Day et al v. Fortune Hi-Tech Marketing, Inc. et al

Filing 66

MEMORANDUM OPINION & ORDER: Dfts' 11 Motion to compel arbitration and dismiss or stay action pending arbitration is GRANTED; this action DISMISSED and STRICKEN from active docket. Signed by Judge Jennifer B Coffman on 2/22/2012.(STB)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
LEXINGTON
CIVIL ACTION NO. 10-305-JBC
YVONNE DAY, et al.,
V.

PLAINTIFFS,
MEMORANDUM ORDER & OPINION

FORTUNE HI-TECH MARKETING, et al.,

DEFENDANTS.

***********
This matter is before the court on the defendants’ motion to compel
arbitration and dismiss or stay action pending arbitration, R. 11. For the following
reasons, the motion will be granted.
I. BACKGROUND
The defendants filed their motion to compel arbitration in response to the
plaintiffs’ allegations of an illegal pyramid scheme operation. The plaintiffs, former
individual representatives (“IRs”) of Fortune Hi-Tech Marketing, Inc. (“FHTM”),
brought several claims against the defendants, including supposed violations of 18
U.S.C. § 1961-1968 “RICO” laws, the Kentucky Consumer Protection Act under
KRS § 367, and Kentucky common law torts. The defendants include FHTM,
FHTM officers, and other individuals. In their motion to compel arbitration, the
defendants argue that the claims brought against them by the plaintiffs are covered
by a valid arbitration agreement to which the plaintiffs are bound. In support of
this argument, the defendants point to two documents, the Application &
1

Agreement and FHTM’s Policies and Procedures, which both contain arbitration
provisions. The plaintiffs attest that they are not bound by an arbitration provision
because there was no valid agreement to arbitrate between the parties. Despite
the plaintiffs’ arguments that the alleged arbitration agreement lacks assent, is
illusory, and is unconscionable, the court finds that there is a valid agreement to
arbitrate between the parties under which the plaintiffs’ claims are covered;
therefore, the motion to compel will be granted.
II. ANALYSIS
The court is bound by the Federal Arbitration Act (“FAA”), which provides
that “an agreement in writing to submit to arbitration an existing controversy
arising out of . . .” “a contract evidencing a transaction involving commerce . . . “
“shall be valid, irrevocable, and enforceable, save upon such grounds as exist at
law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Before deciding
whether to compel the parties to arbitrate under the FAA, the court must make
four determinations:
“first, it must determine whether the parties agreed to arbitrate;
second, it must determine the scope of that agreement; third, if the
federal statutory claims are asserted, it must consider whether
Congress intended those claims to be nonarbitrable; and fourth, if the
court concludes that some, but not all, of the claims in the action are
subject to arbitration, it must determine whether to stay the remainder
of the proceedings pending arbitration.”
Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th Cir. 2000).
In making these determinations, “any doubts regarding arbitrability should be
resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr.
2

Corp., 460 U.S. 1, 24-25 (1983). While Kentucky contract law will “govern[] in
determining whether the arbitration clause itself was validly obtained,” Doctor’s
Assocs. V. Casarotto, 517 U.S. 681, 686-87, the federal presumption in favor of
arbitration is still taken into consideration. Inland Bulk Transfer Co. v. Cummins
Engine Co., 332 F.3d 1007, 1014 (6th Cir. 2003).
a. Agreement to arbitrate
i. Assent to the agreement
A valid agreement to arbitrate exists between the plaintiffs and the
defendants because an agreement including the arbitration provision was assented
to by both parties. “When deciding whether the parties agreed to arbitrate a
certain matter . . . , courts generally . . . should apply ordinary state-law principles
that govern the formation of contracts.” First Options v. Kaplan, 514 U.S. 938,
944 (1995). The relevant facts, even construed most favorably to the plaintiffs,
see Lawrence v. Chancery Court of Tenn., 188 F.3d 687, 691 (6th Cir.
1999)(stating that “[w]hen considering a motion to dismiss. . . the district court . .
. “ should “construe the complaint liberally in favor of the plaintiff”), demonstrate
that under Kentucky law a contract was formed between each of the plaintiffs and
the defendants: the plaintiffs provided money and their consent to FHTM
representatives, who enrolled the plaintiffs as IRs by agreeing to the Application &
Agreement on their behalf, and the plaintiffs thereafter acted as IRs under the
agreement and the Policies & Procedures.
The plaintiffs first argue that the arbitration provision lacks mutual assent.
3

They claim they never personally saw or signed the Application & Agreement,
which contained an arbitration provision. They also allege that they did not see
FHTM’s Policies & Procedures, which includes a similar arbitration provision, until
after their relationships with FHTM ended. But this argument fails under principles
of agency and ratification. Even though the plaintiffs may not have actually signed
the Application & Agreement or known of its existence at the time of enrollment,
they are held to its contents; their consent to enrollment in the FHTM IR program
by the FHTM representatives acted as consent to be bound by the terms of the
enrollment program, which included the provisions of the Application & Agreement
and the Policies & Procedures. Additionally, the plaintiffs’ continued involvement in
the FHTM program for a period of time after their enrollment ratified their
agreements with FHTM.
A defendant has the burden of showing the existence of a contract. Cantrell
Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 384 (Ky. App. 2002). Here,
the defendants offer no proof that the plaintiffs actually signed the Application &
Agreement. But the defendants have shown the execution of a contract through
implied authority. “Implied authority is actual authority circumstantially proven
which the principal actually intended the agent to possess and includes such
powers as are practically necessary to carry out the duties actually delegated." Mill
Street Church of Christ v. Hogan, 785 S.W.2d 263, 267 (Ky. App. 1990). The
plaintiffs impliedly gave the FHTM representatives authority to agree to the terms
of the Application & Agreement document when they paid the representatives, by
4

either cash or credit card, and provided their personal information to the
representatives for the purpose of joining FHTM. Even though the plaintiffs claim
that they did not intend for the FHTM representatives to agree to the terms of the
Application & Agreement on their behalf, the circumstances surrounding the
interactions between the plaintiffs and the FHTM representatives demonstrate
implied consent.
When determining the existence of implied authority, the court must examine
the point-of-view of the agent. Id. While one statement made by a party may not
be enough to find an agency relationship, the “acts and conduct of the parties” can
establish this authority. Id. The plaintiffs’ conduct leading up to their enrollment in
the FHTM program establishes “the apparent scope of the agent[s’,] [meaning the
FHTM representatives’,] authority” to bind the plaintiffs to the enrollment
documents. Id. at 268. For instance, before agreeing to join FHTM as IRs, each of
the plaintiffs attended at least one meeting with an FHTM manager or
representative. Some of the plaintiffs watched video presentations about FHTM or
attended several FHTM meetings before joining. Each plaintiff also paid a $299 fee
to join and, in some cases, additional fees for training rights or products. The
plaintiffs explicitly agreed to become FHTM IRs and gave money to the FHTM
representatives to enroll them.
The facts circumstantially show intent by the plaintiffs to give authority to
the FHTM representatives to take all steps required to enroll the plaintiffs into the
FHTM program. The plaintiffs displayed a level of interest in and knowledge of the
5

FHTM program by their attendance at meetings, payment of enrollment fees, and
communication to the representatives that they wanted to join. It was “practically
necessary” for the FHTM representatives to sign the Application & Agreement on
behalf of the plaintiffs in order “to carry out the duties actually delegated” to them
(which was enrollment in the FHTM program), and it was reasonable for the
representatives to perceive the scope of their authority as extending to filling out
the documents necessary for enrollment. Id. at 687.
Even if the FHTM representatives had no implied authority to sign the
Application & Agreement on the plaintiffs’ behalf, the plaintiffs ratified their
contract with FHTM by their actions as IRs after they agreed to join FHTM.
“Ratification is a question of fact, and, as applied to contracts, it may be express
or implied.” Hofgesang v. Silver, 232 Ky. 503, 508 (Ky. 1930). The enrollment
contract between the plaintiffs and FHTM, which included the terms of the
Application & Agreement, was ratified by the plaintiffs when they began reaping
the benefits of FHTM IR status. Whether the plaintiffs actually earned money or
not during their tenure as IRs, they were presented with the opportunity to earn
money through access to FHTM products, materials, and the FHTM name.
Additionally, at least three of the four plaintiffs signed forms stating that
they were trained by an FHTM representative after their enrollment. On these
same documents, the FHTM trainers signed acknowledgements that they covered
the FHTM policies and procedures during the training sessions. This shows that
most of the plaintiffs were at least aware of a governing Policies & Procedures
6

document to which they were bound as IRs, and it places this case in conformity
with the factual scenario of Seawright v. Am. Gen. Fin., Inc., 507 F.3d 967 (6th
Cir. 2007) in which continued employment constituted assent to an arbitration
provision in a contract that had been mailed to employees. Here, while the Policies
& Procedures document may have not been mailed to the plaintiffs, the plaintiffs
were put on notice of its existence during the training sessions, so their continued
actions as FHTM IRs constituted assent to the terms of that document, including
the arbitration provision.
ii. Mutuality of obligation
“An arbitration agreement may be invalidated for the same reasons for which
any contract may be invalidated, including forgery, unconscionability, and lack of
consideration.” Fazio v. Lehman Brothers, Inc., 340 F.3d 386, 392 (6th Cir. 2003).
Here, the plaintiffs also argue that there is no valid agreement to arbitrate between
the parties because the agreement was illusory and therefore there is no mutuality
of obligation. “Consideration is an essential element of every contract,” and “[a]
promise constitutes consideration for another promise only when it creates a
binding obligation.” Floss v. Ryan’s Family Steakhouses, Inc., 211 F.3d 306 (6th
Cir. 2000) (internal citations omitted). This means that without mutuality of
obligation, “a contract based on reciprocal promises lacks consideration.” Id. (citing
Kentucky law).
Here, each of the FHTM documents containing the arbitration provisions
includes a provision reserving FHTM’s right to amend the documents. The
7

Application & Agreement states that FHTM may amend the Application &
Agreement, the Policies & Procedures, or the Marketing and Compensation Plan
“from time to time.” R. 27-1, p.2. The Policies & Procedure permit FHTM to
amend the Agreement at “its sole and absolute discretion.” R.1-2, p.7. The
plaintiffs argue that these provisions make the agreement to arbitrate illusory
because FHTM may unilaterally amend the agreement, and if they can alter or
eliminate the arbitration provision at any time, they have no binding obligation to
arbitrate.
Before addressing the merits of this argument, the court must first decide
whether this is an issue within its jurisdiction to decide. The plaintiffs phrase their
argument in terms of the illusory nature of the arbitration agreement itself but
concede that “[t]he [purported] illusory nature of Fortune’s alleged promise . . .
extend[s] to all terms contained within the Policies & Procedures and Application &
Agreement documents.” R.22, p.17. This is an important distinction.
“Challenges to the validity of arbitration agreements are divided into
two types: those that challenge the validity of the agreement to
arbitrate itself; and those that challenge the contract as a whole on
grounds that affect the entire agreement . . . or on the ground that
one provision renders the whole contract invalid.”
Moran v. Svete, 366 Fed. Appx. 624, 631 (6th Cir. 2010).
“Unless the challenge is to the arbitration clause itself, the issue of the contract’s
validity is considered by the arbitrator in the first instance.” Buckeye Check
Cashing v. Cardegna, 546 U.S. 440, 445-46 (2006).
Any ruling that would deem the arbitration agreement illusory would in
8

essence be a ruling that the entire agreement between the parties is illusory;
FHTM’s ability to amend affects not only the arbitration provisions in both the
Application & Agreement and Policies & Procedures, but also every other provision
within those two documents. Recognizing that other district courts have examined
the validity of arbitration provisions contained within broader contracts, the court
cannot ignore that the plaintiffs’ argument here in substance challenges the validity
of the entire agreement between the parties. For that reason, the court will decline
to review the merits of whether the agreement to arbitrate lacks mutuality of
obligation and will defer to the arbitrator to consider the argument in the context of
the entire agreement.
iii. Unconscionability
The plaintiffs lastly argue that the agreement to arbitrate is unconscionable.
They claim that the arbitration provision “is unfairly surprising because it is
contained in a document not even accessible to the prospective IR at the time the
IR agrees to enroll.” R. 22, p.29. Again, the plaintiffs’ argument alleging
procedural unconscionability goes to the heart of the entire agreement between the
parties, not just the arbitration provision. The plaintiffs do not contend that the
arbitration provision is hidden within either of the documents or portrayed
differently than any other provision; rather, they allege that the entire document,
either the Application & Agreement or the Policies & Procedures, was not
accessible to the plaintiffs. For the reasons stated above, the court will decline to
address the merits of the plaintiffs’ unconscionability argument, as it affects the
9

validity of all of the document’s terms, not just the arbitration provision.
b. Scope of the agreement
The court must next determine the scope of the arbitration agreement.
Whether the plaintiffs’ claims fall within the scope of the arbitration agreement is
determined by asking whether “an action [for each claim] could be maintained
without reference to the contract or relationship at issue.” Fazio v. Lehman Bros.,
Inc., 340 F.3d 386 (6th Cir. 2003). If so, the claims are likely outside the scope of
the agreement. Id. Here, the plaintiffs claim RICO violations under 18 U.S.C. §
1962 (A), (C), & (D) and 18 U.S.C. § 1964 (A), violations of the Kentucky
Consumer Protection Act, unjust enrichment, and conversion. In each of these
claims, the plaintiffs reference the agreement between the plaintiffs and the
defendants to some degree, including the defendants’ marketing of the FHTM
enrollment program, the payment of funds from the plaintiffs to the defendants, or
the FHTM program itself. None of these claims could be brought without mention
of the agreement or the relationship between the parties.
Also, the arbitration provisions at issue are broadly inclusive.

The

Application & Agreement states as follows:
“all disputes and claims relating to FHTM, the Representative
Agreement, the FHTM Marketing and Compensation Plan or its
products and services, the rights and obligations of an independent
Representative and FHTM, or any other claims or causes of action
relating to the performance of either as independent Representative of
FHTM under the Agreement or the FHTM Policies and Procedures shall
be settled totally and finally by arbitration . . . .” R. 27-1, p.4.
All of the plaintiffs’ claims relate to FHTM and fall within the scope of this broad
10

arbitration provision.
c. Arbitrability of statutory claims & stay of non-arbitrable claims
Because the plaintiffs have asserted RICO claims, the court must consider
whether Congress intended those federal statutory claims to be nonarbitrable.
“[T]here is nothing in the text of the RICO statute that even arguably evinces
congressional intent to exclude civil RICO claims from the dictates of the
Arbitration Act.” Shearson/American Express v. McMahon, 482 U.S. 220, 238
(1987). The RICO claims are thus arbitrable.
All of the claims asserted by the plaintiffs in this action are subject to
arbitration; therefore, there is no need to determine whether a stay of proceedings
pending arbitration is appropriate. The plaintiffs distinguish between the claims
asserted against FHTM and its officers and the claims asserted against the
individual defendants. They argue that even if an agreement to arbitrate were
found between the plaintiffs and FHTM, the individual defendants, who are not
agents of FHTM, could not enforce that arbitration agreement. The court,
however, finds these facts analogous to the facts of Arnold v. Arnold Corp., in
which the court found that the alleged wrongful acts of the nonsignatory
defendants related to their capacities as agents of the corporation defendant. 920
F.2d 1269, 1282 (6th Cir. 1990).
Even though FHTM states in the Application & Agreement that IRs are not
agents or legal representatives of FHTM, the plaintiffs allege in their complaint that
“[a]ll of the defendants in this action collectively form an ‘enterprise’” and “are a
11

group of individuals and entities associated in fact, although not a legal entity.”
R.1, p.34. If the plaintiffs "can avoid the practical consequences of an agreement
to arbitrate by naming nonsignatory parties as [defendants] in [the] complaint, or
signatory parties in their individual capacities only, the effect of the rule requiring
arbitration would, in effect, be nullified." Arnold, 920 F.2d at 1281 (internal
citations omitted). The court will therefore enforce the arbitration agreement as it
pertains to all defendants. With all claims against all defendants being submitted to
arbitration, a stay is not appropriate in this action.
d. Waiver of right to judicial forum
Finally, the plaintiffs argue that even if an arbitration agreement is found to
exist between the plaintiffs and defendants, arbitration is not appropriate because
the plaintiffs have not waived their rights to adjudicate their claims in a judicial
forum.

In evaluating whether an arbitration agreement is effective to waive the

plaintiffs’ right to pursue their claims in federal court, the court must
“evaluat[e] whether a [waiver] has been knowingly and voluntarily
executed, . . . look[ing] to (1) plaintiff[s’] experience, background, and
education; (2) the amount of time the plaintiff[s] had to consider
whether to sign the waiver, including whether the [plaintiffs] had an
opportunity to consult with a lawyer; (3) the clarity of the waiver; (4)
consideration for the waiver; as well as (5) the totality of the
circumstances.”
Morrison v. Circuit City Stores, 317 F.3d 646, 668 (6th Cir. 2003).
Here, the plaintiffs knowingly and voluntarily waived their rights to a judicial
forum because the totality of the circumstances shows that the plaintiffs, after
participating in meetings and/or informational sessions on FHTM, consented to
enrollment in the FHTM program and thus consented to the arbitration provision.
12

The FHTM representatives executed the enrollment documents on behalf of the
plaintiffs using implied authority. The plaintiffs had ample opportunity to explore
the Application & Agreement and Policies & Procedures documents which
contained the arbitration provisions after their enrollment in the program, and at
least three of the plaintiffs were instructed on the Policies & Procedures during
training sessions after they joined.
Additionally, the arbitration provisions are straightforward and clear about
the “procedures that would be used in place of a judicial proceeding.” Alonso v.
Huron Valley Ambulance Inc., 375 App. 487, 493 (6th Cir. 2010)(finding no
judicial waiver when no information about the grievance procedure was provided to
plaintiffs). The prescribed arbitration process has set parameters because it must
be conducted “in accordance with the Federal Arbitration Act and the Commercial
Arbitration Rules of the American Arbitration Association.”

R. 27-1, p.4.

This case is analogous to Moore v. Ferrellgas, in which the court found that
the plaintiff knowingly and voluntarily waived his right to a judicial forum because
he did not request extra time to consider an employee agreement or ask to contact
a lawyer and nothing indicated that the plaintiff ever told the defendant that he did
not understand the arbitration agreement or any portion of the employee
agreement. 533 F. Supp. 2d 740, 748-49 (W.D. Mich. Feb. 8, 2008). While the
plaintiffs here now contest the validity and existence of an arbitration agreement,
during their period as IRs for FHTM, they were aware, or should have been aware,
of the Policies & Procedures and its contents, yet nothing indicates that they
13

inquired into or questioned its provisions. Accordingly,
IT IS ORDERED that the defendants’ motion to compel arbitration and
dismiss or stay action pending arbitration, R. 11, is GRANTED.
The court having determined that all claims are subject to arbitration, IT IS
FURTHER ORDERED that this action is DISMISSED and STRICKEN from the active
docket.

Signed on February 22, 2012

14