Tores v. SGE Management

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IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 09-20778

JUAN RAMON TORRES; EUGENE ROBISON,

Plaintiffs–Appellants,

v.

S.G.E. MANAGEMENT, L.L.C.; STREAM GAS & ELECTRIC, L.T.D.;

STREAM S.P.E. G.P. L.L.C.; STREAM S.P.E., L.T.D.; IGNITE HOLDINGS,

L.T.D; CHRIS DOMHOFF; ROB SNYDER; PIERRE KOSHAKJI; DOUGLAS

WITT; STEVE FLORES; MICHAEL TACKER; DONNY ANDERSON; TREY

DYER; STEVE FISHER; RANDY HEDGE; BRIAN LUCIA; LOGAN STOUT;

PRESLEY SWAGERTY,Defendants–Appellees.

 

 

 

Appeal from the United States District Court

for the Southern District of Texas (09-CV-2056)

Before GARZA and BENAVIDES, Circuit Judges, and LYNN, District Judge.*

LYNN, District Judge:**

Juan Ramon Torres and Eugene Robison appeal the district court’s order

dismissing their claims for improper venue based on the parties’ agreement to

United States Court of Appeals

Fifth Circuit

F I L E D

October 5, 2010

Lyle W. Cayce

Clerk

District * Judge of the Northern District of Texas sitting by designation.

** Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not

be published and is not precedent except under the limited circumstances set forth in 5TH CIR.

R. 47.5.4.

Case: 09-20778 Document: 00511254109 Page: 1 Date Filed: 10/05/2010

No. 09-20778

arbitrate. Because we hold that the arbitration clause at issue is illusory, we

reverse and remand.

I

This appeal concerns a dispute over the enforceability of an arbitration

clause. Stream Energy is a retail provider of electricity in Texas. It markets its

product through its subsidiary, Ignite, which operates a multilevel marketing

program. The program operates by recruiting persons to invest money to

purchase the Ignite Services Program (ISP), which can only be purchased

through a current member of Ignite. Once a person purchases an ISP, he

becomes an Independent Associate (IA).

Torres and Robison purchased ISPs and became IAs. In doing so, they

signed an agreement with Ignite. The agreement was comprised of three parts:

a Compensation Plan, the Policies and Procedures, and the Terms and

Conditions. The Policies and Procedures contained the following arbitration

clause:

IAs agree that any claim, dispute or other difference between IAs

and Ignite or among IAs and Ignite will be exclusively resolved by

binding arbitration . . . with arbitration to occur at Dallas, Texas.

Torres and Robison sued Chris Domhoff; Rob Snyder; Pierre Koshakji;

Douglas Witt; Steve Flores; Michael Tacker; Donny Anderson; Trey Dyer; Steve

Fisher; Randy Hedge; Brian Lucia; Logan Stout; Presley Swagerty; S.G.E.

Management, LLC; Stream Gas & Electric, Ltd.; Stream SPE GP, LLC; Stream

SPE, Ltd.; and Ignite Holdings, Ltd. (collectively, the defendants), alleging that

the defendants’ marketing program was an illegal pyramid scheme in violation

of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.

§ 1961 et seq. The defendants moved to dismiss the case for improper venue

under Federal Rule of Civil Procedure 12(b)(3). Specifically, they contended that

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No. 09-20778

venue in federal district court was improper because Torres and Robison had

agreed to arbitrate all disputes. The district court granted the motion and

dismissed the case. Torres and Robison now appeal.

II

We review the district court’s dismissal under Federal Rule of Civil

Procedure 12(b)(3) de novo. We similarly review the enforceability 1 of a forumselection

or arbitration clause de novo.2

III

Torres and Robison argue that the arbitration clause in the agreement is

illusory and thus unenforceable. The determination of whether an arbitration

agreement is valid “is generally made on the basis of ordinary state-law

principles that govern the formation of contracts.”3 The parties do not dispute

that Texas law governs the enforceability of the arbitration clause here.

Under Texas law, a stand-alone arbitration agreement requires binding

promises on both sides as consideration for the contract.4 “But when an

arbitration clause is part of an underlying contract, the rest of the parties’

agreement provides the consideration.”5 Still, an arbitration agreement may be

illusory if a party can unilaterally avoid the agreement to arbitrate.6 Here,

Torres and Robison assert that the arbitration clause is illusory because Ignite

could amend the clause “in its sole discretion” and because the modification

1 See Ambraco, Inc. v. Bossclip B.V., 570 F.3d 233, 237 (5th Cir. 2009).

2 Afram Carriers, Inc. v. Moeykens, 145 F.3d 298, 301 (5th Cir. 1998).

3 Morrison v. Amway Corp., 517 F.3d 248, 254 (5th Cir. 2008) (internal quotation marks

and citation omitted).

4 In re AdvancePCS Health, L.P., 172 S.W.3d 603, 607 (Tex. 2005).

5 Id.

6 See J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 230-31 (Tex. 2003).

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No. 09-20778

would become immediately effective upon notice to the IAs or upon posting to

Ignite’s website.

A

As a preliminary matter, the parties dispute whether Ignite was required

to give the IAs 30 days’ notice before any modifications to the arbitration clause

went into effect. Torres and Robison concede in their reply brief that if Ignite is

required to give them 30 days’ notice of any amendments, then the arbitration

clause is enforceable. Thus, we must consider whether 30 days’ notice is

required under the agreement. The interpretation of a contract is a matter of

law reviewed de novo.7

Amendments or modifications to the agreement are discussed in both the

Terms and Conditions and the Policies and Procedures, but the agreement states

that “in the case of any conflict” between the Policies and Procedures and other

parts of the agreement, “these Policies and Procedures will prevail.” In the

Terms and Conditions, Paragraph 1 states that Ignite may amend the Terms

and Conditions and the Policies and Procedures at its “sole discretion.”

Paragraph 1 further states that “[n]otification of amendments shall be posted in

Ignite’s website” and that “[a]mendments shall become effective 30 days after

publication.” Paragraph 13 also discusses amendments to the agreement. It

provides:

Ignite reserves the right to modify its Policies and Procedures,

Compensation Plan, and applicable program and renewal fees from

time to time. Such modifications shall become a binding part of this

Agreement. Publication of such changes in official Ignite materials,

Ignite corporate Website or by other means as Ignite determines is

appropriate shall be deemed notice to me. The continuation of my

Ignite Independent Associate position or my acceptance of

commissions or bonuses shall constitute my acceptance of any and

all amendments.

EOG Res., Inc. v. 7 Chesapeake Energy Corp., 605 F.3d 260, 264 (5th Cir. 2010).

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No. 09-20778

In the Policies and Procedures, the agreement provides that:

IAs understand and acknowledge that in order to maintain a viable

marketing program and to comply with changes in federal, state or

local laws or economic conditions, Ignite may modify existing

Policies and Procedures and provide updated Policies and

Procedures and rules and regulations for IAs from time to time, as

well as modify its Compensation Plan, customer services and

charges at its sole discretion. Such modifications to the Policies and

Procedures, the rules and regulations, the Compensation Plan or

any customer services, and all charges thereto, will, upon notice to

the IA or by publication by Ignite in the Power Center, become a

binding part of the Independent Associate Agreement. IAs accept

publication of these Policies and Procedures in the Power Center as

notice of such modifications and assume responsibility for

periodically reviewing these Policies and Procedures in the Power

Center for such modifications.8

Torres and Robison contend that these parts of the agreement conflict and

that, as such, the 30-day notice provision in the Terms and Conditions is

trumped by the Policies and Procedures, thereby leaving the agreement without

a notice requirement for amendments.

We agree that these notice provisions conflict. While the Terms and

Conditions provide that amendments are effective upon 30 days’ notice, the

Policies and Procedures provide that amendments “become a binding part” of the

agreement “upon notice.” They do not reference any time frame for notice, but

rather, suggest that amendments become effective immediately. Accordingly,

these provisions conflict, and the provision in the Policies and Procedures

governs. Thus, any amendment to the agreement binds the IAs “upon notice.”

B

We must now determine whether the agreement to arbitrate is illusory.

The Texas Supreme Court has considered whether an arbitration clause not

R. at 314 (emphasis added). The 8 Power Center is Ignite’s password secured website

that it uses to notify IAs of changes to the ISP agreement.

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No. 09-20778

supported by consideration is illusory in three recent cases. In In re Halliburton

Co., the court held that an arbitration agreement between an employer and an

at-will employee was not illusory, despite the company’s right to modify or do

away with the arbitration program. The court reasoned that 9 two clauses saved

the arbitration provision from being illusory. For one, the agreement provided

that any modification to the arbitration clause was not to apply retroactively to

a dispute of which Halliburton had notice on the day of the amendment.10 In

addition, the agreement stated that if Halliburton terminated the arbitration

program, “termination shall not be effective until 10 days after reasonable notice

of termination is given to Employees or as to Disputes which arose prior to the

date of termination.”11 The court explained that, because of these two provisions,

Halliburton could not “avoid its promise to arbitrate by amending the provision

or terminating it altogether.”12 Accordingly, it held that the provision was not

illusory.

In J.M. Davidson, Inc. v. Webster, the Texas Supreme Court indicated that

an employer’s right to unilaterally abolish or amend an arbitration clause

without notice could render the arbitration clause in an employment agreement

illusory.13 There, the court considered an agreement to arbitrate contained in

an employer’s personnel policy.14 The employer had “reserve[d] the right to

unilaterally abolish or modify any personnel policy without prior notice.”15 The

9 80 S.W.3d 566, 569-70 (Tex. 2002).

10 Id.

11 Id. at 570.

12 Id.

13 128 S.W.3d at 230-31.

14 Id. at 228.

15 Id. at 229.

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court ruled that the contract was ambiguous since it was unclear whether the

right to unilaterally abolish personnel policies applied to the arbitration clause.16

In doing so, the court noted “that most courts that have considered this issue

have held that, if a party retains the unilateral, unrestricted right to terminate

the arbitration agreement, it is illusory.”17 This circuit has since explained that

in Davidson, “the court plainly held that if the defendant-employer retained the

right to ‘unilaterally abolish or modify’ the arbitration program, then the

agreement to arbitrate was illusory and not binding on the plaintiff-employee.”18

Lastly, in In re AdvancePCS Health L.P., the Texas Supreme Court

considered the validity of an arbitration clause contained in a provider

agreement between a pharmacy benefits management company and member

pharmacies.19 AdvancePCS Health (PCS) could modify the arbitration clause

upon 30 days’ notice to a member pharmacy, and it could terminate the

agreement immediately if the member pharmacy failed to perform or breached

a provision in the contract.20 The court found that PCS’s ability to modify the

clause did not render it illusory, since it “provides a 30-day window during which

the arbitration clause cannot be cancelled.”21 The court also determined that

PCS’s ability to terminate the clause upon breach did not make the clause

illusory, since the contract provided that “any obligations that arise prior to the

termination of the Agreement shall survive such termination.”22 The court

16 Id. at 230-31.

17 Id. at 231 n.2.

18 Morrison v. Amway Corp., 517 F.3d at 255 (emphasis in original).

19 172 S.W.3d at 605.

20 Id. at 607.

21 Id.

22 Id.

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explained that because of this provision, “[h]ad the pharmacies invoked

arbitration rather than filing suit, PCS could not have avoided arbitration by

terminating the Provider Agreement.”23

In addition, this circuit recently considered the validity of an arbitration

clause under Texas law in Morrison v. Amway Corp. There, 24 we held that an

arbitration clause was illusory in light of Davidson. The clause at issue was in

a distributorship contract, and Amway had the right to modify it unilaterally,

as long as it published notice.25 In holding the arbitration agreement illusory,

we explained that the documents did not preclude elimination of the arbitration

program and that the agreement contained “no Halliburton type savings clauses

which preclude application of such amendments to disputes which arose (or of

which Amway had notice) before the amendment.”26

In sum, these cases make clear that even if an arbitration clause may be

unilaterally modified, if the modification or elimination of the clause does not

apply retroactively so as to allow the avoidance of arbitration, the promise to

arbitrate is not illusory. Conversely, the cases do not precisely state when an

arbitration agreement is illusory. However, they suggest that the lack of a

notice window before any elimination of the clause becomes effective and the

ability to amend the agreement retroactively so as to avoid any promise to

arbitrate are factors indicating that the agreement may be illusory.

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

23 Id. at 607-08.

24 517 F.3d 248 (5th Cir. 2008).

25 Id. at 254.

26 Id. at 257.

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No. 09-20778

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 27 type savings

clauses which preclude application of such amendments to disputes which arose

. . . before the amendment.”28 Ignite essentially could renege on its promise to

arbitrate by merely posting an amendment to the agreement on its website.

The defendants contend that Morrison is distinguishable because the

agreement here provides for notice of amendments and states that IAs may

accept any amendments by continuing their business with Ignite and accepting

bonuses or commissions. We do not find this argument persuasive. As noted

previously, Ignite’s Policies and Procedures govern and provide that

amendments are binding and effective immediately, “upon notice.” This is

similar to the agreement in Morrison, in which amendments became effective

upon “published notice.”29 Consequently, because amendments become binding

“upon notice,” the provision allowing IAs to accept modifications by continuing

their business with Ignite is effectively meaningless. The IAs would have no

opportunity to reject the modification and invoke their right to arbitration before

any elimination of the program became effective.

In sum, Ignite’s promise to arbitrate under the terms of this agreement

was hollow. Accordingly, we hold that the arbitration provision is illusory and unenforceable.

27 Id.

28 Id.

29 Id. at 254.

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* * *

For the foregoing reasons, we REVERSE the district court’s order dismissing the case for improper venue and REMAND the case for further proceedings not inconsistent herewith.

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