The Fifth Circuit Court of Appeals has held in an unpublished opinion that an arbitration provision in a multilevel marketing program contract which could be amended at the sole discretion of one party and bound the other party “upon notice” was illusory and unenforceable. In Juan Torres v. S.G.E. Management, L.L.C., No. 09-20778, (5th Cir., October 5, 2010), Ignite operated as a subsidiary of a retail provider of electricity in Texas. Ignite relies on a multilevel marketing program which recruits people to invest money to purchase an Ignite Services Program (ISP) through a current member of Ignite. Once a person purchases an ISP, he becomes an Independent Associate (IA). Juan Ramon Torres and Eugene Robison (plaintiffs) purchased ISPs from Ignite and became IAs. In order to become members of Ignite, plaintiffs signed an agreement which contained an arbitration clause. Plaintiffs sued Ignite’s parent company, Stream Energy, and number of other defendants (collectively Ignite) in district court alleging that Ignite’s marketing program constituted an illegal pyramid scheme. Ignite filed a motion to dismiss for improper venue based on the arbitration clause in the parties’ agreement. The district court granted Ignite’s motion to dismiss the case and plaintiffs appealed. Plaintiffs argued the arbitration clause was illusory and thus unenforceable because Ignite could amend the clause “in its sole discretion” and effective immediately. Applying Texas law, the Court explained that “an arbitration agreement can be illusory if a party can unilaterally avoid the agreement to arbitrate.” The Court then determined whether Ignite could, in fact, amend the arbitration clause in its sole discretion and whether such an amendment would become effective immediately. A Terms and Conditions clause in the parties’ contract conflicted with a Policies and Procedures clause because it provided that amendments made by Ignite would be effective upon 30 days’ notice, while the Policies and Procedures section provided that amendments would become binding “upon notice.” The agreement stated, “that ‘in the case of any conflict’ between the Policies and Procedures and other parts of the agreement, ‘these Policies and Procedures will prevail.’” According to the Court, “these provisions conflict, and the provision in the Policies and Procedures governs. Thus, any amendment to the agreement binds the IAs ‘upon notice.’” Finally, the Court examined In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002), J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (Tex. 2003), and In re AdvancePCS Health, L.P., 172 S.W.3d 603 (Tex. 2005), decided by the Texas Supreme Court and the Fifth Circuit decision in Morrison v. Amway Corp., 517 F.3d 248 (5th Cir. 2008), which considered the validity of an arbitration clause under Texas law. According to the Court: Here, the arbitration clause may be eliminated or modified “upon notice,” and the agreement contains no clause preventing a modification from applying to disputes arising before the modification. The circumstances are similar to those in Morrison. As in Morrison, “[t]here is nothing in any of the relevant documents which precludes amendment to the arbitration program . . . from eliminating the entire arbitration program or its applicability to certain claims or disputes.” And like Morrison, “[t]here are no Halliburton type savings clauses which preclude application of such amendments to disputes which arose . . . before the amendment.” Ignite essentially could renege on its promise to arbitrate by merely posting an amendment to the agreement on its website. The Fifth Circuit held that Ignite’s promise to arbitrate under the terms of the agreement was hollow and the arbitration provision in the parties’ contract was illusory and unenforceable. The Court reversed the district court’s order dismissing the case for improper venue and remanded the case. Disputing blogged here about In re 24R, Inc., a recent Texas Supreme Court case which also examined In re Halliburton Co. We also blogged here about Morrison v. Amway Corp. when it was decided. Technorati Tags: arbitration, ADR, law

The Dallas Court of Appeals has held that a letter which sought clarification regarding whether the other party to a contract wished to proceed with arbitration as provided for in the contract or whether a claim should be filed before a state district court did not alter the arbitration agreement. In Minkoff v. Hicks, No. 05-10-00606-CV (Tex. App. — Dallas, Oct. 21, 2010), Peter Minkoff entered into a contract to build a residence for Jeffrey Hicks and Lisa Winston (appellees) in July 2002. The contract contained a provision which required arbitration for any dispute arising under the contract and provided the parties with seven days from the notice of any dispute to select an arbitrator. On December 11, 2009, appellees informed Minkoff in writing that they were terminating the contract. On January 20, 2010, Minkoff replied with a letter stating that he tendered performance and the parties owed him $97,000. Minkoff additionally stated that he would settle for $75,000, but also provided the appellees with the option to select an arbitrator in lieu of his settlement offer. Appellees responded by arguing that Minkoff waived his right to seek arbitration by failing to select an arbitrator within seven days of their December 11th letter. Minkoff sent another letter to appellees on January 28th which stated that he intended to pursue his claim and asking that appellees notify him whether they wished to proceed with arbitration or for him to file a claim before a state district court. Appellees did not respond to Minkoff’s letter and instead brought suit against him in Dallas County Court seeking declaratory relief and damages. Minkoff responded and sought an order to compel arbitration. The county court requested a briefing regarding whether Minkoff’s January 28th letter “constituted an offer such that there was a novation or modification [of] the contract when appellees sued in state court.” Appellees argued that the January 28th letter constituted an offer to modify the contract which they accepted by filing in county court. The court agreed and refused Minkoff’s motion to compel arbitration. Minkoff appealed. On appeal, the Dallas Appeals Court held that Minkoff’s letter did not alter the arbitration agreement and that the county court erred by denying his motion to compel arbitration. First, the Appeals Court determined that the letter did not constitute an offer but was a request for information from appellees. Minkoff’s letter did not suggest any intention to waive any of his rights under the contract nor was there any clear terms of an offer. Second, even assuming an offer, it was not clear to the court how appellees filing a lawsuit constituted an acceptance as the letter clearly intimated that Minkoff himself would pursue his asserted rights by either seeking arbitration or bringing suit in a district court, rather than a county court. Finally, the Dallas court held that no a “meeting of the minds” occurred. Because appellees failed to meet their evidentiary burden to establish the arbitration agreement was modified, the Dallas Court of Appeals reversed and remanded the case. Technorati Tags: law, ADR, arbitration

by Holly Hayes The Medical Group Management Association (MGMA) annual meeting is being held in New Orleans this week. Yesterday, Marshall Baker, CEO of Physician Advisory Services, Boise, Idaho, led a discussion about Ambulatory Surgery Centers (ASC) and the opportunities available to surgeons despite that accreditation requirements for ASCs are getting stricter. Communication is key to a successful ASC, Baker said, explaining that no one should walk in on a Monday morning and be surprised by any changes. Also, he said physicians need to know upfront that bad behavior is not tolerated—even if they are the ASC’s top revenue producer. He suggested that ASCs conduct frequent satisfaction surveys of patients and area doctors, and said it was especially helpful to ask the physician community if they would refer patients to the ASC and, if not, why not. Another tip Baker passed along was to conduct frequent drills so staff will know exactly what to do in case of a fire, power outage, attempted child abduction or if a patient or patient family member becomes disruptive. He also said it’s a good idea to have employees navigate the facility in a wheelchair to test its accessibility. Once again, the communication themes among caregivers, patients, families and the community, as well as zero tolerance of disruptive behavior in the medical setting, point toward an important role for conflict resolution skills development in healthcare personnel. We welcome your thoughts on this topic. Holly Hayes is a mediator at Karl Bayer, Dispute Resolution Expert where she focuses on mediation of health care disputes. Holly holds a B.A. from Southern Methodist University and a Masters in Health Administration from Duke University. She can be reached at holly@karlbayer.com. Technorati Tags: Mediation

In Las Palmas Medical Center v. Moore, No. 08-09-00226-CV (October 6, 2010), the El Paso Court of Appeals reversed a lower court’s decision to overturn an arbitration award and adopted a de novo standard of review for vacation, modification, or confirmation of an arbitration award. In 2004, the Las Palmas Medical Center (Las Palmas) recruited urologists Robert Moore and Deborah Moore to relocate from Houston to El Paso by offering the Moores a guaranteed income if they agreed to practice full-time in El Paso for 48 months. The parties’ agreement also allowed Las Palmas to audit the Moores’ medical practice to ensure compliance with the agreement. Additionally, both parties agreed to arbitrate any disputes arising out of the agreement. In December 2006, Las Palmas requested documents from the Moores in an effort to conduct an audit. The requested information was not provided and in October 2007 Las Palmas initiated arbitration proceedings. An arbitrator was selected from a list of potential arbitrators provided to both parties. The arbitrator properly notified counsel for both parties that she had had previous professional contact with Las Palmas’ counsel and invited formal objections before the arbitration began. Neither party objected. As part of the arbitration proceedings, an audit of the Moores’ practice records was completed by January 21, 2008. Around this time, the Moores changed their legal counsel in the arbitration. On July 31, 2008, 11 days before the final arbitration hearing, the Moores’ counsel challenged the arbitrator’s objectivity due to her prior contact with Las Palmas’ counsel. After review, the arbitrator determined the challenge was not substantial given her prior disclosure. Moreover, she determined that withdrawing at that time would cause undue delay and expense for both parties. After the final hearing, she issued a written judgment finding fault with both parties but with a net award to Las Palmas of $1,055,322.27. This award was largely based on a finding that Deborah Moore failed to maintain a full-time urology practice in El Paso as required by the parties’ agreement. On September 15, 2008, Las Palmas filed a petition to confirm the arbitration award and the Moores filed an answer which contained several affirmative defenses, including that the award was obtained by corruption, fraud, or other undue means, that the Moores’ rights were prejudiced by “the evident partiality of the arbitrator,” that the arbitrator engaged in willful misbehavior by performing the role of an advocate and that the arbitrator refused to hear material evidence by limiting the testimony of an expert witness. The arbitration transcript, evidence from the proceeding and a deposition of the arbitrator were entered as evidence. The trial court subsequently entered an order which denied Las Palmas’ petition, set aside the arbitration award and ordered that the dispute be reheard by a different arbitrator. Las Palmas appealed. On appeal, the Moores initially challenged the court’s jurisdiction by arguing that a directed rehearing was not an appealable judgment or decree under TEX. CIV. PRAC. & REM. CODE ANN. § 171.098(a). In affirming the propriety of its jurisdiction, however, the El Paso Court relied on a recent Texas Supreme Court decision in East Texas Salt Water Disposal Co. v. Werline, 307 S.W.3d 267 (Tex. 2010) which “held that a district court judgment which denies confirmation of an arbitration award, vacates the award, and directs a rehearing is appealable.” The El Paso Court then noted that “[i]ntermediate appellate courts in Texas have utilized different standards of review for vacation, modification, or confirmation of an arbitration award.” Specifically, the El Paso Court pointed out that the San Antonio Court utilized an abuse of discretion standard “without citing authority” in Koch v. Koch, 27 S.W.3d 93, 95 (Tex.App.— San Antonio 2000, no pet.), while in Kendall Builders, Inc. v. Chesson, 149 S.W.3d 796, 802-03 (Tex.App.— Austin 2004, pet. denied) the Austin Court of Appeals “applied traditional sufficiency-of-the-evidence review.” The court also noted that in other cases, “one or both of the parties filed summary judgment motions and the appellate courts employed the applicable summary judgment standard of review.” In ultimately adopting a form of de novo review, the El Paso Court first noted that it agreed with Werline that abuse of discretion was not the appropriate standard of review. Second, the Court stated that while in “true” de novo review, the appellate court “exercises its own judgment and redetermines each issue of fact and law” without affording any deference, the U.S. Supreme Court in First Options of Chicago, Inc. Kaplan, 514 U.S. 938 (1995) “cited with approval the following standard utilized at the time by the majority of the circuits: the reviewing court accepts findings of fact that are not “clearly erroneous” but decides questions of law de novo.” The El Paso Court further noted that this “standard of review approved by the United States Supreme Court is not true de novo, but is comparable to the standard by which Texas appellate courts review factual findings for legal and factual sufficiency, and review legal conclusions de novo.” After reviewing the record, the Court held that the trial court did not make any factual determinations entitled to deference and stated any questions of law were reviewed de novo. The El Paso Court found that the Moores failed to meet the evidentiary burden to establish any of the four grounds for reviewing an arbitration award provided by the Texas General Arbitration Act (TAA) (TEX. CIV. PRAC. & REM. CODE ANN. § 171.088(a)). The Court also noted the similarities between section 171.088(a)(2)(A) of the TAA and section 10(a)(2) of the Federal Arbitration Act (FAA) before concluding that evident partiality of an arbitrator “can be established through a showing of actual bias.” Although the Texas Supreme Court “has not provided guidance as to the standard to be applied when reviewing a claim of evident partiality based on actual bias,” the Moores pointed to Babcock & Wilcox Co. v. PMAC, Ltd., 863 S.W.2d 225, 233-34 (Tex.App.— Houston [14th Dist.] 1993, writ denied) as establishing a “reasonable impression of partiality standard.” The El […]