Arbitration is intended as a faster, less expensive alternative to traditional litigation, and is often an effective way to resolve relatively minor disputes, such as those between a company and a customer. But what if the conflict involves serious claims, and may affect the general public?
That was the issue presented to the California Court of Appeal by a recent case (Kramer v Coinbase, Inc.)
Darren Kramer and four other customers suited Coinbase, Inc. in San Francisco Superior Court, alleging the cryptocurrency platform had falsely advertised that its technology by which customers could buy, sell and transfer digital currencies was highly secure. In fact, they said, hackers were able to access their Coinbase accounts and steal their funds.
Initially most of the plaintiffs had sued Coinbase in federal court. Coinbase had responded to that lawsuit by asking that the case be handled through arbitration rather than in court. It noted that its user agreement said, “you and Coinbase agree that any dispute, claim, disagreements arising out of or relating in any way to your access to or use of the Services or of the Coinbase Site…will be resolved by binding arbitration, rather than in court.”
The federal judge agreed with Coinbase and mandated that the dispute be arbitrated. The plaintiffs then filed a fairly similar complaint in state court, but with some significant differences.
The federal lawsuit sought both private and public injunctive relief – that is, a court order requiring Coinbase to act in specified ways and to refrain from specified acts in regard to both the individual plaintiffs and the general public.
The lawsuit filed in state court sought only public injunctive relief, meaning a court order affecting the company’s behavior affecting the public at large, not just the plaintiffs. This was significant because California law invalidates contract terms – such as an arbitration clause – that purport to waive the right to seek public injunctions.
In state court, Coinbase again moved to compel arbitration of the dispute, citing the terms of its user agreement. It argued that, despite the wording of their complaint, the plaintiffs were actually seeking private injunctive relief.
In denying the Coinbase motion, the trial court rejected the argument that the customers were seeking relief that would only benefit them. “Plaintiffs do not request any sort of relief that would solely benefit them or existing Coinbase customers,” the trial judge noted.
An order requiring Coinbase to inform potential customers of alleged flaws in its security measure would not help the plaintiffs, the court said, because the company’s “allegedly misleading scheme has already harmed plaintiffs,” so they were well aware of its practices.
The main beneficiaries of the relief sought by the plaintiffs would be members of the public, said the court. That precluded mandatory arbitration of the dispute.
Coinbase appealed, arguing that the claims were subject to arbitration because, despite the wording of the state court complaint, the plaintiffs’ real objective was private injunctive relief.
In reviewing the trial court’s decision, the appellate justices noted that “private injunctive relief is relief that primarily resolves a private dispute … and rectifies individual wrongs ... and that benefits the public, if at all, only incidentally.”
By contrast, public injunctive relief “by and large benefits the general public.” The plaintiff benefits, if at all, only “incidentally and/or as a member of the general public.”
One of the plaintiffs’ accusations is that Coinbase used false advertising in describing the security of its platform, the justices pointed out. An injunction against future false advertising would not benefit the plaintiffs because they allegedly have already been injured and are familiar with the company’s practices. The primary beneficiaries of such an injunction would be members of the general public who might consider doing business with the company.
Even if an injunction benefits both present and potential customers of a company, they said, that does not make it a private injunction.
For these reasons, they concluded, plaintiffs seeking a public injunction, or both a public and private injunction, cannot be compelled to submit their claims to arbitration.
The justices affirmed the ruling of the lower court, allowing the case to go to trial rather to arbitration, and awarded the plaintiffs their costs on appeal.
This case in part highlights the difference between the Federal Arbitration Act and the California Arbitration Act. Depending upon what arbitration act applies to a dispute, the results can be quite different.
By Laurie Murphy