Coinbase Decision Highlights Importance Of Official Rules’ Dispute Provisions – Fin Tech

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In a rare example of a sweepstakes leading to litigation,
Coinbase and its promotion agency, Marden-Kane, were sued over a
sweepstakes run by Coinbase and administered by Marden-Kane titled
“Trade Doge. Win Doge.” As part of that sweepstakes,
Coinbase offered prizes totaling $1.2 million of Dogecoin to
individuals who purchased or sold $100 worth of the DOGE
cryptocurrency on the Coinbase exchange. Of course, in order to
comply with federal and state lottery laws, the sweepstakes rules
also included an alternate method of entry (AMOE), which allowed
consumers to enter for free without making a purchase.
Specifically, under federal and state laws, a promotion that
contains all three elements of prize, chance and consideration is
considered a lottery and is generally unlawful outside specific
contexts, such as licensed casinos and state lotteries. Since
sweepstakes by definition include the elements of chance and prize,
the element of consideration must be eliminated in order for the
promotion to be lawfully conducted. While many sweepstakes,
including the Coinbase promotion, award sweepstakes entries in
exchange for a purchase or payment, they rely on an AMOE to
eliminate the element of consideration. In short, as long as there
is also a free way to enter the sweepstakes, entries can be given
to those who make a purchase. In this case, although Coinbase and
Marden-Kane did include an AMOE, the plaintiffs challenged the
promotion on multiple grounds. First, the plaintiffs claimed that
the sweepstakes was a lottery notwithstanding the existence of an
AMOE. Second, they alleged that even if there was an AMOE, it was
not adequately disclosed and the promotion therefore violated
various sweepstakes disclosure requirements, was misleading and
deceptive, and violated the California Consumer Legal Remedies Act

The court’s initial rulings on the defendants’
motion to dismiss contain some important lessons for both brands
and agencies to consider.

First, in an important win for the defendants, the court
dismissed the plaintiffs’ lottery claims in their entirety.
The court noted that no California court has ever found that a
promotion became a lottery when a free entry was offered, even if
the plaintiffs were not aware of that option. This is significant
because if the court suggested that a failure to adequately
disclose the AMOE turned the promotion into a lottery, it could
open the floodgates to future litigation and regulatory action.
Second, the court found that these sweepstakes services fall
outside the CLRA. Ultimately, what’s left in the case are the
defendants’ claims that the promotion did not include
necessary sweepstakes disclosures and violated various state
truth-in-advertising laws.

What is perhaps most interesting at this point about the
court’s decision is its ruling on the defendants’
attempts to move the dispute to arbitration. While the court
granted Coinbase’s motion, it denied Marden-Kane’s,
leaving the agency in the awkward position of having to defend the
case in court while its client is in arbitration. In reaching its
decision, the court relied on the fact that all entrants agreed to
the Coinbase user agreement and its arbitration provision when they
created an account, which was required to enter the sweepstakes.
While Marden-Kane argued that it should also be able to enforce
that arbitration provision, the court rejected that argument
because Marden-Kane was not a party to the Coinbase user agreement.
Thus, Marden-Kane was left to rely on the sweepstakes’
Official Rules, which it was party to, but unfortunately the
Official Rules did not include an arbitration provision. While the
Official Rules did prohibit class action claims, the court found
that the waiver was unconscionable. The CLRA claims, which were
dismissed, were the only ones that permitted punitive damages, and
the $100 purchase to enter the sweepstakes was low enough that the
claims predictably involve small amounts of damages, making the
class action waiver unconscionable.

This case is a good reminder that when drafting Official Rules
for sweepstakes, careful attention should be paid to every
provision in the Official Rules and none should be viewed as
“boilerplate.” In this case, Coinbase was able to rely
on an arbitration provision contained in its user agreement, but
most sweepstakes today do not require accessing a website or
creating an account. And while many sweepstakes’ Official
Rules include a class action waiver, they do not always include an
arbitration provision. This case suggests that if a company wants
to avoid class action litigation, both an arbitration provision and
a class action waiver should be included in the Official Rules, and
they should be included with sufficient prominence as to be
enforceable. Further, promotion agencies may want to ensure that
such provisions expressly cover the agency as well as the sponsor
in order to avoid being left out in the cold.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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