Right to sue exchanges tested in Coinbase hidden fees case

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A group of traders who are suing Coinbase (NASDAQ: COIN) over ‘hidden fees’ must resolve their dispute in arbitration rather than the courts, a California federal judge has ruled.

The case is Cordero et al v Coinbase. The traders had hoped to escape the terms of Coinbase’s user agreement, which stipulates that all disputes must be resolved in arbitration rather than in court, and that users cannot bring class action claims against the exchange.

Last week, the court rejected that argument, finding that the arbitration clause did not rise to the level of unconscionability required for the court to rule it invalid.

The traders had originally sued Coinbase in May, claiming that when users go to buy digital assets on the platform, they’re quoted a price that is routinely 1% higher than appears elsewhere on the website.

“That undisclosed difference between the ‘price’ quoted and the market price goes directly to Coinbase as a hidden fee,” reads the lawsuit.

The traders had hoped to bring Coinbase to trial in a class action suit. However, Coinbase argued that its terms and conditions—agreed to by all users—mandate that disputes must be resolved in arbitration and preclude the traders from filing suit against the exchange.

The arbitration clause reads as follows:

“Subject to the terms of this Arbitration Agreement, 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, any Communications you receive, any products sold or distributed through the Coinbase Site, the Services or the User Agreement and prior versions of the User Agreement, including claims and disputes that arose between use before the effective date of these Terms…will be resolved by binding arbitration, rather than in court.”

Coinbase’s terms and conditions also contain a class waiver, where users must agree that they are not able to bring a class action lawsuit against the company under any circumstances. It reads (caps original):

The traders case was that the class waiver was enough to render the arbitration agreement unconscionable, relying on Discover Bank v Superior Court, a California Supreme Court case which ruled that class waivers are unconscionable when it is “in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.”

Last Tuesday, U.S. District Judge Charles R. Breyer agreed with Coinbase. It ruled that the class waiver was insufficient to make the arbitration agreement unconscionable.

Distinguishing other cases where arbitration agreements were ruled unconscionable, the Judge found that Coinbase’s agreement does not require ‘class-wide’ arbitration and does not enforce representative proceedings that bind absent parties.

Ultimately, the court decided that ruling that the arbitration agreement is invalid would effectively contravene the will of Congress as expressed in the FAA.

The case is an important reminder that potential legal disputes against exchanges are usually strictly limited by their terms and conditions, which often require all disputes to be resolved in arbitration. From the exchange’s point of view, this is almost always preferable: in addition to its lower cost, arbitration proceedings are not public record which can make collective action difficult. Some arbitration agreements (though not Coinbase’s) even limit the number of documents that are required to be disclosed in discovery and may even give companies the unilateral right to select and dismiss the arbitrator.

In many circumstances, as the traders in Cordero found out, it can leave users with very limited options of redress in case of dispute.

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