Fifth Circuit Rejects Amway’s Arbitration Policy

About a week ago, the Fifth Circuit handed down an opinion in an Amway distributorship dispute (link is to .pdf file) which rejects, after a decade of arbitration and arbitrability litigation, a claim by Amway that certain disputes had to be arbitrated. As followers of this area are aware, a Fifth Circuit opinion rejecting arbitrability is noteworthy in and of itself.

Amway, of course, is a company that sells products through distributors who in turn are expected to recruit other distributors to sell products. Commissions are paid not only on products an individual distributor sells, but also on products distributors recruited by that individual sells. In other words, the real money is made when a distributor creates a network of sub-distributors, who in turn, ideally, then recruit sub-sub distributors.

As of 1998, Amway included in its distributorship agreements a specific agreement to arbitrate any disputes between Amway and its distributors, including disputes over the calculation of commissions. Prior to that time, however, Amway’s distributorship agreement did not contain an arbitration clause. Instead, it contained language that required distributors to comply with Amway’s Rules of Conduct, which Amway retained the right to amend at will.

In 1997, Amway did in fact amend its Rules to include an arbitration requirement. That same year, in June, a group of Amway distributors had complained to Amway about a variety of issues, including the manner in which their commissions were calculated. Later that year, Amway added the arbitration requirement to its Rules, and in January 1998 the Distributors sued. Amway sought and achieved a litigation stay in favor of arbitration, and Amway ultimately prevailed at arbitration.

The distributors, at every step of this process, challenged the case’s arbitrability, arguing that since Amway retained the right to unilaterally amend its Rules, and the Rules contained the arbitration agreement, the agreement was illusory and unenforceable. Last week, the Fifth Circuit, applying Texas law under the FAA, agreed.

According to the Fifth Circuit, all of the disputes subject to the arbitration arose prior to the 1997 arbitration Rule. That being the case, since Amway could unilaterally add arbitration to its Rules, it could also unilaterally remove it or change the policy. This distinguishes Amway’s rule from the policy approved of in the Texas Supreme Court’s Halliburton opinion. In that case, once Halliburton’s arbitration policy took effect, Halliburton could not revoke it without providing written notice. Furthermore, that policy did not apply to disputes of which Halliburton had notice prior to the inception of the policy.

No such restrictions bound the Amway Plan, at least as of 1997. That being the case, the Fifth Circuit, after ten years of arbitration and related litigation, ruled that the dispute was not in fact arbitrable. An purported agreement to arbitrate is not enforceable in Texas if the party seeking to impose it can amend, modify or revoke it at will. Such an “agreement” would be illusory. It is important to remember, of course, that this analysis must apply specifically to the arbitration agreement, not to the contract between the parties as a whole.

All of this, of course, is probably not as exciting as it at first seems. While the very fact that the Fifth Circuit has rejected an arbitrability argument is newsworthy (or at least blogworthy), the precedent is probably not all that helpful for most practitioners. It would be quite easy for a company, like Amway, to avoid the issue that torpedoed Amway by simply copying the approved-of language from Halliburton’s policy which the Amway court distinguished. The opinion does not, in other words, stand for the proposition that companies like Amway and Halliburton cannot impose arbitration on their employees and contractors at will. Instead, it simply seems to say that the imposition cannot be willy-nilly. Which is a distinction that ought to be easily avoided by reasonably careful drafting. Nonetheless, the opinion does perhaps reflect a blossoming trend of greater scrutiny being applied to arbitration, generally, particularly in situations marked by stark disparity of bargaining power between the parties.

Morrison, et al. v. Amway, et al., ___ F3d ___ (5th Cir. 2008), Cause No. 06-20138.

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