Amway/Quixtar loses big time

Arbitration agreement ruled:
"illusory* and unenforceable"
in Morrison case

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

Read the court's opinion for yourself.   Morrison's arguments   Amway's arguments

"We accordingly hold that the arbitration agreement was illusory and unenforceable under Davidson as applied to the claims asserted in the instant suit.12 We thus reverse the district court’s October 15, 1998 order staying the case pending arbitration and its September 15, 2005 final judgment denying the Distributors’ motion to vacate the award, granting Amway’s motion to confirm the award, and entering judgment based upon the award; and we remand the case for further proceedings not inconsistent herewith.

REVERSED and REMANDED"

See also Judge Dorr's opinion about Quixtar's arbitration agreement.

Analysis
This was the appeal of the trial court's entry of judgment on an arbitrator's award against Joe Morrisson and several other former Amway distributors.  Morrison and many other distributors sued Amway, Dexter Yaegar and others in 1998, one year after Amway had unilaterally added the arbitration provisions to the distributor rules.  Although the dispute with Morrison stems from acts that occurred before there was any arbitration agreement, Amway initially succeeded in getting the federal district court judge to compel the case to arbitration before JAMS, Amway's arbitration services provider, before one of the "neutrals" - an arbitrator from a list hand picked and privately trained by Amway. 

Like everyone in the Amway arbitration process, Morrison lost and was ordered to pay Amway a balance of $6 million in attorneys' fees.  Amway then went back to the federal district court to have a judgment entered on the arbitrator's award.  At that point, Morrison contested the entry of judgment on five grounds: (1) the arbitrator was obviously biased and not impartial; (2) the arbitration agreement was not valid and unenforceable due to Amway’s retention of a unilateral right to modify it; (3) the arbitration agreement was unconscionable (this was the same argument Judge Richard Door found convincing in Kenny Stewart's lawsuit in Missouri); (4) the arbitration agreement did not cover all of the Distributors’ asserted claims; and (5) the district judge lacked jurisdiction to confirm the arbitration award.

The district court judge entered the judgment over the distributors' objections.  Morrison and the rest then appealed to the Fifth Circuit Federal Court of Appeals in New Orleans, Louisiana.  The Fifth Circuit reversed the district court judge and vacated the arbitrator's award based solely on the second ground raised by Morrison: because Amway retained the right to change the terms at its whim, there was no real consideration for the arbitration agreement and therefore it was unenforceable as a matter of law.  The Fifth Circuit noted that the dispute at issue arose from conduct that occurred before there was an arbitration agreement, but importantly, this was not the reason why the arbitration agreement was unenforceable against Morrison.  Rather, because Amway continued to have the right to revoke or modify it at will, the entire arbitration agreement was unenforceable under Texas law.  The court concluded:

"There is nothing in any of the relevant documents which precludes amendment to the arbitration program – made under Amway’s unilateral authority to amend its Rules of Conduct – from eliminating the entire arbitration program or its applicability to certain claims or disputes so that once notice of such an amendment was published mandatory arbitration would no longer be available even as to disputes which had arisen and of which Amway had notice prior to the publication." 

Thus, it was not just that the arbitration clause appeared for the first time in the rules after the dispute was ongoing, but the fact that Amway could cancel or modify it unilaterally" at any time that made it enforceable.   The reason being that unless Amway was itself truly bound by the arbitration provision, it couldn't force binding arbitration on the distributors.

The court's rationale may have wide ranging application to other arbitrations arising at a time when Amway retained the right to revoke the arbitration provision at its sole discretion, which appears to be the entire duration of time during which this arbitration agreement has been in place.  It is important to note, however, that the rules on "illusory consideration" that are the basis of the court's reasoning in the Morrison case are based on Texas state law, which may vary in other lawsuits brought in other states.  The underlying reasoning may also end up being applicable to the "non-compete clause," which likewise is subject to modification solely at Amway's discretion, though that was not an issue in this appeal.

As for the other four complaints raised by Morrison and the other distributors in the appeal, since this issue required a full reversal, nullifying the arbitrator's award in its entirety, the court did not rule on whether the arbitration system was unfair and unconscionable or whether the arbitrator was obviously biased or the other complaints raised on appeal by the distributors.

* Deceptive, unreal