In a decision with implications nationwide, the Supreme Court of the United States recently ruled that, under the Federal Arbitration Act — the principal federal statute that governs judicial enforcement of arbitration agreements — federal district courts must stay trial-level litigation during the pendency of any interlocutory appeal from a decision denying a motion to compel arbitration.

Facts

The case, styled Coinbase, Inc. v. Bielski, involved class action allegations against Coinbase, a cryptocurrency platform. The plaintiff, Abraham Bielski, who held a cryptocurrency account with Coinbase, alleged that the company failed to replace more than $30,000 a fraudster allegedly stole from his account. Bielski, on behalf of others who had supposedly fallen victim to similar scammers, filed a purported class-action complaint against Coinbase in the U.S. District Court for the Northern District of California. The plaintiffs claimed that Coinbase violated the federal Electronic Funds Transfer Act, and certain regulations promulgated thereunder, by failing to credit the users’ accounts and properly investigate their alleged losses.

Invoking the Federal Arbitration Act, Coinbase moved to compel the plaintiffs to arbitrate their disputes. According to Coinbase, arbitration was required under the agreements that the users had entered into with the company. The district court denied the motion, holding that the plaintiffs’ claims should proceed in litigation.

Coinbase appealed to the U.S. Court of Appeals for the Ninth Circuit and asked the district court to stay further trial-level proceedings pending resolution of the appeal. The district court denied the stay. Coinbase subsequently asked the Ninth Circuit to stay trial proceedings, but that request, too, was denied.

The Ninth Circuit’s Position

In denying Coinbase’s request for a stay, the Ninth Circuit relied on its prior precedent providing that an appeal from the denial of a motion to compel arbitration does not automatically stay district court proceedings. In the Ninth Circuit’s view, no automatic stay was required because section 16(a) of the Federal Arbitration Act, which addresses appeals from orders denying motions to compel arbitration, does not purport to require a stay in so many words.

The Ninth Circuit was not alone in that approach. Notably, the Second Circuit and the Fifth Circuit also took the position that an appeal from a district court order denying a motion to compel arbitration does not automatically stay further trial-level proceedings. However, the majority of circuits took the contrary view. The weight of appellate authority held that a district court must stay litigation pending the resolution of an appeal from a district court order denying a motion to compel arbitration.

Dissatisfied with the Ninth Circuit’s resolution of the matter, Coinbase filed a petition for writ of certiorari. The Supreme Court granted the petition and accepted the case for plenary review.

The U.S. Supreme Court’s Decision

On June 23, 2023, in a five-to-four ruling authored by Justice Brett Kavanaugh, the Supreme Court sided with Coinbase — and the majority of circuits — and held that, under the Federal Arbitration Act, a district court must stay litigation pending the resolution of an appeal from a district-court order denying a motion to compel arbitration.

The Court relied heavily on its prior decision in Griggs v. Provident Consumer Discount Co., in which it held that the pendency of an appeal from a district court ruling “divests the district court of its control over those aspects of the case involved in the appeal” (459 U.S. 56, 58 [1982]). The Court reasoned that this same fundamental principle applied in the arbitration context. And inasmuch as the “aspect[] of the case involved in the appeal” of Coinbase’s motion was whether litigation could proceed in the judicial forum in the first place, the entire case had to be stayed pending appeal, the Court concluded. In short, as the Court put it, “[t]he Griggs principle resolves this case.”

The Court added that, in the arbitration context, the fundamental principle of Griggs was underscored by strong pragmatic and policy rationales. For example, where litigation permitted to proceed while the question of arbitrability was on appeal, parties could be forced to incur substantial and unrecoupable costs for expenses that might end up being all for naught in the event the appellate court ultimately rules that arbitration is required. Similarly, such a ruling would effectively nullify the substantial efficiencies that arbitration is designed to achieve. The Court also rejected the plaintiffs’ argument that certain language in the Federal Arbitration Act displaced the background Griggs rule.

In dissent, Justice Ketanji Brown Jackson, writing for herself and three other Justices, faulted the majority for relying on Griggs rather than a specific affirmative textual command of the Federal Arbitration Act. The dissenters would have given district courts discretion as to whether to impose a stay while the question of arbitrability is on appeal.

Takeaways from the Coinbase Decision

The Coinbase decision offers much for discussion. The following takeaways stand out:

First, the decision is favorable for contracting parties seeking to invoke arbitration clauses. While those clauses occasionally come under fire and have prompted legislation to limit them, they are still generally enforceable, particularly in business settings and user agreements for applications and services. After Coinbase, in all federal jurisdictions, parties seeking to arbitrate disputes under arbitration clauses are entitled to obtain a definitive appellate resolution of arbitrability before engaging in potentially costly court litigation of their disputes. This includes disputes within the Second Circuit — i.e., the federal courts located in New York, Connecticut, and Vermont — where, as noted above, parties were not entitled to an automatic stay of litigation while an arbitrability appeal was pending.

Second, although the Court’s decision only implicates federal practice, it may have ripple effects for practice in state courts, as well. As discussed, Coinbase rested largely on the background rule in federal court that an interlocutory appeal stays all aspects of the case involved in the appeal. However, not all state courts embrace that principle. New York, in particular, rejects it. In New York state courts, interlocutory appeals do not invariably stay trial-court litigation concerning the subject of the appeal — either in the arbitration context or in general. Moreover, discretionary stays are often difficult to obtain. Will Coinbase change that landscape and encourage New York state courts to recognize the importance of staying litigation while the question of arbitrability is pending on appeal? Or will New York state courts dismiss the Coinbase rule as inapplicable given the absence of any general Griggs analog? Litigants will confront these questions as New York state courts begin reckoning with Coinbase and its aftermath.

Third, to obtain the full benefits of an arbitration clause, it is critical that contracting parties ensure that their clauses are carefully drafted and registered with the American Arbitration Association. A common threshold question in the adjudication of motions to compel arbitration is whether the clause at issue is enforceable and binding — an inquiry with ample case law illustrating the trials and tribulations of attempting to contract to arbitrate disputes. Further, the granting of such a motion might not definitively stave off all court activity: Arbitrators applying the rules of the American Arbitration Association may decline to administer arbitrations where an entity does not follow that organization’s particular registration procedures, thereby returning the parties to the very judicial forum they had sought to avoid.

Overall, if a contracting party is considering whether to include an arbitration provision, determining how best to enforce such a provision, or evaluating the myriad other issues arbitration agreements raise, then the party should seek counsel in a timely fashion. The passage of time could bar defenses and jeopardize the party’s legal position.