Coinbase is a win for defendants seeking to compel arbitration

The Supreme Court's ruling in Coinbase v. Bielski delivered another win for defendants in the high court's arbitration jurisprudence. In a 5-4 ruling, the Court held that an interlocutory appeal of a district court's denial of a motion to compel arbitration automatically stays proceedings in the district court pending resolution of the appeal. This ruling resolved a circuit split, and federal courts are now required to stay discovery upon the filing of an appeal challenging the ruling on a motion to compel arbitration.

Background

While the Federal Arbitration Act (FAA) authorizes interlocutory appeals from decisions denying motions to compel arbitration, 9 U.S.C. § 16(a), the FAA is silent as to whether district court proceedings must be stayed while the appeal is pending. Without express guidance, a circuit split arose regarding whether an interlocutory appeal from the denial of a motion to compel arbitration automatically stays underlying district court proceedings.

The majority view, adopted by the Third, Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits, held that an interlocutory appeal automatically stays the underlying district court proceedings. See Levin v. Alms & Assoc., Inc., 634 F. 3d 260, 266 (4th Cir. 2011); Ehleiter v. Grapetree Shores, Inc., 482 F. 3d 207, 215, n. 6 (3d Cir. 2007); McCauley v. Halliburton Energy Servs., Inc., 413 F. 3d 1158, 1162-1163 (10th Cir. 2005); Blinco v. Green Tree Servicing, LLC, 366 F.3d 1249, 1253 (11th Cir. 2004); Bombardier Corp. v. National Passenger Corporation, 333 F. 3d 250, 252 (D.C. Cir. 2003); Bradford-Scott data Corp. v. Physician Computer Network, Inc., 128 F. 3d 504, 506 (7th Cir. 1997).

These circuits reached this conclusion based on the longstanding Griggs principle which holds that an appeal, including an interlocutory appeal, "divests the district court of its control over those aspects of the case involved in the appeal." Griggs v. Provident Consumer Discount Co., 459 U. S. 56, 58 (1982). The majority view deems this principle outcome determinative when an interlocutory appeal is filed after the denial of a motion to compel arbitration. As explained by the Seventh Circuit, whether "the litigation may go forward in the district court is precisely what the court of appeals must decide." Bradford-Scott, 128 F. 3d at 506; Blinco, 366 F.3d at 1253.

Put simply, where the question on appeal concerns whether a matter may be properly litigated in the district court, it makes little sense to permit that matter to proceed forward in the district court before that threshold question is resolved. Blinco, 366 F.3d at 1253.

The minority view, adopted by the Second, Fifth, and Ninth Circuits, held that an interlocutory appeal from the denial of a motion to compel arbitration does not automatically stay the underlying district court proceedings. See Weingarten Realty Investors v. Miller, 661 F. 3d 904, 907-910 (5th Cir. 2011); Motorola Credit Corp. v. Uzan, 388 F. 3d 39, 53-54 (2nd Cir. 2004); Britton v. Co-op Banking Group, 916 F. 2d 1405, 1412 (9th Cir. 1990).

These circuits reason that the issue of arbitrability on appeal is distinct from the merits of the litigation and therefore the Griggs principle does not require that the underlying district court proceedings be stayed. See Britton, 916 F. 2d at 1411. Further, the Ninth Circuit holds that an automatic stay in these situations would give a litigant the opportunity to "stall a trial simply by bringing a frivolous motion to compel arbitration." Id. at 1412. Because staying proceedings is not mandatory, these circuits instead apply the four-factor test articulated in Nken v. Holder to determine whether a stay pending appeal is appropriate:

(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) whether the public interest favors a stay. 556 U.S. 418 (2009).

The Supreme Court granted certiorari to resolve this circuit split.

Coinbase Ruling

The Court ruled in line with the majority of circuits on this issue. It explained that although the FAA does not expressly state whether district court proceedings must be stayed during an interlocutory appeal, it was enacted against a clear background principle: "[a]n appeal, including an interlocutory appeal, 'divests the district court of its control over those aspects of the case involved in the appeal."' Coinbase, Inc. v. Bielski, No. 22-105, 2023 WL 4138983 at *1 (U. S. June 23, 2023) (citing Griggs, 459 U. S. at 58). Accordingly, the Court found that the Griggs principle resolves this case because the question on appeal is "whether the case belongs in arbitration or instead in the district court, the entire case is essentially 'involved in the appeal.'" Id.

The Court also noted that following the Griggs principle comported with the leading treatises as well as circuit court rulings applying the Griggs principle in similar contexts, such as when an appeal on double jeopardy or qualified immunity is underway. Coinbase, Inc., No. 22-105, 2023 WL 4138983 at *4.

The Court further remarked that the majority view's practice of following the Griggs principle "reflect[ed] common sense." Id. Indeed, permitting proceedings to continue pending appeal would result in "many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) [being] irretrievably lost - even if the court of appeals later concluded that the case actually had belonged in arbitration all along." Id. The potential for "blackmail settlements" in class actions absent a mandatory stay also troubled the Court. Id. The Court did not mince words to describe the circumstances parties would find themselves without a stay pending appeal: "A right to interlocutory appeal of the arbitrability issue without an automatic stay of the district court proceedings is therefore like a lock without a key, a bat without a ball, a computer without a keyboard - in other words, not especially sensible." Id.

Importantly, in analyzing Congress's historical signaling on whether stays are automatic in the context of an interlocutory appeal, the Court noted that Congress has typically stated its intent outright. The Court provided multiple examples of legislation where Congress has enacted a statute with a mechanism for appeal and explicitly mentioned that proceedings are not stayed in the interim. Id. at 6.

After presenting the principles underlying its ruling, the Court rejected the five arguments raised by Plaintiff. Two are of particular importance. First, the Court disagreed that automatic stays would encourage frivolous appeals to delay proceedings, explaining there has been little evidence of this occurring in practice when the Griggs principle is applied, the Plaintiff did not argue that the appeal was frivolous in this case, and that courts have robust measures of determining whether an appeal is frivolous already. Id. at 5. The Court also disagreed with Plaintiff's argument that the discretionary stay procedure would adequately protect parties seeking arbitration because courts have generally not considered litigation-related costs to qualify as "irreparable harm." Id. at 6.

Justice Jackson, along with Justices Sotomayor and Kagan in whole and Justice Thomas in part, dissented, arguing that the Court's decision was overbroad and categorically favored defendants. The dissent's first objection focused on the statutory text of the FAA. It agreed with the Plaintiff's argument that Congress's inclusion and exclusion of specific language within the same statute is indicative of its intent on that given issue. And here, Congress specifically discussed automatic stays in two other sections of the FAA. Id. at 7-8. The dissenting justices noted that the majority focused on the presence of non-stay language in other statutes, but not within the FAA itself, and noted these other statues did not pertain to arbitration. Id. at 8. The dissent also criticized the majority opinion's reliance on the Griggs principle, arguing that the exalted status given to the Griggs principle ran afoul of another "background principle": "the power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket." Id. at 9. Because "[t]his discretionary decision making promotes procedural fairness because it allows for a balancing of all relevant interests," and without statutory text or a prior decision supporting that a stay must be mandatory, the dissent saw "no basis here for wresting away the discretion traditionally entrusted to the judge closest to a case." Id. at 7.

Impact

Coinbase is a win for defendants seeking to compel arbitration. Because a stay of proceedings is now mandatory upon the filing of an interlocutory appeal of a decision denying a motion to compel arbitration, defendants retain the benefits of arbitration during the appeal. Defendants will be spared from engaging in costly discovery and avoid being confronted with the "blackmail settlements" that concerned the majority in Coinbase.