US Supreme Court rules litigation is automatically stayed pending appeal of denial of motion to compel arbitration

On June 23, 2023, the US Supreme Court in Coinbase, Inc. v. Bielski, No. 22-105, resolved a circuit split by holding that a district court must stay its proceedings pending an interlocutory appeal of a decision denying a motion to compel arbitration. As a result, litigants in all federal courts can now obtain a stay of litigation in a district court while the underlying decision refusing to compel arbitration is on appeal to the circuit courts of appeal.

Background of the dispute

The Supreme Court's ruling came out of a putative class action filed in the Northern District of California against Coinbase, Inc. (Coinbase) for alleged violations of the Electronic Funds Transfer Act.

Coinbase had moved to compel arbitration of the claims based on the dispute resolution clause in its user agreement. The district court denied the motion. Coinbase then filed an interlocutory appeal under the Federal Arbitration Act with the US Court of Appeals for the Ninth Circuit, where it asked both the district court and the Ninth Circuit to stay the proceedings pending the appeal.

Following standing precedent in the Ninth Circuit holding that such stays are discretionary, both courts refused to grant a stay. The Ninth Circuit's precedent, though in line with precedents in the Second and Fifth Circuits, conflicted with precedents in other circuits holding that stays pending interlocutory appeals of denials of motions to compel arbitration under the Federal Arbitration Act are mandatory. The Supreme Court granted certiorari on this issue to resolve the circuit split.

In the Supreme Court, Coinbase argued that an interlocutory appeal generally divests jurisdiction of the district court over the issue on appeal, and that the issue of whether to proceed in the district court is intrinsically tied to the question of arbitrability. It also argued that allowing the district court proceedings to continue would undermine Congress's purpose in the Federal Arbitration Act to move parties into arbitration as quickly and efficiently as possible.

On the other side, the plaintiff warned that Coinbase's position would encourage frivolous appeals of the denial of motions to compel arbitration to automatically obtain a stay, and that an automatic stay was not necessary because the discretionary stay factors are sufficient to protect a party's rights with respect to any such appeal. The plaintiff also argued that the part of the Federal Arbitration Act authorizing interlocutory appeals, unlike other related statutory provisions, did not contain express language mandating a stay pending appeal and that such omission by Congress was intentional.

The Court's ruling

The Supreme Court sided with Coinbase in a 5-4 opinion delivered by Justice Kavanaugh. The Court majority held that Congress enacted the interlocutory appeal provision of the Federal Arbitration Act against the clear "background principle" that an interlocutory appeal "'divests the district court of its control over those aspects of the case involved in the appeal,'"¹ also known as the Griggs principle.

The Court concluded that "[t]he 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'"² and, as such, "the district court must stay its proceedings while the interlocutory appeal on arbitrability is ongoing."³

The Court additionally reasoned that it "'makes no sense for trial to go forward'"⁴ while the appellate court determines whether the dispute should be in arbitration. The Court agreed with Coinbase that if the district court could move forward with its proceedings, "many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost."⁵ In addressing the possibility of frivolous appeals, the Court found that courts of appeal are already well-equipped to handle such situations.⁶

Justice Jackson authored a dissent, joined by Justices Sotomayor, Kagan and in part Thomas, disagreeing with the rule announced by the majority. The dissent reasoned that there was no basis in statute or precedent for this rule and that there was no justification to depart from the discretion traditionally imparted upon judges to determine whether a stay is appropriate under the specific facts and circumstances of a case. The dissenting justices' views, however, did not carry the day.

Takeaways

As a result of the Coinbase decision, district courts in the Second, Fifth, and Ninth Circuits will join courts in the other Circuits in imposing mandatory stays of litigation pending an appeal of the denial of a motion to compel arbitration.

The Court's decision makes it easier and more cost efficient for parties enforcing arbitration clauses given the underlying litigation will not move forward while the question of arbitrability is appealed.

For parties enforcing arbitration clauses, Coinbase is an important addition to the Court's pro-arbitration precedents.