Ninth Circuit Refuses to Enforce Arbitration Agreement
Quixtar, Amway's successor-in-interest, required its distributors to enter into agreements, under Michigan law, that included a carefully crafted three step ADR process for dispute resolution. The first two steps involved non-binding “conciliation” and the third step was mandatory arbitration. When Quixtar was sued in a purported “class action” under allegations of RICO violations and California's B&P Code section 17200 for allegedly operating an illegal pyramid scheme, Quixtar attempted to have the case dismissed or ordered to arbitration pursuant to its standard ADR agreement. The District Court held that the ADR agreement was not enforceable as it was an unconscionable agreement that lacked either procedural or substantive due process.
Unfortunately for Quixtar, the Ninth Circuit agreed and refused to enforcethe agreement, applying California law, not Michigan law. The court looked to California precedent regarding enforceability of arbitration agreements inthe employment context.
The Court held that the agreement was procedurally unconscionable because (1) there were no negotiations over the terms of the contract, and (2) the agreement was presented to distributors on a take it or leave it basis. Further,because Quixtar retained the right to amend the rules pertaining to ADR at any time, the Court found that substantive unconscionability multiplied “the degree of procedural unconsionability.”
The Ninth Circuit then carefully identified numerous other problems raised by the ADR contracts:
- Lacking mutuality - distributors were required to resolve disputes under the “ADR” process but Quixtar was not.
- The Court held that Quixtar's non-binding “conciliation” program only provided Quixtar with a free peek of the plaintiff's case giving certain advantage toQuixtar (that it referred to as the “employer”).
- Unfair time restrictions - Distributors were precluded from starting an arbitration until at least 90 days after the claim arose and, per the agreement, were limited to a two year statute of limitations to bring any claim. However, Quixtar had no similar limit. And, because there were no time limits for Quixtar to take action, it could delay the claim until after the statute of limitations had run against the distributor.
- A unilateral confidentiality provision - the agreement also contained a confidentiality agreement whereby as soon as the distributors learned of a claim against Quixtar, they could not disclose the claim, the basis, anything learned in discovery or any award. However, Quixtar was not bound by the confidentiality provisions. Further, the provision was not fair to the distributors as it prevented them from exploring and investigating their claims or conducting discovery and Quixtar would benefit from accumulating knowledge as to how to defend itself against claims from its distributors.
- In addition, the arbitrator selection process was tainted. Quixtar's distributors had the choice of selecting a “Quixtar-trained” arbitrator, who's fees were capped, or a non-Quixtar-trained arbitrator, with no fee cap.According to the Court,Quixtar-trained arbitrators go through two complete days of Quixtar seminars intended to produce a favorable view of Quixtar which included “subtle manipulation on issues which could be expected to be considered by the arbitrators.” The District Court concluded that a distributor “should not have to pay extra to avoid the unfairness created by Quixtar's orientation program.”
- Finally, the ADR Agreement's fee shifting clause put the distributors (in the instant matter) at risk of incurring greater costs than they would bear if they were to litigate in court. While a successful RICO plaintiff may be awarded his attorneys' fees, an unsuccessful RICO plaintiff is not at risk for such fees, unless the action were to proceed under the ADR agreement.
Given the totality of substantive and procedural due process, the Ninth Circuit would not sever any of the provisions finding that the agreements were “too tainted to be saved through minor adjustments and the agreements were “permeated with unconscionable provisions.”
Certainly, Quixtar had gone to great effort and expense to attempt to create an ADR procedure that would save it time, public exposure and the uncertainty of the Court system. However, in order to enforce arbitration or ADR Agreements in California, mutuality of obligations is of great importance to the courts. In this case, it is possible that the Ninth Circuit would not have taken issue with so much of the agreement had Quixtar been bound to play by the same “rules” that it imposed on its distributors. The Pokorny v. Quixtar, Inc. decision is here.
Be sure to seek out legal counsel in conjunction with creating any ADR contract to maximize the opportunity that such contracts will be enforceable.