Day et al v. Fortune Hi-Tech Marketing, Inc. et al
Filing
75
MEMORANDUM OPINION & ORDER: 67 MOTION Under Federal Rule of Civil Procedure 59 to Alter or Amend The Court's Order Compelling Arbitration and Dismissing This Action GRANTED; Court's 66 order RESCINDED; Rule 26 Meeting Report due in 30 days. Signed by Judge Jennifer B Coffman on 9/13/2012.(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 OPINION & ORDER
FORTUNE HI-TECH MARKETING, et al.,
DEFENDANTS.
***********
This matter is before the court upon the plaintiffs’ motion to alter or amend
the court’s order compelling arbitration and dismissing this action, R.67. For the
following reasons, the court will grant the motion.
I. Background
The plaintiffs, as former individual representatives (“IRs”) of Fortune Hi-Tech
Marketing, Inc. (“FHTM”), filed suit against the defendants, including FHTM, FHTM
officers, and other individuals, for alleged violations of Title 18 U.S.C. § 19611968 “RICO” laws, the Kentucky Consumer Protection Act under KRS § 367, and
Kentucky common law torts. The defendants moved to compel arbitration of the
claims, and the court granted the motion, dismissing the action and submitting all
of the claims to arbitration.
The plaintiffs now ask the court to reconsider on four grounds: (1) that the
court has jurisdiction to address the issue of whether the alleged arbitration
agreement was supported by consideration; (2) that the court should not apply the
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FAA presumption favoring arbitration to its analysis of whether an agreement was
formed; (3) that the FHTM sponsors had no actual implied authority to bind the
plaintiffs to an arbitration agreement and that the plaintiffs are entitled to a jury
trial on any factual disputes; and (4) that the plaintiffs did not ratify their contracts
with FHTM. The court reviews the motion under Fed. R. Civ. P. 59 (e) for a
showing of “(1) a clear error of law; (2) newly discovered evidence; (3) an
intervening change in controlling law; or (4) a need to prevent manifest injustice.”
Henderson v. Walled Lake Consol. Sch., 469 F.3d 479, 496 (6th Cir. 2005). Upon
review, the court finds that it has jurisdiction to address the issue of whether the
alleged arbitration agreement was supported by consideration and will analyze the
issue accordingly. The court will also clarify its position on the FAA presumption
favoring arbitration. However, because the court finds that the alleged arbitration
agreement was not supported by consideration, it will not review the issues of
implied authority and ratification; rather, it will rescind its prior findings on those
issues.
II. Analysis
The court has jurisdiction to address the plaintiffs’ consideration argument
because “where the dispute at issue concerns contract formation, the dispute is
generally for courts to decide.” Granite Rock v. Int’l Brotherhood of Teamsters, 130
S. Ct. 2847, 2855-2856 (2010). The court previously erred in applying Buckeye
Check Cashing v. Cardegna, 546 U.S. 440, 445-46 (2006), which involved a
challenge to an existing agreement rather than a claim that no arbitration
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agreement was reached. “Every contract requires mutual assent and
consideration,” so an inquiry into consideration is part of the contract-formation
analysis. Cuppy v. Gen. Accidental Fire & Life Assurance Corp., 378 S.W.2d 629,
632 (Ky. 1964); see also Cantrell Supply v. Liberty Mut. Ins. Co., 94 S.W.3d 381,
384 (Ky. App. 2002). Even though the plaintiffs’ argument – that the FHTM
policies and procedures document is illusory and lacks consideration – implicates
the entire alleged contract between the parties and not just the arbitration
agreement, see Moran v. Svete, 366 Fed. Appx. 624, 631 (6th Cir. 2010), the
court has jurisdiction under Granite Rock to review the consideration dispute
because it concerns contract formation. Even though the federal presumption in
favor of arbitration is taken into consideration when making determinations on the
scope of arbitrable issues, see Moses H. Cone Mem’l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24-25 (1983), the court will not apply that presumption to the
discussion of whether an arbitration agreement was formed, see Granite Rock, 130
S. Ct. at 2858 (2010). The court erred in doing so in its prior opinion.
Because the FHTM policies and procedures authorize FHTM to amend the
Agreement — meaning, collectively, the FHTM application and agreement, the
FHTM trainer/coach agreement, the policies and procedures, and the marketing and
compensation plan — at any time in its sole and absolute discretion, the agreement
to arbitrate is illusory and lacks consideration. “Consideration is an essential
element of every contract.” Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d
306, 315 (6th Cir. 2000)(citing Cuppy, 378 S.W.2d at 632 (Ky. Ct. App. 1964)).
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A promise may act as consideration but only if “it creates a binding obligation” on
each promisor. Id. (citing David Roth’s Sons, Inc. v. Wright and Taylor, Inc., 343
S.W.2d 389, 390 (Ky. Ct. App. 1961)). When the promisor has no true fixed
obligation to perform, the contract is illusory and lacks consideration. See David
Roth’s Sons, Inc., 343 S.W.2d at 391. In this case, FHTM has no fixed obligation
to arbitrate. Even though both the FHTM application and agreement and policies
and procedures contain arbitration agreements, the policies and procedures (which
are incorporated into the application and agreement, R.1-2, p.7, and supersede and
prevail over any conflicting terms in the application and agreement, R.27-1, p.4),
provide FHTM the sole discretionary authority to amend FHTM documents at any
time. R.1-2, p.7.
By retaining the right to amend the documents “in its sole and absolute
discretion,” FHTM has no binding obligation to arbitrate. R.1-2, p.7; see also David
Roth’s Sons, Inc., 343 S.W.2d at 390 (Ky. Ct. App. 1961). At any point, after
providing only notice of the amendment, FHTM could amend the policies and
procedures or the application and agreement to either alter or remove entirely the
arbitration agreements. This means that the unilateral-amendment provision of the
policies and procedures renders illusory any alleged promise to arbitrate by FHTM,
and FHTM’s promise to arbitrate cannot act as consideration for the arbitration
agreement. Floss, 211 F.3d at 315 (6th Cir. 2000); see also Daniel Boone Coal
Co. v. Miller, 217 S.W. 666 (Ky. 1920).
The agreement to arbitrate is illusory despite the requirement that FHTM
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must provide notice to IRs of any amendment to the application and agreement or
policies and procedures documents. A notice provision can constitute sufficient
consideration for an otherwise illusory contract by limiting a party’s ability to
unilaterally amend or terminate an agreement, see Morrison v. Circuit City Stores,
317 F.3d 646 (6th Cir. 2003); see also Seawright v. Am. Gen. Fin., Inc., 507 F.3d
967 (6th Cir. 2008). The provision at issue, however, does not provide for
advance notice. Amendments to any of the FHTM documents are “effective upon
notice to IRs that the Agreement has been modified.” R.1-2, p.7. Notice is
accomplished by publishing the amendment in official FHTM materials, including
posting it on the FHTM website, e-mailing it to IRs, broadcasting it over voice mail,
or including it in FHTM periodicals. Notice is “deemed received by the IR upon
posting.” R.1-2, p.7.
The FHTM agreement is distinguishable from the agreement in Morrison,
which was upheld, because in that case an employer had the authority to alter or
terminate an agreement at the end of each year only “upon giving thirty days’
notice [of the amendment or termination] to its employees.” Morrison, 317 F.3d at
667 (6th Cir. 2003). The thirty-day provision is significant because the Morrison
court found that it provided enough of a limitation on the employer’s ability to
terminate or amend the agreement to constitute consideration. Id. The notice
provision was a promise “to maintain the arbitration agreement” for a specified
period of time, thirty days. Id. at 668. In this case, the arbitration agreement
appears closer to an agreement that may be altered with “unfettered discretion,”
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Floss, 211 F.3d at 315, than the Morrison and Seawright arbitration agreements,
which provided thirty-day and ninety-day grace periods, respectively, before
amendments became effective. The FHTM IRs are bound by an amendment as
soon as it is published, R.1-2, p.7; thus, FHTM does not promise to maintain the
arbitration agreement for a specified amount of time, and no mutuality of obligation
to arbitrate exists.
Also, the agreement to arbitrate is illusory despite the fact that the
agreement contains a survival provision. The arbitration agreement in the policies
and procedures provides that the “agreement to arbitrate shall survive any
termination or expiration of the Agreement.” R.1-3, p.10. The defendants argue
that this provision restricts FHTM’s right to modify or eliminate the arbitration
provision, which means that FHTM does not have an “absolute right” to cancel or
terminate the agreement. See Hale v. Cundari Gas Transmision Co., 454 S.W.2d
680, 684 (Ky. Ct. App. 1974)(stating that only an absolute right to terminate an
agreement renders the agreement illusory). The survival provision, however, does
not eliminate FHTM’s discretion to terminate or amend the arbitration agreement
while the underlying contracts remain in effect; FHTM could even remove or alter
the survival provision of the arbitration agreement under the authority of the
amendment provision in the policies and procedures.
FHTM’s promise to arbitrate is illusory and thus cannot act as consideration
for an agreement to arbitrate with the plaintiffs. Because this finding renders moot
the plaintiffs’ remaining arguments regarding whether an agreement to arbitrate
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was formed, the court rescinds its prior ruling on the issues of whether FHTM
sponsors had implied authority to bind the plaintiffs to an arbitration agreement and
whether the plaintiffs ratified their contracts with FHTM. Those issues will be
resolved at the appropriate time, as either questions of law or questions of fact,
after the parties have had sufficient opportunity for full discovery and have
thoroughly briefed the issues. Accordingly,
IT IS ORDERED that the plaintiffs’ motion to alter or amend the court’s order
compelling arbitration and dismissing this action, R.67, is GRANTED.
IT IS FURTHER ORDERED that the court’s order granting the defendant’s
motion to compel arbitration and dismiss or stay the action, R.66, is RESCINDED.
IT IS FURTHER ORDERED that the parties shall file a Rule 26(f) joint written
report with proposed deadlines no later than 30 days from the date of entry of this
order.
Signed on September 13, 2012
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