NY Federal Court Orders Dispute With Digital Currency Exchange to Arbitration

The Eastern District of New York has ordered a negligence case that was filed against a digital currency exchange to arbitration.  In Sultan v. Coinbase, Inc., No. 18-934 (E.D.N.Y., January 24, 2019), a man, Sultan, signed up for an online account with Coinbase, Inc.   The company operates as a broker for a variety of digital currencies such as Bitcoin and Ethereum in more than 30 nations.  As part of creating his account, Sultan checked a box stating he agreed to Coinbase’s User Agreement and Privacy Policy.  The User Agreement contained a binding arbitration clause and class action waiver.

Later, Sultan purportedly called Coinbase’s customer support number in order to discuss a pending transaction related to his account.  Instead, however, Sultan spoke to a third party hacker who allegedly stole approximately $200,000 worth of digital currency from Sultan using the information he provided during the telephone call.  After learning of his financial loss, Sultan pursued a negligence lawsuit against Coinbase in the Eastern District of New York.  In response to Sultan’s complaint, Coinbase filed a motion to compel the dispute to arbitration based on the terms of the company’s User Agreement.

In a memorandum opinion, the Eastern District of New York first stated there was “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” After that the court said:

“The threshold question of whether the parties indeed agreed to arbitrate is determined by state contract law principles.” Nicosia, 834 F.3d at 229. Perhaps the most fundamental of those principles is that “there must be a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms.” Express Indus. & Terminal Corp. v. New York State Dep’t of Transp., 93 N.Y.2d 584, 589 (1999). Assent may be manifested by words or conduct, but where the purported assent is largely passive, the contract-formation question will often turn on whether a reasonably prudent offeree would be on notice of the term at issue. In other words, where there is no actual notice of the term, an offeree is still bound by the provision if he or she is on inquiry notice of the term and assents to it through the conduct that a reasonable person would understand to constitute assent.  Schnabel v. Trilegiant Corp., 697 F.3d 110, 120 (2d Cir. 2012).

The federal district court then examined two relevant Second Circuit Court of Appeals cases before applying them to Sultan’s dispute with Coinbase:

The website at issue in Nicosia—Amazon.com—allowed users to place an order by clicking “Place your order,” but advised them elsewhere on the page that “[b]y placing your order, you agree to Amazon’s privacy notice and conditions of use.” 834 F.3d at 241. The second underlined phrase linked to the full text of the conditions of use, which included a mandatory arbitration provision. The circuit court concluded that reasonable minds could differ as to whether a prudent offeree had inquiry notice of the arbitration provision, relying on the following features of the interface:

• “[C]licking `Place your order’ does not specifically manifest assent to the additional terms, for the purchaser is not specifically asked whether she agrees or to say `I agree.'” Id. at 236.
• “Nothing about the `Place your order’ button alone suggests that additional terms apply, and the presentation of terms is not directly adjacent to the `Place your order’ button so as to indicate that a user should construe clicking as acceptance.” Id. at 236-37.
• “The message itself—`By placing your order, you agree to Amazon.com’s . . . conditions of use’—is not bold, capitalized, or conspicuous in light of the whole webpage.” Id. at 237.
• “There are numerous other links on the webpage, in several different colors, fonts, and locations, which generally obscure the message.” Id.
• “[T]he presence of customers’ personal address, credit card information, shipping options, and purchase summary are sufficiently distracting so as to temper whatever effect the notification has.” Id.

The interface at issue in Meyer—a smartphone app for the ride-sharing service Uber—directed users to click “Register” to create an account. See 868 F.3d at 76. Underneath “Register” was the following notice: “By creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY,” with the underlined phrases linking to the respective documents. Id. In contrast to Nicosia, the circuit court concluded that “the design of the screen and language used render the notice provided reasonable as a matter of California law.” Id. at 78. It then described the salient features of the interface:

• “The Payment Screen is uncluttered, with only fields for the user to enter his or her credit card details, buttons to register for a user account or to connect the user’s pre-existing PayPal account or Google Wallet to the Uber account, and the warning that `By creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.'” Id.
• “The text, including the hyperlinks to the Terms and Conditions and Privacy Policy, appears directly below the buttons for registration.” Id.
• “The entire screen is visible at once, and the user does not need to scroll beyond what is immediately visible to find notice of the Terms of Service. Although the sentence is in a small font, the dark print contrasts with the bright white background, and the hyperlinks are in blue and underlined.” Id.
• “[N]otice of the Terms of Service is provided simultaneously to enrollment, thereby connecting the contractual terms to the services to which they apply.” Id.

According to the Eastern District of New York, “Coinbase’s interface is far closer to Uber’s than Amazon’s.”  In addition, the court said:

Coinbase’s interface is even clearer than Uber’s in one important respect. “A putative [Uber] user is not required to assent explicitly to the contract terms.” See id. at 76. Nor is a purchaser on Amazon.com. See Nicosia, 834 F.3d at 236 (“[C]licking `Place your order’ does not specifically manifest assent to the additional terms.”).

Coinbase users, by contrast, must click a box certifying that they “agree to the User Agreement and Privacy Policy.” Lyn Decl., Ex. 2. That is significant because even the implicit acceptance language in Meyer was “a clear prompt directing users to read the Terms and Conditions and signaling that their acceptance of the benefit of registration would be subject to contractual terms.” 868 F.3d at 79. The explicit acceptance required here is an even clearer signal that a Coinbase account would be subject to terms and conditions, and an even stronger prompt to a reasonably prudent user to click on the link to see what those terms and conditions were before agreeing. See id. at 75 (“Courts routinely uphold [these so-called] clickwrap agreements for the principal reason that the user has affirmatively assented to the terms of agreement by clicking `I agree.'”).

Sultan, therefore, had inquiry notice of the terms of the User Agreement. The only remaining question is whether Sultan, in fact, assented to those terms.

The New York federal court then dismissed Sultan’s claim that he did not recall assenting to Coinbase’s User Agreement before ultimately granting the company’s motion to compel the dispute to arbitration.

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