory appeal and whether proceedings are stayed pending that appeal are determined by a state’s own rules as to an appeal taken from any order in a civil action. There may also be additional specific state rules limiting interlocutory appeals of arbitration determinations. See, e.g., Hershewe v. Alexander, 264 S.W.3d 717 (Mo. Ct. App. 2008) (order denying motion to compel arbitration must be appealed within ten days).
The thirty-six jurisdictions adopting either the 1955 or 2000 uniform acts are: Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Maine, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah, Virginia, Washington, and West Virginia.
The remaining fifteen states will also have their own arbitration legislation that will depart from FAA § 16(a) and will not be controlled by Coinbase. See, e.g., Deer Auto. Grp., L.L.C. v. Brown, 163 A.3d 176, 181–188 (Md. 2017) (state court order denying motion to compel arbitration is not a final, appealable judgment). Cf. Cal. Civ. Proc. Code § 1294(a) (West) (allowing interlocutory appeal).
States can also pass laws making clear that they do not follow FAA § 16(a) or Coinbase with respect to interlocutory appeals, and such state legislation would most likely survive an FAA preemption challenge. Specifically, a state can enact new legislation that limits the right to an interlocutory appeal of a denial to enforce an arbitration agreement, or a state can enact new legislation that provides that the trial court has discretion to continue the case during an interlocutory appeal. See, e.g., introduced California S.B. 365 (amended May 18, 2023, set for a second hearing July 12, 2023) (“An order dismissing or denying a petition to compel arbitration. Notwithstanding Section 916, the perfecting of such an appeal shall not automatically stay any proceedings in the trial court during the pendency of the appeal”). See also NCLC’s Model State Consumer and Employee Justice Enforcement Act, Title VII: Appellate Jurisdiction, § 1, No jurisdiction over interlocutory appeals (no interlocutory appeal of state court denial of motion to enforce arbitration).
Neither the FAA nor Coinbase preempts state appellate procedures inconsistent with Coinbase. The FAA’s appellate procedures at issue apply only to motions filed in federal court pursuant to FAA §§ 3 and 4. See also Badgerow v. Walters, 142 S. Ct. 1310, 1316 n.2 (2022) (while FAA substantive provisions apply in state courts, the Court has never held that FAA procedural provisions apply in state courts); Southland Corp. v. Keating, 465 U.S. 1, at 16 n.10 (1984) (“In holding that the Arbitration Act preempts a state law that withdraws the power to enforce arbitration agreements, we do not hold that §§ 3 and 4 of the Arbitration Act apply to proceedings in state courts”). Nor do state courts interpreting their own arbitration appellate rules have to follow Coinbase. Coinbase is limited to an interpretation of FAA § 16, which has different language and a different history than state legislation relating to arbitration appeals.
—How to Remain in State Court, Avoiding Coinbase
Filing a case in state court does not, of course, ensure that it will be litigated there. If the defendant successfully removes the case to federal court, Coinbase will apply. FAA § 4 also allows a defendant to apply to a federal court to obtain an order requiring the matter be arbitrated, and Coinbase applies to that federal court’s ruling as well.
One way to keep a case in state court and avoid the application of both FAA §§ 3 and 4 is for the consumer to raise individual or class counterclaims in response to a company’s state court collection case against the consumer. These counterclaims to the collection action cannot be removed to federal court, even if the counterclaim is a class claim that would otherwise be removable to federal court under the Class Action Fairness Act (CAFA). See Home Depot U.S.A., Inc. v. Jackson, 139 S. Ct. 1743 (2019); NCLC’s Collection Actions § 5.7.4.
Another way to stay in state court is to bring only state law claims and avoid federal diversity jurisdiction. To avoid diversity jurisdiction in an individual case, the plaintiff’s claim should not exceed $75,000, or at least one plaintiff and one defendant should be citizens of the same state, or the case is filed in the defendant’s home state. In a class action, CAFA must also be considered in keeping the case in state court. CAFA removal to federal court can be avoided in one of three ways: either (1) the class must have fewer than 100 members; (2) less than $5 million must be at stake; or (3) the class action must have a close nexus to the forum state. See NCLC’s Consumer Class Actions § 2.4.
A state court case also cannot be successfully removed to federal court if the plaintiff does not meet the Article III case or controversy requirements that apply in federal court. If the defendant removes such a case to federal court, the federal court must remand it. State court standing requirements are often more flexible than those for federal court, allowing the case to proceed in state court. See NCLC’s Consumer Class Actions Appx. G (analysis of state court standing requirements and strategic issues). See also another NCLC article Protecting Federal Claims by Using State Courts, that considers some of the tactical considerations concerning filing federal claims initially in state courts, particularly as they relate to standing issues.
In all three of these situations (counterclaims, no federal claim or diversity or CAFA coverage, and no federal court standing), if a company seeks to remove the case to federal court, the case should be remanded to state court for lack of federal court jurisdiction. In addition, an application under FAA § 4 to require a federal court to order the state case to arbitration should be denied because § 4 provides that a party “may petition any United States district court which, save for such [arbitration] agreement, would have jurisdiction under title 28.” But in these three situations, there is no federal jurisdiction, so FAA § 4 does not apply.
2. The Supreme Court’s Opinion in Coinbase Suggests Plaintiff Options
In the majority opinion in Coinbase, Justice Kavanaugh states that litigants have options to deal with unwanted delay or frivolous appeals when a party files an interlocutory appeal from the denial of a motion to compel arbitration:
Importantly, moreover, the courts of appeals possess robust tools to prevent unwarranted delay and deter frivolous interlocutory appeals. For example, a party can ask the court of appeals to summarily affirm, to expedite an interlocutory appeal, or to dismiss the interlocutory appeal as frivolous. In addition, nearly every circuit has developed a process by which a district court itself may certify that an interlocutory appeal is frivolous. … Finally, a court of appeals may impose sanctions where appropriate; the possibility of sanctions also helps deter frivolous appeals.
Coinbase, at *5.
Experienced appellate consumer litigators caution as counterproductive seeking appellate sanctions or arguing that an appeal is frivolous. Unless the district court indicates that it believes that the interlocutory appeal is frivolous, an appellate court is likely to want the benefit of briefing before determining an appeal and may find as grandstanding the consumer’s request for sanctions or dismissal of the appeal as frivolous. Instead of speeding the appeal, consumer attorneys may only hurt their credibility. In any event, in most consumer cases statutory attorney fees will be awarded to a consumer who prevails on appeal and eventually on the merits, without the need for a fee award based on the appellate court awarding sanctions.
Seeking a summary affirmance may be a better approach, at least in some cases. Summary affirmance can speed an appeal because briefing, oral argument, and even discussion among an appellate panel can be eliminated. The Federal Rules of Appellate Procedure do not mention motions for summary disposition, but the federal circuit courts of appeal, pursuant to their inherent authority, have their own rules, internal operating procedures, or practice guides prescribing the procedures for a motion for a summary affirmance.
The advisability of such a motion may depend on the circuit. The Seventh Circuit strongly discourages summary affirmance motions. Seeking summary affirmance might not save much time in other circuits that require motions for summary affirmance to be filed late in the appellate process or where oral argument is still allowed on motions for summary affirmance.
In circuits with more favorable approaches to summary affirmance, a motion for summary affirmance is best suited where the district court sets out in detail compelling reasoning to deny arbitration and existing precedent is consistent with the court’s reasoning. Consumer prejudice from the case being put on hold while the interlocutory appeal is being resolved may be relevant as well.
An alternative is to request an expedited appeal, but an expedited appeal is likely to speed things up only so much, since briefing and oral argument may still be allowed. When compared to other cases on a circuit’s docket, a consumer suit for damages may seem less compelling a case for an expedited appeal. Perhaps the interlocutory nature of the appeal and the fact that Justice Kavanaugh cites to this option could be persuasive.
3. Where the Arbitration Requirement Is Inapplicable as to Certain Parties or Claims
Coinbase deals with a case where the only defendant (Coinbase) and all the plaintiffs and claims were arguably subject to an arbitration requirement. But in different cases, federal district courts may have discretion to allow some discovery to proceed where there is no dispute that the arbitration agreement does not apply to at least certain parties or claims. See NCLC’sConsumer Arbitration Agreements § 5.4.5; Narragansett Elec. Co. v. Constellation Energy Commodities Grp., Inc., 563 F. Supp. 2d 325 (D.R.I. 2008) (denying stay of non-arbitrable claims after defendant filed interlocutory appeal of order denying motion to compel arbitration).
Consumer litigants should scrutinize the defendant’s motion that seeks to enforce an arbitration requirement. Did all the defendants join the motion? Did the motion apply to all of the consumers’ claims and all of the consumer plaintiffs? If not, the interlocutory appeal should not apply to those parties or claims, and discovery arguably should be available as to those parties or claims not involved in the arbitration motion on appeal.
For example, when a consumer sues a creditor and a consumer reporting agency (CRA), there may be an arbitration provision in the credit agreement, but there may be no consumer contract at all with the CRA, and the CRA may never have raised that the creditor’s arbitration provision applies to it. See, e.g., Oestreicher v. Equifax Info. Servs., L.L.C., 2023 WL 3819378 (E.D.N.Y. June 5, 2023) (Experian and not TransUnion or Equifax sought a discovery stay pending resolution of Experian’s claim that its arbitration agreement applied; court ordered discovery to proceed against TransUnion and Equifax).
4. Coinbase Should Not Apply Where FAA §§ 3 or 4 Are Never Invoked or Properly Invoked
FAA § 16(a) refers to orders refusing to “stay litigation” or “compel arbitration.” If a party moves to dismiss an action on the ground that arbitration is required but does not additionally move to stay litigation under FAA § 3 or compel arbitration under FAA § 4, then the party will not be able to take an interlocutory appeal of an order denying the motion to dismiss. See, e.g.,United States ex rel. Dorsa v. Miraca Life Sciences, Inc., 983 F.3d 885, 888–889 (6th Cir. 2020); Kum Tat Ltd. v. Linden Ox Pasture, L.L.C., 845 F.3d 979, 982–983 (9th Cir. 2017); NCLC’s Consumer Arbitration Agreements § 2.6.2.
By the terms of FAA § 16(a), to seek an interlocutory appeal of a denial of a motion to enforce the arbitration agreement, the motion must comply with either FAA §§ 3 or 4. Both provisions refer to an agreement in writing for such arbitration. Thus, neither provision should apply where there is no written arbitration agreement.
Coinbase relates to a case where there clearly was a written arbitration agreement, and the plaintiffs did not argue that there was no written arbitration agreement. Bielski v. Coinbase, Inc., 2022 WL 1062049, at *6 (N.D. Cal. Apr. 8, 2022) finds the Coinbase written arbitration provision was unconscionable. Thus FAA §§ 3 and 4 apply.
This leaves open the question whether Coinbase applies where the federal district court finds there is no written arbitration agreement—e.g., where the defendant presents a written document including an arbitration provision, but the court finds that FAA §§ 3 and 4 require there first be a formed arbitration agreement between the parties and that the arbitration agreement was never properly consummated. To make this argument, the consumer practitioner will have to distinguish Arthur Andersen L.L.P. v. Carlisle, 556 U.S. 624, 628–629 (2009), which held that a non-signatory could enforce FAA § 16(a). But in that case, there was a written agreement, and the question was who could enforce it, not whether it had ever been formed.
5. Calling the Defendant’s Bluff and Seeking Arbitration in Individual Cases
Often the last thing the defendant wants is to arbitrate a case. It only viewed the arbitration requirement as tactic to avoid class and even individual court actions. Where the defendant files an interlocutory appeal or even before the federal district court rules on a motion to enforce an arbitration provision, the consumer in an individual case can ask the court to stay the action while the consumer files the case in arbitration. A stay is important instead of voluntary dismissal to protect against a statute of limitations defense—as will be described below, the case may end up back in court.
When defendants learn what it will cost them to arbitrate an individual claim, they frequently will refuse to pay their arbitration fees or participate in the arbitration, and this should provide a basis for the consumer to go back to court. The consumer’s cost to arbitrate under American Arbitration Association (AAA) or JAMS consumer rules is minimal in comparison to the cost to the company.
If a consumer seeks arbitration before the AAA, the costs involved are very different if brought under the AAA’s consumer rules or commercial rules. Under the commercial rules, each party generally pays half of all fees and costs. Under the consumer rules, the business pays almost all fees and costs.
As described at NCLC’s Consumer Arbitration Agreements § 9.3.3, to initiate arbitration under AAA’s Consumer Arbitration Rules, the consumer pays $200 and that is the total amount the consumer must pay for the arbitration, no matter the length of the arbitration hearing. If the arbitration case is dropped because the business does not pay its fees, the $200 is refunded to the consumer. In addition, the AAA may, in the event of the consumer’s extreme hardship, defer or reduce the $200 amount.
Once the consumer has paid the $200 fee and meets the AAA’s filing requirements, the business must then pay $1700 in case management and filing fees. The business must also pay $750 for the AAA to review the arbitration agreement unless the agreement is already currently registered with the AAA.
If the consumer opts for a documents-only arbitration, the business pays another $1700. If the document-only arbitration requires more than seven hours, or involves more than 100 pages of documents, the business pays $300/hour for the excess amount. If the consumer opts for an in-person or telephone hearing, the business pays the full cost of the hearing at a rate of $2500/day plus a $500 hearing fee. Payment is due early in the procedure. AAA rules set out additional fees that are also all paid by the business.
The JAMS fee schedule for consumer arbitrations is somewhat differently structured. The consumer’s total obligation is $250. The business initially pays $950 and then 100% of the arbitrator’s fee, which will be hundreds of dollars an hour, plus a 13% JAMS case management fee.
If the defendant fails to pay these fees, AAA or JAMS will not conduct the arbitration and the consumer should be in a good position to return to court to litigate there. See NCLC’s Consumer Arbitration Agreements § 9.4. See also Cal. Civ. Proc. Code §§ 1281.97 to 1281.99 (West) (explicitly providing right to go back to court). If the defendant does agree to pay the fees, consumers can still obtain excellent results in arbitration before the right arbitrator. For a detailed discussion of conducting an arbitration proceeding, see NCLC’s Consumer Arbitration Agreements Chapter 9.
We would like to thank the following for commenting on this article prior to its publication: Carolyn Carter, Rich Frankel, Karla Gilbride, Shennan Kavanagh, Stuart Rossman, Dick Rubin, and David Seligman.