The Fine Print Fallout: $2.25 Million Reasons Why You Should Conspicuously Disclose Your Sweepstakes Alternative Method of Entry

Last month, Coinbase Inc., the operator of the largest U.S.-based cryptocurrency exchange platform, and Marden-Kane, its promotions marketing agency, settled a class action lawsuit brought by participants of a Coinbase sweepstakes for $2.25 million. After nearly four years of litigation, including a trip to the U.S. Supreme Court over a conflict in dispute resolution clauses between the sweepstakes Official Rules and the Coinbase User Agreement, Coinbase and Marden-Kane agreed to settle.

Coinbase hired a popular third-party promotions agency to design, market and implement a sweepstakes that encouraged consumers to purchase $100 in Dogecoin (the first meme coin) through their account on the Coinbase platform for a chance to win a number of varying prizes in Dogecoin, with the grand prize being $300,000 in Dogecoin. After reviewing email and website advertisements, plaintiffs created accounts and executed trades through Coinbase to receive entries in the sweepstakes. Only after completing these steps, however, did plaintiffs allegedly learn there was an alternative, free means of entry (AMOE) to sign up for the sweepstakes. According to the plaintiffs, at no point in the email ads or the sweepstakes entry process did Coinbase mention that users could also enter the sweepstakes for free by mailing a 3x5 inch index card to Coinbase containing certain information—rather, Coinbase only described this free method of entry on a separate “rules and details” webpage (i.e., the Official Rules).

Although the Official Rules were linked in the email ads and entry page, plaintiffs alleged that Coinbase and Marden-Kane specifically designed the email ads and entry page with the intent that their text, structure and design would cause users to make a trade (i.e., pay Coinbase $100 or more, plus commissions) without seeing the Official Rules and learning that they could enter the sweepstakes for free. Plaintiffs subsequently filed a class action lawsuit against Coinbase and Marden-Kane in the U.S. District Court for the Northern District of California, alleging that they entered the sweepstakes by trading $100 of Dogecoin per the paid method of entry when they would have entered the sweepstakes for free per the AMOE.

Plaintiffs executed the Coinbase User Agreement when they signed up for accounts on Coinbase, which contained a delegation clause requiring mandatory arbitration for all disputes under the contract. When plaintiffs signed up to enter the Coinbase sweepstakes, they agreed to a second contract, the sweepstakes Official Rules. The Official Rules were silent as to arbitration. The Official Rules did, however, include a forum selection clause, which provided that California courts had exclusive jurisdiction over any disputes that might arise concerning the sweepstakes. Relying on its User Agreement, Coinbase filed a motion to compel arbitration. The District Court, however, denied Coinbase’s motion because it determined that the Official Rules controlled, as the plaintiffs agreed to the Official Rules to enter the sweepstakes and, therefore, the forum selection clause in the Official Rules superseded the delegation clause in the User Agreement. Coinbase appealed to the U.S. Court of Appeals for the Ninth Circuit, which affirmed the District Court’s decision. Coinbase then appealed to the U.S. Supreme Court.

Recognizing that two contracts are at play—the User Agreement and the Official Rules—Justice Ketanji Brown Jackson, writing for the unanimous Court, examined whether a court or arbitrator should decide if a subsequent contract supersedes an earlier arbitration agreement containing a delegation clause. The Court ultimately affirmed the Ninth Circuit’s and District Court’s judgments and found that, when parties have agreed to two contracts, with one directing disputes to arbitration and one directing disputes to courts, a court must decide which contract governs, rather than an arbitrator. Thus, because the District Court made the determination that the Official Rules’ forum selection clause controlled over the User Agreement’s delegation clause, the dispute was properly directed to a California court rather than to arbitration. As a result, the case proceeded in the District Court, and Coinbase ultimately settled.

Why It Matters

 In addition to complying with a myriad of state and federal sweepstakes laws, advertisers, when offering a sweepstakes, must be cognizant of how consumers will perceive their sweepstakes advertising and entry process. On its face, Coinbase had good intentions of bringing positive attention to its crypto platform by giving its customers a chance to win a significant amount of Dogecoin. However, by not diving into the nitty-gritty of the interaction between sweepstakes law compliance and the consumer’s entry experience, it ended up winning the grand prize of a consumer class action that could have very easily been avoided by including legally required instructions for the AMOE in its advertising disclosures. It is crucial that all promotions, including sweepstakes, have a comprehensive set of official rules and clear and prominent abbreviated disclosures that accompany both promotional marketing copy and the entry registration flow. We can take away few important learnings from the Coinbase case:

• Advertisers often engage promotions agency to administer and take the responsibility for administering sweepstakes in compliance with legal obligations. Here, the agreement between Coinbase and Marden-Kane was crucial in determining who would be responsible for picking up the $2.25 million tab for the settlement, so don’t overlook your promotions indemnity agreements. Also, it is important to consider that, while advertisers may shift the financial liability resulting from a legal issue to the promotions agency, there is still the negative publicity associated with years of litigation that can ensue and the time and effort of the advertiser’s legal department in having to deal with the phases of litigation.
  
• Advertisers running promotions tend to overlook how all the various consumer contracts that may govern the sweepstakes interact with each other. The Coinbase case teaches us that, in most online promotions, at least two contracts could potentially govern the promotion (for example, where users must create an account to enter the promotion and are required to agree to the website terms of use, the terms of use and the sweepstakes official rules will apply). Advertisers should ensure that the dispute resolution clauses in both such contracts are consistent and clear as to which disputes each contract governs to avoid uncertainty as to where disputes related to the promotion may be raised and to avoid litigation (and hefty payments) that may result from such uncertainty.
  
• Advertisers are, in most instances, not properly disclosing their AMOE in advertising for their sweepstakes. Advertisers running sweepstakes specifically where an AMOE (i.e., a free method of entry) is legally required to not violate state lottery laws must ensure that any advertising of the sweepstakes’ paid method of entry also includes a description of the free method entry, so consumers are not misled into thinking that they can only enter the sweepstakes through the paid method of entry. Additionally, regardless of whether a company is advertising the paid method of entry in the sweepstakes ad, all sweepstakes ads should contain certain legally required abbreviated disclosures regarding the sweepstakes, including language such as “No purchase necessary to enter or win” and other information about the sweepstakes, depending on the medium of the ad.
  
• Specific to crypto companies, Coinbase’s settlement arrives at a time of regulatory shift within the cryptocurrency space, as the U.S. Securities and Exchange Commission drops enforcement actions against digital asset developers and exchanges (including a longstanding legal battle against Coinbase) and the U.S. Department of Justice scales back on prosecutors’ abilities to bring criminal charges against crypto firms. While this enforcement environment may embolden crypto companies to run more promotions, such as sweepstakes and contests, companies are not immune from consumer class actions (and regulatory enforcement) and still must ensure that their promotions are legally compliant from an advertising and consumer protection perspective.

Before launching any promotion that involves a promise to win a prize, you should, among other things, consider what sweepstakes or contest laws are applicable, whether an AMOE is necessary to avoid structuring an illegal lottery and if other contracts will govern the promotion. Even if you hire a promotions agency to assist with your sweepstakes administration, it is a good idea for advertisers to have their own legal counsel review and sign off on everything before launch. To help with structuring your promotion to comply with applicable legal requirements and ensuring that all ad copy includes all the appropriate disclosures, we recommend engaging specialized legal counsel, like your Manatt team member. Manatt has decades of experience with complying with the patchwork of international, federal and state laws that regulate advertising and promotional activities like the sweepstakes offered by Coinbase. Coinbase could have avoided four years of litigation and a $2.25 million settlement payment if they had done so.

Complaint, Suski v. Coinbase Global Inc., Case No. 3:21-cv-04539 (N.D. Cal. June 11, 2021).

Coinbase, Inc. v. Suski, No. 23-3 (U.S. May 23, 2024) (slip op.).