Juan Torres, et al v. S.G.E. Management, L.L.C., et al

Filing

UNPUBLISHED OPINION FILED. [09-20778 Reversed and Remanded] Judge: EMG , Judge: FPB , Judge: BML Mandate pull date is 10/26/2010 [09-20778]

Juan Torres, et al v. S.G.E. Management, L.L.C., et al

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IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
October 5, 2010 N o . 09-20778 Lyle W. Cayce Clerk

J U A N RAMON TORRES; EUGENE ROBISON, P la in t if f s ­ A p p e lla n t s , v. S .G .E . MANAGEMENT, L.L.C.; STREAM GAS & ELECTRIC, L.T.D.; S T R E A M S.P.E. G.P. L.L.C.; STREAM S.P.E., L.T.D.; IGNITE HOLDINGS, L .T .D ; CHRIS DOMHOFF; ROB SNYDER; PIERRE KOSHAKJI; DOUGLAS W I T T ; STEVE FLORES; MICHAEL TACKER; DONNY ANDERSON; TREY D Y E R ; STEVE FISHER; RANDY HEDGE; BRIAN LUCIA; LOGAN STOUT; P R E S L E Y SWAGERTY, D e fe n d a n t s ­ A p p e lle e s .

A p p e a l from the United States District Court for the Southern District of Texas (0 9 -C V -2 0 5 6 )

B e fo r e GARZA and BENAVIDES, Circuit Judges, and LYNN, District Judge.* L Y N N , District Judge:* * J u a n Ramon Torres and Eugene Robison appeal the district court's order d is m is s in g their claims for improper venue based on the parties' agreement to
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District Judge of the Northern District of Texas sitting by designation.

Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

**

Dockets.Justia.com

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No. 09-20778 a r b it r a t e . Because we hold that the arbitration clause at issue is illusory, we r e v e r s e and remand.

I T h is appeal concerns a dispute over the enforceability of an arbitration c la u s e . Stream Energy is a retail provider of electricity in Texas. It markets its p r o d u c t through its subsidiary, Ignite, which operates a multilevel marketing p rog ram . The program operates by recruiting persons to invest money to

p u r c h a s e the Ignite Services Program (ISP), which can only be purchased t h r o u g h a current member of Ignite. Once a person purchases an ISP, he b e c o m e s an Independent Associate (IA). Torres and Robison purchased ISPs and became IAs. In doing so, they s ig n e d an agreement with Ignite. The agreement was comprised of three parts: a Compensation Plan, the Policies and Procedures, and the Terms and C o n d it i o n s . The Policies and Procedures contained the following arbitration c la u s e : I A s agree that any claim, dispute or other difference between IAs a n d Ignite or among IAs and Ignite will be exclusively resolved by b in d in g arbitration . . . with arbitration to occur at Dallas, Texas. Torres and Robison sued Chris Domhoff; Rob Snyder; Pierre Koshakji; D o u g la s Witt; Steve Flores; Michael Tacker; Donny Anderson; Trey Dyer; Steve F is h e r ; Randy Hedge; Brian Lucia; Logan Stout; Presley Swagerty; S.G.E. M a n a g e m e n t , LLC; Stream Gas & Electric, Ltd.; Stream SPE GP, LLC; Stream S P E , Ltd.; and Ignite Holdings, Ltd. (collectively, the defendants), alleging that t h e defendants' marketing program was an illegal pyramid scheme in violation o f the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. The defendants moved to dismiss the case for improper venue u n d e r Federal Rule of Civil Procedure 12(b)(3). Specifically, they contended that

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No. 09-20778 v e n u e in federal district court was improper because Torres and Robison had a g r e e d to arbitrate all disputes. The district court granted the motion and d is m is s e d the case. Torres and Robison now appeal. II W e review the district court's dismissal under Federal Rule of Civil P r o c e d u r e 12(b)(3) de novo.1 We similarly review the enforceability of a forums e le c t io n or arbitration clause de novo.2 III T o r r e s and Robison argue that the arbitration clause in the agreement is illu s o r y and thus unenforceable. The determination of whether an arbitration a g r e e m e n t is valid "is generally made on the basis of ordinary state-law p r in c ip le s that govern the formation of contracts."3 The parties do not dispute t h a t Texas law governs the enforceability of the arbitration clause here. Under Texas law, a stand-alone arbitration agreement requires binding p r o m i s e s on both sides as consideration for the contract.4 "But when an

a r b it r a t io n clause is part of an underlying contract, the rest of the parties' a g r e e m e n t provides the consideration."5 Still, an arbitration agreement may be illu s o r y if a party can unilaterally avoid the agreement to arbitrate.6 Here, T o r r e s and Robison assert that the arbitration clause is illusory because Ignite c o u ld amend the clause "in its sole discretion" and because the modification

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See Ambraco, Inc. v. Bossclip B.V., 570 F.3d 233, 237 (5th Cir. 2009). Afram Carriers, Inc. v. Moeykens, 145 F.3d 298, 301 (5th Cir. 1998).

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Morrison v. Amway Corp., 517 F.3d 248, 254 (5th Cir. 2008) (internal quotation marks and citation omitted).
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In re AdvancePCS Health, L.P., 172 S.W.3d 603, 607 (Tex. 2005). Id. See J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 230-31 (Tex. 2003).

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No. 09-20778 w o u ld become immediately effective upon notice to the IAs or upon posting to I g n it e 's website. A A s a preliminary matter, the parties dispute whether Ignite was required t o give the IAs 30 days' notice before any modifications to the arbitration clause w e n t into effect. Torres and Robison concede in their reply brief that if Ignite is r e q u ir e d to give them 30 days' notice of any amendments, then the arbitration c la u s e is enforceable. Thus, we must consider whether 30 days' notice is

r e q u ir e d under the agreement. The interpretation of a contract is a matter of la w reviewed de novo.7 A m e n d m e n t s or modifications to the agreement are discussed in both the T e r m s and Conditions and the Policies and Procedures, but the agreement states t h a t "in the case of any conflict" between the Policies and Procedures and other p a r ts of the agreement, "these Policies and Procedures will prevail." In the T e r m s and Conditions, Paragraph 1 states that Ignite may amend the Terms a n d Conditions and the Policies and Procedures at its "sole discretion." Paragraph 1 further states that "[n]otification of amendments shall be posted in I g n it e 's website" and that "[a]mendments shall become effective 30 days after p u b lic a t io n ." Paragraph 13 also discusses amendments to the agreement. It p r o v id e s : Ignite reserves the right to modify its Policies and Procedures, C o m p e n s a t io n Plan, and applicable program and renewal fees from t im e to time. Such modifications shall become a binding part of this A g r e e m e n t . Publication of such changes in official Ignite materials, I g n ite corporate Website or by other means as Ignite determines is a p p r o p r ia te shall be deemed notice to me. The continuation of my I g n ite Independent Associate position or my acceptance of c o m m is s io n s or bonuses shall constitute my acceptance of any and a ll amendments.

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EOG Res., Inc. v. Chesapeake Energy Corp., 605 F.3d 260, 264 (5th Cir. 2010).

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No. 09-20778 I n the Policies and Procedures, the agreement provides that: I A s understand and acknowledge that in order to maintain a viable m a r k e t in g program and to comply with changes in federal, state or lo c a l laws or economic conditions, Ignite may modify existing P o lic ie s and Procedures and provide updated Policies and P r o c e d u r e s and rules and regulations for IAs from time to time, as w e ll as modify its Compensation Plan, customer services and c h a r g e s at its sole discretion. Such modifications to the Policies and P r o c e d u r e s , the rules and regulations, the Compensation Plan or a n y customer services, and all charges thereto, will, upon notice to t h e IA or by publication by Ignite in the Power Center, become a b in d in g part of the Independent Associate Agreement. IAs accept p u b lic a tio n of these Policies and Procedures in the Power Center as n o tic e of such modifications and assume responsibility for p e r io d ic a lly reviewing these Policies and Procedures in the Power C e n t e r for such modifications.8 T o r r e s and Robison contend that these parts of the agreement conflict and t h a t , as such, the 30-day notice provision in the Terms and Conditions is t r u m p e d by the Policies and Procedures, thereby leaving the agreement without a notice requirement for amendments. We agree that these notice provisions conflict. While the Terms and C o n d it io n s provide that amendments are effective upon 30 days' notice, the P o lic ie s and Procedures provide that amendments "become a binding part" of the a g r e e m e n t "upon notice." They do not reference any time frame for notice, but r a t h e r , suggest that amendments become effective immediately. Accordingly, t h e s e provisions conflict, and the provision in the Policies and Procedures g o v e r n s . Thus, any amendment to the agreement binds the IAs "upon notice." B W e must now determine whether the agreement to arbitrate is illusory. The Texas Supreme Court has considered whether an arbitration clause not

R. at 314 (emphasis added). The Power Center is Ignite's password secured website that it uses to notify IAs of changes to the ISP agreement.

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No. 09-20778 s u p p o r t e d by consideration is illusory in three recent cases. In In re Halliburton C o ., the court held that an arbitration agreement between an employer and an a t -w ill employee was not illusory, despite the company's right to modify or do a w a y with the arbitration program.9 The court reasoned that two clauses saved t h e arbitration provision from being illusory. For one, the agreement provided t h a t any modification to the arbitration clause was not to apply retroactively to a dispute of which Halliburton had notice on the day of the amendment.1 0 In a d d it io n , the agreement stated that if Halliburton terminated the arbitration p r o g r a m , "termination shall not be effective until 10 days after reasonable notice o f termination is given to Employees or as to Disputes which arose prior to the d a t e of termination."1 1 The court explained that, because of these two provisions, H a llib u r t o n could not "avoid its promise to arbitrate by amending the provision o r terminating it altogether."1 2 Accordingly, it held that the provision was not illu s o r y . I n J.M. Davidson, Inc. v. Webster, the Texas Supreme Court indicated that a n employer's right to unilaterally abolish or amend an arbitration clause w it h o u t notice could render the arbitration clause in an employment agreement illu s o r y .1 3 There, the court considered an agreement to arbitrate contained in a n employer's personnel policy.1 4 The employer had "reserve[d] the right to u n ila t e r a lly abolish or modify any personnel policy without prior notice." 1 5 The

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80 S.W.3d 566, 569-70 (Tex. 2002). Id. Id. at 570. Id. 128 S.W.3d at 230-31. Id. at 228. Id. at 229.

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No. 09-20778 c o u r t ruled that the contract was ambiguous since it was unclear whether the r ig h t to unilaterally abolish personnel policies applied to the arbitration clause.16 I n doing so, the court noted "that most courts that have considered this issue h a v e held that, if a party retains the unilateral, unrestricted right to terminate t h e arbitration agreement, it is illusory."1 7 This circuit has since explained that in Davidson, "the court plainly held that if the defendant-employer retained the r i g h t to `unilaterally abolish or modify' the arbitration program, then the a g r e e m e n t to arbitrate was illusory and not binding on the plaintiff-employee." 1 8 L a s t ly , in In re AdvancePCS Health L.P., the Texas Supreme Court c o n s id e r e d the validity of an arbitration clause contained in a provider a g r e e m e n t between a pharmacy benefits management company and member p h a r m a c ie s .1 9 AdvancePCS Health (PCS) could modify the arbitration clause u p o n 30 days' notice to a member pharmacy, and it could terminate the a g r e e m e n t immediately if the member pharmacy failed to perform or breached a provision in the contract.2 0 The court found that PCS's ability to modify the c la u s e did not render it illusory, since it "provides a 30-day window during which t h e arbitration clause cannot be cancelled."2 1 The court also determined that P C S 's ability to terminate the clause upon breach did not make the clause illu s o r y , since the contract provided that "any obligations that arise prior to the t e r m in a t io n of the Agreement shall survive such termination." 2 2 The court

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Id. at 230-31. Id. at 231 n.2. Morrison v. Amway Corp., 517 F.3d at 255 (emphasis in original). 172 S.W.3d at 605. Id. at 607. Id. Id.

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No. 09-20778 e x p la in e d that because of this provision, "[h]ad the pharmacies invoked a r b it r a t io n rather than filing suit, PCS could not have avoided arbitration by t e r m in a t in g the Provider Agreement." 2 3 I n addition, this circuit recently considered the validity of an arbitration c la u s e under Texas law in Morrison v. Amway Corp.2 4 There, we held that an a r b it r a t io n clause was illusory in light of Davidson. The clause at issue was in a distributorship contract, and Amway had the right to modify it unilaterally, a s long as it published notice.2 5 In holding the arbitration agreement illusory, w e explained that the documents did not preclude elimination of the arbitration p r o g r a m and that the agreement contained "no Halliburton type savings clauses w h ic h preclude application of such amendments to disputes which arose (or of w h ic h Amway had notice) before the amendment." 26 I n sum, these cases make clear that even if an arbitration clause may be u n ila t e r a lly modified, if the modification or elimination of the clause does not a p p ly retroactively so as to allow the avoidance of arbitration, the promise to a r b it r a t e is not illusory. Conversely, the cases do not precisely state when an a r b it r a t io n agreement is illusory. However, they suggest that the lack of a n o tic e window before any elimination of the clause becomes effective and the a b ility to amend the agreement retroactively so as to avoid any promise to a r b it r a t e are factors indicating that the agreement may be illusory. Here, the arbitration clause may be eliminated or modified "upon notice," a n d the agreement contains no clause preventing a modification from applying t o disputes arising before the modification. The circumstances are similar to

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Id. at 607-08. 517 F.3d 248 (5th Cir. 2008). Id. at 254. Id. at 257.

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No. 09-20778 t h o s e in Morrison. As in Morrison, "[t]here is nothing in any of the relevant d o c u m e n t s which precludes amendment to the arbitration program . . . from e lim in a t in g the entire arbitration program or its applicability to certain claims o r disputes."2 7 And like Morrison, "[t]here are no Halliburton type savings c la u s e s which preclude application of such amendments to disputes which arose . . . before the amendment."2 8 Ignite essentially could renege on its promise to a r b it r a t e by merely posting an amendment to the agreement on its website. The defendants contend that Morrison is distinguishable because the a g r e e m e n t here provides for notice of amendments and states that IAs may a c c e p t any amendments by continuing their business with Ignite and accepting b o n u s e s or commissions. We do not find this argument persuasive. As noted p r e v io u s ly , Ignite's Policies and Procedures govern and provide that a m e n d m e n t s are binding and effective immediately, "upon notice." This is s im ila r to the agreement in Morrison, in which amendments became effective u p o n "published notice."2 9 Consequently, because amendments become binding " u p o n notice," the provision allowing IAs to accept modifications by continuing t h e ir business with Ignite is effectively meaningless. The IAs would have no o p p o r t u n it y to reject the modification and invoke their right to arbitration before a n y elimination of the program became effective. In sum, Ignite's promise to arbitrate under the terms of this agreement w a s hollow. Accordingly, we hold that the arbitration provision is illusory and u n e n fo r c e a b le .

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Id. Id. Id. at 254.

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No. 09-20778 * * *

F o r the foregoing reasons, we REVERSE the district court's order d is m is s in g the case for improper venue and REMAND the case for further p r o c e e d in g s not inconsistent herewith.

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