Advertising Law Blog

In their Second Amended Complaint, the plaintiffs alleged that Coinbase’s sweepstakes was an unlawful lottery. Plaintiffs also asserted claims for false advertising and misrepresentation under California’s Business and Professions Code and its False Advertising Law.

The parties did not dispute that: (1) plaintiffs agreed to Coinbase’s User Agreement and (2) the User Agreement contained a valid arbitration agreement. There was also no dispute that the claims fell within the scope of the User Agreement’s arbitration provision. However, when the plaintiffs subsequently entered the Dogecoin sweepstakes, they were provided with Official Rules stating that California courts had exclusive jurisdiction over any controversies regarding the sweepstakes.

When the lawsuit was filed, Coinbase moved to compel arbitration under its User Agreement or, in the alternative, to dismiss the case for failure to state a claim. The main issue in the threshold motion was which contract (Coinbase’s User Agreement or the Dogecoin sweepstakes’ Official Rules) governs this dispute.

The district court ruled that because the User Agreement’s arbitration provision and the sweepstakes rules’ forum selection clause conflicted, arbitration should not be compelled. The sweepstakes rules came later, and in the district court’s view, those rules superseded the earlier User Agreement. Therefore, the district court denied Coinbase’s motion to compel arbitration.

The district court then turned to the alternative motion to dismiss for failure to state a claim. The plaintiffs alleged that, in order to enter the sweepstakes, they were required to trade $100 in Dogecoins, which transformed the sweepstakes into an illegal lottery. The district court called it a close case, but ruled the sweepstakes was not an illegal lottery. The sweepstakes was saved from illegality by the alternate method of entry (AMOE), the ability to enter by mailing in an index card with name and contact information. According to the ruling, the plaintiffs may not have been aware of the alternate entry method when they made a trade of Dogecoins, but awareness or not, they were not actually required to make the Dogecoin trade in order to have a chance to win. The promotional materials allegedly highlighted the $100 trade requirement over the AMOE but the ruling stated, “Because California penal statutes are construed strictly and because no California court has held that being unaware of the free method of entry is sufficient to demonstrate the required consideration, the Court finds that Plaintiffs have not and cannot allege a violation of California Penal Code § 320. Therefore, the Court grants Coinbase’s motion to dismiss as to Plaintiffs’ first claim (violation of Cal. Bus. & Prof. Code § 17200) in full.”

Most of the remaining portions of the motion to dismiss, namely the claims based on lack of disclosure and misrepresentation, were denied. The court also granted the plaintiffs leave to amend to advance a new legal theory about the illegal lottery. As this decision was largely a victory for the plaintiffs, the defendants appealed the arbitration clause issue to the Ninth Circuit Court of Appeals and asked the district court to stay the litigation while the appeal was briefed and argued.

On April 19, 2022, the district court refused to stay the case pending the appeal, meaning the defendants will have to proceed with defending the class action lawsuit in district court, while simultaneously pursuing the appeal.

TAKEAWAY: Much of the defendants’ pain-- and some of the risks posed in the class-action lawsuit-- could have been avoided if the sweepstakes rules had an arbitration clause identical to the one already present in the Coinbase user agreement. Moreover, the lawsuit highlights the need to not just provide an alternative method of entry, but to exercise caution in promoting the paid method of entry.