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

Filing 56

MEMORANDUM OPINION & ORDER: Dft's 44 MOTION to Compel Arbitration and to dismiss or stay all proceedings is DENIED; Parites shall file a Rule 26(f) joint written report w/i 30 days. Signed by Judge Jennifer B Coffman on 09/24/2012. (KLB) cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
LEXINGTON
CIVIL ACTION NO. 11-127-JBC
REBECCA WALLACE, et al.,
V.

PLAINTIFFS,

MEMORANDUM OPINION & ORDER

FORTUNE HI-TECH MARKETING, INC., et al.,

DEFENDANTS.

***********
This matter is before the court upon the defendants’ motion to compel
arbitration and to dismiss or stay all proceedings, R.44. For the following reasons,
the court will deny the motion.
The plaintiffs are past independent representatives (“IRs”) of Fortune Hi-Tech
Marketing, Inc. (“FHTM”), who filed suit against the defendants for allegedly
operating an illegal pyramid scheme in violation of California state and federal laws.
The plaintiffs assert claims of RICO and California Business and Professions Code
violations and seek a judgment declaring FHTM’s arbitration and forum selection
provisions unconscionable and unenforceable. The defendants include FHTM,
FHTM officers, and other individuals. Together they move to compel arbitration,
arguing that this action should be submitted to arbitration because the plaintiffs’
claims are covered by a valid arbitration agreement.
The defendants point to two documents, the application and agreement and
the FHTM policies and procedures, which they claim contain arbitration provisions
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to which the plaintiffs assented and by which they are bound. The plaintiffs
disagree, stating that they are not bound to arbitrate with FHTM because the
parties never agreed to arbitrate, the FHTM agents had no authority to bind the
plaintiffs to an arbitration policy, and the arbitration provision is illusory. Finding
that the alleged agreement to arbitrate is illusory, the court will deny the motion to
compel arbitration.
The Federal Arbitration Act (“FAA”) 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. In deciding whether to compel 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).
Kentucky contract law “governs in determining whether the arbitration clause
itself was validly obtained,” Doctor’s Assocs. v. Casarotto, 517 U.S. 681, 686-87;
see also Inland Bulk Transfer Co. v. Cummins Engine Co., 332 F.3d 1007, 1014
(6th Cir. 2003), but in making determinations on the scope of arbitrable issues,
“any doubts regarding arbitrability should be resolved in favor of arbitration.” Moses
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H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).
The parties did not agree to arbitrate because there was no exchange of
consideration. “Every contract requires mutual assent and consideration.” Cuppy v.
General Accident Fire & Life Assurance Corp., 378 S.W.2d 629, 632 (Ky. 1964).
A promise may act as consideration for an agreement as long as “the promisor
receives in exchange for that promise some act or forbearance, or the promise
thereof.” Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306 (6th Cir. 2000).
Here, the alleged agreement to arbitrate consisted of promises by both parties to
arbitrate. See R.1-1, p. 50. But FHTM’s promise to arbitrate is illusory because of
a provision in the FHTM policies and procedures (which are incorporated into the
application and agreement, R.1-1, p.29) that authorizes FHTM to unilaterally amend
all of its obligations under the Agreement — meaning, collectively, the FHTM
application and agreement, the FHTM trainer/coach agreement, the policies and
procedures, and the marketing and compensation plan. R.1-1, p.29.
The amendment provision renders illusory the alleged agreement to arbitrate
because FHTM “has in actuality no fixed obligation[]” to perform. David Roth’s
Sons, Inc. v. Wright & Taylor, Inc., 343 S.W. 2d 389, 391 (Ky. App. Ct. 1961).
“[A]t any time,” “in its sole and absolute discretion,” FHTM may amend the
Agreement, including the arbitration provisions within the Agreement. R.1-1, P.29.
This is so even though FHTM must post notice to IRs of any amendment to the
Agreement. A notice provision can constitute consideration for an otherwise
illusory contract by limiting a party’s ability to unilaterally amend or terminate an
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agreement. See Morrison v. Circuit City Stores, 317 F.3d 646, 667 (6th Cir.
2003) (upholding an arbitration agreement because 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.”); see also
Seawright v. Am. Gen. Fin., Inc., 507 F.3d 967 (6th Cir. 2008)(upholding an
arbitration agreement containing a ninety-day notice provision). The FHTM notice
provision, however, does not provide for advance notice. Amendments are
“effective upon notice to IRs that the Agreement has been modified,” which 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.1-1, p.29.
Because this notice provision requires no wait period between the time notice
is published and when an amendment takes effect, it does not limit FHTM’s
“unfettered discretion.” Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306,
315 (6th Cir. 2000). FHTM “could inform an [IR] of its decision to radically alter
the terms of an arbitration agreement immediately after both parties had bound
themselves to the agreement and the [IR] would be left without any of the
protections for which he had bargained.” Stanich v. Hissong Group, Inc., 2010 U.S.
Dist. LEXIS 98709, *19 (S.D. Ohio 2010). There is no promise “to maintain the
arbitration agreement” for a specified period of time, and, therefore, not enough of
a limitation on FHTM’s ability to terminate or amend the arbitration agreement to
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constitute consideration. Morrison, 317 F.3d at 667 (6th Cir. 2003).
Even a survival clause in the arbitration provision does not prevent the
arbitration agreement from being illusory. The “agreement to arbitrate shall survive
any termination or expiration of the Agreement,” but FHTM can remove or alter the
arbitration provisions in the Agreement, including the survival clause, while the
underlying contracts remain in effect. R.1-1, p.50. “[FHTM’s] promise to perform
is illusory in the sense that [it] has made no legally enforceable commitment, and
justice demands the other party should not be bound.” David Roth’s Sons, Inc.,
343 S.W. 2d at 391 (Ky. App. Ct. 1961). Because this promise to arbitrate is
illusory, “there is indeed no sufficient consideration, and therefore no contract.” Id.
(internal citations omitted). Accordingly,
IT IS ORDERED that the defendants’ motion to compel arbitration and to
dismiss or stay all proceedings, R.44, is DENIED.
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 24, 2012

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