Wednesday, April 21, 2010
Ninth Circuit Rules That ADR Provisions in Amway Contracts Are Unconscionable
By Kenneth Ofgang, Staff Writer
Alternative dispute resolution procedures in contracts between the successor to Amway Corporation and the company’s distributors are procedurally and substantively unconscionable and are unenforceable, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The panel affirmed a district judge’s ruling that allows three distributors to proceed with their putative class action against Quixtar Inc. in U.S. District Court in San Francisco.
Judge Mary M. Schroeder, writing for the Court of Appeals, agreed with District Judge Samuel Conti of the Northern District of California that numerous features of the agreements, including a provision for binding arbitration before decision-makers trained by the company, were oppressive.
Features Not Severable
Schroeder also agreed with the district judge that the offensive features could not be severed from other provisions of the agreements.
Under Quixtar’s marketing plan, products and services are sold through “Independent Business Owners.” Senior IBOs produce and market “business support materials” and other services to junior IBOs.
Junior IBOs and California residents Jeff Pokorny and Larry Blenn sued the company, along with their senior IBOs, in 2007, alleging that the defendants were operating a pyramid scheme in violation of the federal Racketeer Influenced and Corrupt Organizations Act and California’s Unfair Competition Law. A third California plaintiff, Kenneth Bussiere, later joined the suit, in which the plaintiffs claim that they and other class members have suffered millions of dollars in damages.
They allege that the company charges them so much for its products that it is virtually impossible to resell them at a profit, that they have been fraudulently induced to purchase worthless business support materials, and that senior IBOs are primarily concerned with recruitment of new IBOs—thereby enriching themselves and the company—rather than with helping current IBOs make a profit.
Motion to Dismiss
The defendants moved to dismiss the suit or to stay it and compel the plaintiffs to proceed by way of ADR. Conti, however, ruled that the ADR provisions were unenforceable under California law and denied the motion.
On appeal, the Ninth Circuit agreed with the district judge both on the choice-of-law issue and on the merits.
Schroeder rejected Quixtar’s contention that the law of Michigan, where the company is headquartered, controls the issue of unconscionability.
The jurist explained that under the Federal Arbitration Act, the court applies the choice-of-law rules of the forum state, and that California choice-of-law rules require application of the substantive law of the state with the superior “governmental interest.” Because the plaintiffs are California residents with “no discernible connection to Michigan,” Schroeder wrote, California has the greater interest.
Applying California law, the judge concluded that the agreement was procedurally unconscionable because Quixtar had a superior bargaining position, did not allow plaintiffs to negotiate the provisions, failed to attach to the agreements the company’s Rules of Conduct and other documents that were referenced in the agreements and essential to the operation of the ADR process, and retained the right to unilaterally revise the procedures at any time.
The fact that the plaintiffs could have refused to enter into the agreements, and thus not become Quixtar distributors, does not save the agreements from being found unconscionable, the judge said. “The availability of alternative business opportunities does not preclude a finding of procedural unconscionability under California law,” Schroeder wrote.
The jurist went on to say that the agreement was substantively unconscionable as well.
She agreed with the district judge that it was “exceedingly” unconscionable for the company to create a one-sided process in which it, but not the IBO with whom it has a dispute, may compel nonbinding “informal conciliation,” followed by equally nonbinding “formal conciliation” before a hearing panel of senior IBOs, before binding resolution of the dispute may be sought.
“The ADR deck could not possibly be stacked more in Quixtar’s favor than it is here,” Conti wrote, and Schroeder agreed.
The appellate jurist also agreed that the binding arbitration process itself was unconscionable, citing a provision barring any claim by an IBO absent a request for binding arbitration within two years of the event causing the dispute or the period of the applicable statute of limitations, whichever is less, while placing no limits on how long Quixtar has to bring a claim against an IBO; the requirement that IBOs, but not Quixtar, submit to binding arbitration; a one-sided confidentiality clause; and the procedure for selecting arbitrators.
Under that procedure, an IBO who has requested arbitration receives a letter containing the names of at least five JAMS arbitrators who have attended a Quixtar “orientation” and are encouraged to select an arbitrator from the list. If the IBO objects within 14 days, a list of non-Quixtar-trained JAMS arbitrators is sent to both parties.
If a non-Quixtar-trained arbitrator is selected, a higher rate may be charged. Regardless of who arbitrates, the non-prevailing party must pay the entire fee of the arbitrator, as well as the other side’s costs and reasonable attorney fees.
Schroeder cited a 2005 ruling by a district judge in Missouri, finding a prior version of Amway’s Rules of Conduct to be unconscionable under Michigan law, based on a finding that the company’s orientation for arbitrators included an indoctrination into Amway’s corporate culture and a favorable presentation of the company’s business.
The judge acknowledged that the rules then in effect, unlike the current ones, did not allow an IBO to insist that an arbitrator not trained by Quixtar be selected. But that alternative is unrealistic, Schroeder concluded, because it “presents IBOs with the unpalatable choice of selecting a possibly biased arbitrator whose daily fees are capped, or selecting a neutral arbitrator with no daily fee cap.”
She agreed with the district judge that an IBO “should not have to pay extra” to avoid the unfairness created by Quixtar’s orientation program.
The case is Pokorny v. Quixtar, Inc., 08-15880.
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