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Appeals court: Class action vs Coinbase can bypass arbitration because seeks 'public relief'

NORTHERN CALIFORNIA RECORD

Friday, November 22, 2024

Appeals court: Class action vs Coinbase can bypass arbitration because seeks 'public relief'

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California Appellate Justice Ioana Petrou | Law.berkeley.edu/

A state appeals panel has agreed Coinbase can’t use an arbitration agreement to sidestep a class action from customers of its crypto wallet service who accuse the company of misleading them and the public about its business practices.

Four named plaintiffs sued Coinbase, seeking an injunction under the Consumer Legal Remedies Act, the California False Advertising Law and the state’s Unfair Competition Law. 

After San Francisco County Superior Court Judge Richard Ulmer denied the company’s motion to compel arbitration, it challenged the matter before the California First District Appellate Court. Justice Ioana Petrou wrote the opinion. Justices Alison Tucker and Carin Fujisaki concurred.

According to court background, the plaintiffs don’t dispute the updated user agreement they accepted in 2022 as part of keeping their accounts, which provide access to a platform for trading various cryptocurrencies. Two of them, Manish Aggarwal and Mostafa El Bermawy, first filed a federal lawsuit alleging Coinbase failed to protect their accounts from hackers, mitigate losses from online theft or provide support following the crimes.

Although a federal judge agreed to compel arbitration, the plaintiffs had also filed a complaint in San Francisco Superior Court. Though that lawsuit relied on the same facts, it also explicitly alleged Coinbase misrepresents its security features. The state court complaint sought only “public injunction relief.”

That demand is significant, as plaintiffs said the alleged lack of personal benefit to any individual plaintiffs means Coinbase can't then use the arbitration language in its user agreement to keep the case out of court.

Coinbase succeeded in removing the complaint to federal court, but the plaintiffs dismissed the suit and refiled in state court after adding a California-based plaintiff.

“Here, the complaint plainly shows that plaintiffs are only seeking public injunctive relief,” Judge Ulmer wrote. “Plaintiffs do not request any sort of relief that would solely benefit them or existing Coinbase customers. In fact … defendants’ allegedly misleading scheme has already harmed plaintiffs and plaintiffs are aware of defendants’ practice. It is thus unclear how the requested injunction will benefit plaintiffs.”

The panel agreed with Ulmer, holding the lawsuit “asserts Coinbase is aware of the importance of security to consumers and thus advertises itself to the public as the ‘most trusted’ and ‘most secure’ cryptocurrency platform.’ It does so via information on its website and in online, television, and newspaper advertisements. The complaint further alleges ongoing harm toward the public,” such as by targeting advertising to new customers.

Although the lawsuit contains allegations specific to existing, individual customers, Petrou wrote, it doesn’t seek specific relief for those people, but are included to “exemplify how Coinbase’s actual conduct differs from its marketing statements to the public.”

Coinbase argued the relief the plaintiffs have requested, at most, would benefit potential Coinbase users and not the general public. The panel, however, said “similar arguments have been considered and rejected,” because to hold otherwise would require too narrow a view of what constitutes a potential customer.

The company further noted the plaintiffs alleged they would keep using Coinbase if it remedied security lapses, but the panel said the important distinction is whether the complaint itself asks a judge to compel those changes rather than just challenging the company’s marketing materials as allegedly deceptive, with Petrou writing: “Coinbase appears to confuse an injunction requiring it to modify its security features — which has not been requested — with an injunction requiring it to cease misrepresentations regarding its security features.”

The panel further rejected Coinbase’s arguments that the plaintiffs didn’t meet the burden of showing how an injunction would benefit the public, stressing the plaintiffs weren’t resisting arbitration on an issue they consent is included in the user agreement, but are instead pursuing a claim they say falls outside that contract.

“While we agree with Coinbase that courts should not blindly rely on a complaint’s prayer for public injunctive relief, such is not the case here,” Petrou wrote. “Plaintiffs’ complaint does not superficially request such relief but contains supporting allegations and facts. The complaint identifies specific statements at issue, how those statements were conveyed by Coinbase and why those statements would allegedly mislead the public. These statements, if ultimately proven at trial, would support a claim for public injunctive relief.”

Finally, the panel rejected Coinbase’s argument that the federal judge’s order compelling arbitration should bear on the appellate ruling. The company accused the plaintiffs of “gamesmanship” and attempting to use a state court lawsuit for leverage and compensation in the federal litigation. But the panel said the federal lawsuit is broader in terms of allegations and intended relief and the fact the later inclusion of Unfair Competition Law claims in that complaint didn’t persuade a judge to change course on compelled arbitration doesn’t have bearing on the much more specific nature of the state court lawsuit.

Coinbase is represented by Norton Law Firm.

In response to a query, a Coinbase spokesperson issued a statement on the ruling: “The plaintiff has not provided any evidence that his claims belong in court, rather than arbitration. Coinbase intends to petition the California Supreme Court for review and we look forward to the court’s consideration.”

The plaintiffs, who are allowed to recover the costs of the appeal process, are represented by the firm of Braun Hagey & Borden.

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