iOn December 5, 2023, the Ninth Circuit in Bielski, et al. v. Coinbase, Inc., No. 22-15566 (9th Cir. 2023) concluded that federal courts can look to the parties’ agreement as a whole when determining whether the delegation provision of an arbitration agreement is enforceable and held that the at-issue delegation provision was not unconscionable.
Abraham Bielski filed a putative class action against Coinbase in the U.S. District Court for the Northern District of California under the Electronic Funds Transfer Act, 15 U.S.C. §§ 1693–1693r, and Regulation E, 12 C.F.R. §§ 1005.1–1005.20, alleging that Coinbase failed to investigate the unauthorized transfer of funds and replaced funds fraudulently taken from users’ accounts. Coinbase moved to compel arbitration based on its user agreement, which contained an arbitration agreement with a delegation provision. The latter delegated to the arbitrator any dispute arising out of the agreement. Bielski argued that the delegation provision and the arbitration agreement were unenforceable. The district court agreed, denying the motion to compel arbitration and finding both the delegation provision and the arbitration agreement unconscionable and inseverable.
The Ninth Circuit reversed the district court’s denial of Coinbase’s motion to compel arbitration, holding that the district court erred in concluding the delegation provision was unconscionable. Notably, the Ninth Circuit utilized a three-prong analysis as a matter of first impression, as the Court had not previously set forth what a party must do to specifically challenge a delegation provision and what a court may consider when evaluating the enforceability of a delegation provision. Finally, the Court applied those standards to evaluate the enforceability of Coinbase’s delegation provision.
As a threshold issue, the Ninth Circuit concluded that, where a party specifically challenges the delegation provision, the district court must consider the challenge before ordering compliance. A party resisting arbitration must state that it is challenging the delegation provision and make specific arguments attacking the provision. Agreeing with the Third and Fourth Circuits, the panel held that a party may use the same arguments to challenge both the delegation provision and the arbitration agreement, provided the party articulates why the argument invalidates each specific provision. Because Bielski specifically challenged the delegation provision, the district court correctly considered that challenge.
Next, the panel held that, in evaluating an unconscionability challenge to a delegation provision under California law, a court must be able to interpret that provision in the context of the arbitration agreement as a whole. This may require examining the underlying agreement. The panel determined that the district court correctly considered the whole context surrounding the delegation provision in its analysis of the provision’s validity.
Finally, and critically, the panel held that the delegation provision in context was not unconscionable. Bielski argued the provision was unconscionable because it was an adhesion contract, lacked mutuality, and imposed one-sided, onerous pre-arbitration procedures on users. The Ninth Circuit disagreed and reversed, finding that — although Bielski established a low level of procedural and substantive unconscionability — there was nothing in the delegation provision that was “overly harsh, unduly oppressive, or unfairly one-sided” “to tip the scales to render the provision unconscionable.”
The Ninth Circuit’s opinion in Bielski finally makes clear what a party must do to challenge a delegation provision and what a court may consider when evaluating such a challenge. But it also offers helpful insight for drafters of delegation and arbitration provisions: a party may assert the same or substantially similar arguments in challenging delegation and an arbitration agreement as a whole, so it is important to make sure that both are written in plain, concise, and inconspicuous terms. Drafters should also be conscious of the fact that, if a delegation provision refers to specifically defined terms or to the arbitration agreement as a whole, the court will need to look outside of the delegation provision itself and examine the question of unconscionability in the greater context of the entire arbitration agreement, including assessing whether or not other provisions of the arbitration agreement serve to render the delegation provision procedurally and/or substantively unconscionable. Although arbitration agreements are often fiercely contested in putative consumer class actions, reasoned practices for ensuring the enforceability of arbitration provisions generally will also serve to inform the enforceability of any related delegation provisions and may potentially help insulate the delegation provision from a successful challenge.
