Dr. Joe and Dawn Morrison et al vs Amway Corporation et al, District Court of Harris County, Texas, 1/6/98.
The timing could not have been more dramatic. On 1/6/98, even as Amway embarked on a desperate campaign to vilify and silence the authors of web sites like this one, a group of 29 distributors, most at the Emerald level, filed a lawsuit that lays bare Amway's ugliest secrets. Coming hard on the heels of the Hayden and Hart lawsuits, the Morrison lawsuit deals yet another staggering blow to Amway's credibility and carefully constructed public image.
The plaintiffs in this case are claiming that their lawsuit is "the largest and most significant action by upper echelon Amway distributors in the history of the company." This may very well be true; while the tools business has been at the heart of most of the previous distributor lawsuits, these plaintiffs, like Brig Hart, are in a better position to have observed and be familiar with its innermost workings.
The information made available to the public on AUS and other web sites has long pointed to the conclusion that the Amway Business became the Tools Business years ago, devised and run by distributors like Yager and Britt with the knowledge and protection of Amway Corp. While Amway would like you to believe that this is a malicious accusation made by a "disgruntled activist" or a "competitor" with a "hidden agenda," these recent lawsuits are a clear vindication of those of us who have risked retaliation from a powerful corporation in order to bring the truth to light.
This latest lawsuit is notable for its unflinching description of what the Amway business has become under Dexter Yager and others like him. It alleges that:
UPDATE: On 8/13/98 the judge in this case ordered that the plaintiffs must first pursue their complaint through Amway's non-voluntary arbitration process. We may never know the outcome of the case, which is probably exactly what Amway had in mind when they cooked up this "agreement." The judge's order also applies to the Musgrove/Pruitt suits, and probably the Griffith suit as well.
UPDATE: On 8/23/98 this ruling was appealed.
Houston, January 6, 1998. The Amway Corporation, founders Jay Van Andel and Richard DeVos, Amway icon Dexter Yager and others have been sued in Harris County District Court by a group of high-level distributors seeking damages in excess of $200 million. This filing marks the largest and most significant action by upper echelon Amway distributors in the history of the company.
Dr. Joseph Morrison, spokesmand for the 29 complainants, said "This lawsuit has been filed because there is something rotten in the Amway organization. We have tried unsuccessfully to work out our complaint with Amway and others through the system, but it only gets worse. We had no choice but to take this step."
The petition cites fraud and misrepresentations, as well as intentional interference in the business of the group.
"It is trule ironic that we have found out the overriding principle this company has preached so hard--integrity--is the quality that has been largely absent in the past, bringing us to this stage," Morrison said.
The group has represented and been "upline" to as many as 40,000 or more different Amway businessmen and women, which has been regarded as one of the largest and most prolific in Amway history. Among the plaintiff's group is Morrison, a medical doctor, two other medical doctors, a chiropractor and other professionals. Many of these people had actually retired from their professions in order to pursue their Amway dream. They had achieved, in some instances, some of the highest achievement levels recognized in the Amway organization.
"We all thought that Amway was the key to our future, and the future of our families. We worked as hard as anyone, and did what we were told to help our business grow. In the end, though, we weren't ready to sacrifice our own integrity to enhance our business," Morrison said.
The extraordinary damages sought relate to the devastation of the businesses of the individual plaintiffs, and the business of their future generations. One member of the group was forced to take bankruptcy because of the conduct of the Amway defendants.
"We know this is a lot of money we are seeking," Morrison said. But what must be remembered is that many of us altered our careers, altered our lives because of this business and what had been told and sold to us."
"We all thought we were going to be living the American dream, if only we worked hard enough. What we found out is that if we allowed the wrong to continue, it would be really more the American nightmare."
DR. JOE AND DAWN MORRISON,
| IN THE DISTRICT COURT OF,
KELLY ROBBINS, RANDY AND JANET
|
COUNCILL, DAN AND HELEN HIGGINS,
|
RON & KAREN GREEN, VICTOR & CATHY
|
BROOK, DR. MARION & JEAN MCMURTREY,
|
DAN & HELEN HIGGINS, DR. T. M. &
|
CYNTHIA HUGHES, RICHMOND EAGLE
|
CORP., DAVE & ROSE ROBERTS, DR.
|
RICHARD & LINDA WERNER, TONY &
|
MARYANN CUTAIA, WARREN & DONNA
|
BIRD, TOM & KYE YEAMAN, and WADE &
|
DEBBIE MCKAY
|
|
VS.
| HARRIS COUNTY, TEXAS
|
AMWAY CORPORATION, RICH DeVOS,
|
JAY VANANDEL, DICK DeVOS, STEVE VAN
|
ANDEL, DOUG DeVOS, BOB KERKSTRA,
|
JA-RI CORPORATION, DEXTER YAGER,
|
INDIVIDUALLY AND D/B/A YAGER
|
ENTERPRISES AND INTERNET SERVICES
|
CORPORATION, JEFF YAGER, DONALD R.
|
WILSON, INDIVIDUALLY AND D/B/A WOW
|
INTERNATIONAL AND WILSON
|
ENTERPRISES, INC., RANDY & VALORIE
|
HAUGEN, INDIVIDUALLY AND D/B/A
|
FREEDOM ASSOCIATES, INC., FREEDOM
|
TOOLS, INC. AND ALL STAR PRODUCTION
|
COMPANY, JOHN SIMS, INDIVIDUALLY AND
|
D/B/A SIMS ENTERPRISES, RANDY & SUSAN
|
WALKER, INDIVIDUALLY AND D/B/A
|
WALKER, INTERNATIONAL, MARK &
|
MARTHA HUGHES, BILL & ALYSSA
|
BERGFELD, INDIVIDUALLY AND D/B/A AS
|
BERGFELD INTERNATIONAL, INC., JODY
|
VICTOR, INDIVIDUALLY AND D/B/A JEVI
|
CORPORATION, MARK CORDNER, BILLY
|
ZEOLI, INDIVIDUALLY AND D/B/A GOSPEL
|
FILMS, DENNIS JAMES
| 164TH JUDICIAL DISTRICT
PLAINTIFFS’ ORIGINAL PETITION
TO THE HONORABLE JUDGE OF SAID COURT:
COMES NOW, DR. JOE and DAWN MORRISON, KELLY ROBBINS,
RANDY and JANET
COUNCILL, DAN and HELEN HIGGINS, RON & KAREN
GREEN, VICTOR & CATHY BROOK,
DR. MARION & JEAN MCMURTRY, DAN & HELEN HIGGINS,
DR. T. M. & CYNTHIA HUGHES,
RICHMOND EAGLE CORP., DAVE & ROSE ROBERTS, DR.
RICHARD & LINDA WERNER, TONY
& MARYANN CUTAIA, WARREN & DONNA BIRD, TOM
& KYE YEAMAN, and WADE & DEBBIE
MCKAY, Plaintiffs in the above-entitled and numbered
cause and files this,
their Original Petition complaining of AMWAY CORPORATION,
RICH DeVOS, JAY
VAN ANDEL, DICK DeVOS, STEVE VAN ANDEL, DOUG
DeVOS, BOB KERKSTRA, JA-RI
CORPORATION, DEXTER YAGER, INDIVIDUALLY AND D/B/A
YAGER ENTERPRISES AND
INTERNET SERVICES CORP., JEFF YAGER, DONALD R. WILSON,
INDIVIDUALLY AND
D/B/A WOW INTERNATIONAL AND WILSON ENTERPRISES, INC.,
RANDY & VALORIE
HAUGEN, INDIVIDUALLY AND D/B/A FREEDOM ASSOCIATES,
INC. AND FREEDOM TOOLS,
INC. AND ALL STAR PRODUCTION COMPANY, JOHN SIMS,
INDIVIDUALLY AND D/B/A SIMS
ENTERPRISES, RANDY & SUSAN WALKER, INDIVIDUALLY
AND D/B/A WALKER
INTERNATIONAL, MARK & MARTHA HUGHES, BILL &
ALYSSA BERGFELD, INDIVIDUALLY
AND D/B/A BERGFELD INTERNATIONAL, INC., JODY VICTOR,
INDIVIDUALLY AND D/B/A
JEVI CORPORATION, MARK CORDNER, BILLY ZEOLI, INDIVIDUALLY
AND D/B/A GOSPEL
FILMS, DENNIS JAMES, Defendants and in support thereof
would show unto this
Court the following:
I. Venue
Venue is proper in Harris County as Plaintiffs are residents of Harris County, Texas and all are part of the acts complained of took place in Harris County, Texas.
All other Defendants are subject to the jurisdiction
of this Court under the Texas Long Arm Statute in that they are nonresidents
of the State of Texas who have (a) transacted and continue to transact
business, and have engaged in purposeful activity within the State of Texas;
and that the claims of Plaintiffs arise out of said business and activity;
(b) committed a tortuous act or acts or omissions within Texas against
Plaintiffs, and/or (c) committed a tortuous injury or injuries in Texas
against Plaintiffs caused by acts or omissions outside of Texas and have
regularly done or solicited business in Texas, engaged in a persistent
course of conduct within Texas and derived substantial revenue from goods
used or consumed in Texas. Furthermore, certain of the actions of all Defendants
here complained were transacted in Harris County, Texas and venue properly
lies in this Court.
II. Service
Defendant, Amway Corporation is a Michigan Corporation whose principal place of business is located 7575 East Fulton St., Ada, Michigan 49355, and may be served with process through its registered agent for service, CT Corporation,at 350 North St. Paul Street, Dallas, Texas 75201.
Defendant, JA-RI Corporation is a Michigan corporation whose business address is the same as the Amway in Ada, Michigan. It may be served with process through its registered agent for service, Kim S. Mitchell, at 7575 East Fulton Street East, Ada, Michigan 49355.
Rich DeVos is an individual residing in Ada, Michigan and may be served at his business address of 7575 Fulton Street East, Ada, Michigan 49355.
Jay Van Andel is an individual residing in Ada, Michigan and may be served at his business address of 7575 Fulton Street East, Ada, Michigan 49355.
Dick DeVos is an individual residing in Ada, Michigan and may be served at his business address of 7575 Fulton Street East, Ada, Michigan 49355.
Steve Van Andel is an individual residing in Ada, Michigan and may be served at his business address of 7575 Fulton Street East, Ada, Michigan 49355.
Doug DeVos is an individual residing in Ada, Michigan and may be served at his business address of 7575 Fulton Street East, Ada, Michigan 49355.
Bob Kerkstra is an individual residing in Ada, Michigan and may be served at his business address of 7575 Fulton Street East, Ada, Michigan 49355.
DexterYager Individually and d/b/a Yager Enterprises and Internet Services Corporation, and Jeff Yager are individuals residing in Charlotte, North Carolina and may be served at their business address of 12201 Steele Creek Road, Charlotte, North Carolina 28273.
Donald R.Wilson, Individually and d/b/a Wow International and Wilson Enterprises, Inc. is an individual residing in Ogden, Utah and may be served at 6057 South 2950 East, Ogden, Utah 84403.
Randy & Valorie Haugen, Individually and d/b/a Freedom Associates, Inc., Freedom Tools, Inc. and All Star Production Company are individuals residing in Ogden, Utah and may be served at 2488 Bonneville Terrace, Ogden, Utah 84403.
John Sims, Individually and d/b/a Sims Enterprises is an individual residing in Kaysville, Utah and may be served at 1148 N. Highway 89, Kaysville, Utah 84037.
Randy & Susan Walker, Individually and d/b/a Walker International are individuals residing in Conroe, Texas and may be served at 1450 Interstate 45 South, #F-13, Conroe, Texas 77304.
Mark & Martha Hughes are individuals residing in Houston, Texas and may be served at 13315 Pantano, Houston, Texas 77065.
Bill & Alyssa Bergfeld, Individually and d/b/a Bergfeld International, Inc. are individuals residing in Conroe, Texas. Bill Bergfeld may be served at The Feed Store, S. Main, Conroe, Texas 77304. Lisa Bergfeld may be served at 202 Old Country Club Road, Conroe, Texas 77304.
Jody Victor, Individually and d/b/a Jevi Corporation is an individual residing in Clinton, Ohio and may be served at 740 Yager Road, Clinton, Ohio 44216.
Mark Cordner is an individual residing in Utah and may be served c/o Freedom Associates or All Star Productions, 2488 Bonneville Terrace, Ogden, Utah 84403.
Billy Zeoli, Individually and d/b/a Gospel Films is an individual residing in Michigan and may be served at 7575 Fulton Street East, Ada, Michigan 49355.
Dennis James is an individual residing in Houston,
Texas and may be served at 601 Cypress Station Drive, #203, Houston, Texas
77090.
III. BACKGROUND FACTS
The Amway Corporation manufactures a wide variety of consumer household products which it sells along with the products of other manufacturers nationwide through hundreds of thousands of distributors, many of them are in Texas. The Amway sales plan is a marketing scheme whereby any purchase or sale of Amway goods by a distributor financially benefits not only Amway, but also those Amway distributors who qualify and occupy levels of the Amway distributorship network hirer than that of the selling distributor. In Amway parliaments, those persons who occupy positions below distributor in each branch of the network are called the distributor’s "downline". Those persons who occupy positions above a distributor in each branch of the network are called the distributor’s "upline". In order to earn significant profits as an Amway distributor, one must develop a sizeable downline organization by recruiting and sponsoring other distributors into the Amway sales organization.
Amway considers its distributors independent contractors and independent businessmen and women. Such distributors earn money by the mark up they make on Amway and other related products sold to customers who are not Amway distributors and other distributors, in a person’s direct downline organization. Distributors also earn money through a complicated system of commissions, cross-commissions, bonuses, refunds, discounts, dividends and other considerations in the Amway program as a result of the sale of such goods or services to "downline" distributors and/or the recruitment of additional participant distributors. This income is derived in one way or another from either the sale of Amway products to customers who are not distributors or to other distributors; and, the recruitment of new Amway distributors to one’s "downline". A downline distributor is expected and encouraged to purchase Amway products.
Once a distributor reaches a certain volume level of business generated by the sale of Amway products to either their "downline" Amway distributors or to customers who are not Amway distributors, that distributor may qualify as a "direct distributor" and may begin buying their products directly from Amway without purchasing those products from their "upline" distributor as they formally had done before they reached the direct distributor level. A direct distributor may still qualify for certain monetary benefits, commissions and awards from his downline organization even if that organization contains other direct distributors. In short, a direct distributor does not share in the profits generated by the sale of products from other direct distributors in his/her downline; but, does obtain monetary awards directly from Amway because of the increased volume created by direct distributors in his downline organization. Therefore, because it is simply impossible for one person to generate a large amount of profit from the sale of individual products, the overwhelming incentive in the Amway organization and the Amway plan is to recruit more and more distributors into one’s downline to increase the volume of products sold in the downline organization by other distributors, whether direct or not direct, and thereby maximize the bonus and reward potential to be paid to the person at the top of this downline organization by Amway.
Defendant Yeager occupies a position at the top of
his own vast Amway distributorship network to which all the Plaintiffs
and many of the Defendants belong. Plaintiffs are all direct distributors
with Amway and have been so for some time. In fact, Plaintiffs are
some of the most successful direct distributors in the entire Amway organization.
They have qualified at the Emerald and in one case, Diamond level.
The Diamond level is the highest level of achievement, and therefore, largest
organization headed by a single distributor, in the Amway organizational
and marketing program.
IV. PLAINTIFFS’ BUSINESSES AND DEFENDANTS’ CONDUCT
For several years, Plaintiffs have run their independent Amway businesses in accordance with the edicts and instructions of the Amway business and marketing plan. Plaintiffs developed very successful Amway distributorships each of which contained tens of thousands of downline distributors. These organizations were among the most successful in all of Amway. These distributorships generated significant revenue for the Plaintiffs and in most cases became the Plaintiffs’ only source of revenue after they retired from their regular line of work to devote their full time and attention to their growing Amway businesses. Plaintiffs’ distributorships would have continued to grow and generate even more revenue for Plaintiffs had it not been for the interference and tortuous acts of Defendants.
When Plaintiffs first became Amway distributors, and as they began to build their Amway distributorships upon the instruction and advice of Defendants, they were sold materials, tapes and other documents which indicated that if a person worked hard, there was no limit to the amount of financial reward that person could find as an Amway distributor. They were shown a book called the "Profiles of Success" which showed the lavish lifestyles of highly successful Diamond level distributors in the Amway organization. They were told to attend seminars and rallies on a monthly and then a weekly basis, where diamond level and emerald level distributors were paraded across the stage and spoke about their tremendous financial success and lavish lifestyles they were able to lead because of their Amway distributorship business. At all times, Defendants stressed continually the "independent businessman" aspect of the Amway business and reiterated on many occasions that all Amway distributors are independent business people working for themselves.
Plaintiffs were told to purchase motivational tapes, as many as three per week, and to sell as many of these tapes as they could to their downline distributors without disclosing to Plaintiffs or other distributors the source of the tapes or whether or not anyone was making a profit from the tapes. These tapes contained motivational talks by many of the same Emerald direct distributors and Diamond level direct distributors who spoke at the functions. In fact, only Emerald direct distributors and Diamond direct distributors are allowed to speak at, organize or run functions and rallies. Defendants, conspiring with one another and working in conjunction with one another, have devised a system scheme or plan to take full control of all the distributors, including Plaintiffs, within Defendant Yager’s downline Amway distributorship organization, by controlling the production and distribution of motivational tapes, seminars and rallies to which all distributors within the Yager organization must attend or subscribe or risk suffering tremendous financial consequences.
Defendants derive the majority of their incomes from the sale of non-Amway motivational materials such as tapes to persons in their downlines and from the money earned through motivational rallies and seminars. Defendants regularly represented or caused to be represented to Plaintiffs and others that their success as Amway distributors and in fact the success of their entire distributorship organization was contingent upon the purchase of these tapes published and/or distributed by Defendants and attendance at meetings, seminars and rallies sponsored by them, and that without such materials and attendance at such meetings, seminars and rallies, Plaintiffs would be unable to build and maintain successful Amway distributorships. Defendants further represented or caused to be represented to Plaintiffs that they should purchase only those motivational materials produced and distributed by Defendants.
In fact, the Defendants took it one step further,
because the sale of tapes and the revenue from ticket sales to downline
distributors and prospective distributors to monthly or bi-monthly seminars
and rallies had become such a vast majority of the revenue for Defendants,
Defendants conspiring with one another and others concocted a scheme whereby
all direct distributors in the Yager downline, including Plaintiffs, were
forced to sell aggressively and literally "push" these tapes on their own
downlines and Defendants coerced Plaintiffs through illegal means to require
that as many of their downline distributors as possible bought tickets
to the various rallies, seminars and functions operated by Defendants.
V. DEFENDANTS’ ILLEGAL CONTROL OF PLAINTIFFS’ BUSINESSES
Defendants, Yager, Wilson, Haugan, Walker, Hughes, Bergfeld and Sims, conspiring amongst themselves and with others, would select which Diamond direct distributors and Emerald direct distributors within the Yager organization would be allowed to hold functions, seminars or rallies in various places around the country on various dates throughout the year. These were the only "approved" functions. All other direct distributors in the particular geographic area where an "approved" event was being held were coerced into selling tickets to that "approved" event to as many of their downline distributors as possible. Only high level direct distributors who were "in the good graces", or "plugged in", of Defendants were allowed to participate in and profit from these events. Anyone trying to hold an event independent of one of the Defendants’ events was essentially "blackballed" and not allowed to participate and profit from events authorized by Defendants.
Further, Defendants conspiring with one another and with others then made attempts to disrupt and tortuously interfere with the business relationships of the Plaintiffs and their respective downline organizations by contacting other distributors in Plaintiffs’ downlines and disparaging and defaming Plaintiffs by telling those downline distributors that Plaintiffs were not "plugged in", were not "team players," and were such that any continued relationship with Plaintiffs threatened their businesses. This was done even though Defendants continually represented to Plaintiffs and others that each Amway distributor is an independent business person and not employed by or bound one to the other in any other relationship other than that of an independent arm’s length business relationship. Finally, the control of Defendants’ conspiracy and evil plan to reap hundreds of millions of dollars at the expense of thousands and possibly millions of other people, got to the point that Defendant Yager and the other Defendants conspiring among themselves and with others, would decide within the Yager organization which individual would next become an Emerald direct distributor or a Diamond level direct distributor regardless of any other individual’s own achievement. They did this by manipulating the Amway point system and by transferring points from one distributor to another, realigning downline groups under a certain favored distributor and other such devices so that Defendants could maintain complete and total control over the development of Yager’s downline organization. In doing so, Defendants have destroyed the personal independent businesses of Plaintiffs. Additionally, Defendants would personally direct and coerce Plaintiffs concerning the conduct of their businesses by telling Plaintiffs which functions to attend, which upline distributors to counsel with and the specific upline distributors with whom to form associations. To do otherwise, Defendants threatened, would mean total destruction of Plaintiffs and their businesses by Defendants.
Plaintiffs are the only direct distributors at a high
enough level to stand up to Defendants and stop their evil scheme.
When Plaintiffs began to question the business practices of Defendants,
Defendants attempted to completely "cut off" Plaintiffs from the motivational
tape, seminar and rally system which is a major source of income for any
Amway distributor above the level of direct distributor. Further,
Defendants engaged in and continue to engage in tortuous interference by
contacting downline distributors in each of the Plaintiff’s respective
downlines and disparaging and defaming Plaintiffs to these distributors
without legal justification. Further, Defendants have tortuously interfered
in Plaintiffs’ attempts to hold independent seminars, rallies and functions
and have defamed Plaintiffs to other distributors in an attempt to keep
them away from Plaintiffs motivational events causing serious irreparable
financial harm to Plaintiffs as well as a loss of reputation and development
in their own business communities.
VI. PARTICIPATION OF AMWAY
Defendants are attempting to control the entire Amway
sales and marketing plan through illegal means by tying success in the
Amway organization to complete obedience to the dictates of Defendants
under the "Yager system" of motivational tapes, seminars and rallies.
This is all being done with Amway’s knowledge and consent; and in fact,
with the active support and collusion of many of its top level employees
and executives. Defendants continue to represent that a fortune may
be made through the sale of Amway products and the recruitment of other
Amway distributors when in fact Defendants know but do not disclose that
the vast majority of their own revenue and income is derived from the "Yager
system" of motivational tapes, seminars and rallies. Such income
opportunities are not truly available to all to whom the "dream" is represented.
This motivational system controlled by Yager and the other Defendants is
an illegal pyramid scheme which has cooped and corrupted the very basics
of what has been a phenomenally successful Amway sales and marketing plan
over the last thirty years. Unfortunately, while Amway and its leaders
and founders preach the concept of integrity, this scheme has been done
with the knowledge and cooperation of Amway all in the name and the pursuit
of greater and greater profits. Additionally, Amway and the other Defendants
ironically continue to benefit and derive income from motivational materials
produced and created by Plaintiffs which are in continuous use throughout
the Yager organization without sharing any of those incomes or revenues
with Plaintiffs. Plaintiffs bring this suit to put a stop to this fraud
and the tortuous interference of Defendants.
VII. CONTROL BY YAGER
Defendants further represented to Plaintiffs that
despite anything the Amway organization might say, the Amway rules and
regulations were irrelevant and should be disregarded, and that Amway would
not dare interfere with the way the Yager organization was run, because
Yager could always pull his downline organization out of Amway, which would
significantly harm Amway.
VIII. AMWAY AWARE OF WRONGFUL CONDUCT
At all time relevant hereto, Amway was aware that
the aforesaid misrepresentations regarding Defendant Yager’s motivational
materials and motivational rallies were being made to Plaintiffs and other
Amway distributors, and that in practice, sales of such materials within
the Yager organization were consistently being conducted in violation of
Amway’s rules, including without limitation, Section B, Rule 4. It
was in Amway’s economic self-interest to permit such misrepresentations
and rules violations to continue, and although Amway has been aware of
such practices for years, Amway has never terminated the distributorship
of Defendant Yager or made any credible effort to halt his practices in
violation of Amway’s rules.
IX. DEFENDANTS’ INTERFERENCE
Defendants engaged in a regular practice of interfering
with Plaintiffs’ respective downlines; cutting out the Plaintiffs from
the distributorship.
X. DEFENDANTS’ INTERFERENCE WITH PLAINTIFFS’ DOWNLINE
On various occasions, Defendants herein sold or caused
the sale of Amway and non-Amway products directly to Plaintiffs’ downline
distributors without authorization from Plaintiffs, thereby interfering
with Plaintiffs’ distributorship relationships.
XI. DEFENDANTS’ DISPARAGEMENT AND DEFAMATION
On numerous occasions, Defendants disparaged and defamed Plaintiffs to Plaintiffs’ own downline distributors and Plaintiff upline distributors, in an effort to interfere with Plaintiffs’ downline distributorship relationships, and to isolate Plaintiffs from upline support and assistance.
XII. RECO
The Defendants’ scheme was, and is, violative of the
Federal Racketeer Influenced to Corrupt Organizations Act (18 U.S.C. §1961
et. seq.) and the Sherman Anti Trust Act (15 U.S.C. §1). These
Defendants’ individual actions were, and are, violative of Texas Common
Law and Tort Contract Principals. The Defendants’ conduct and misrepresentations
constitute violations of the Texas Deceptive Trade Practices Act.
XIII. PLAINTIFFS’ INJURIES
Plaintiffs have been injured as a result of the Defendants’
conduct and will continue to be injured unless it is stopped. In
this action, Plaintiffs seek to recover the revenues actually lost in the
past, and the future revenues that had been represented to them would surely
be theirs for the taking with the effort Plaintiffs’ have generated.
XIV. VIOLATIONS OF TEXAS STATE BRIBERY ACT
The actions of Defendants alleged above constitutes illegal activity within the meaning of the Texas State Bribery Act and wire and mail fraud. Defendants’ participation in the affairs of the enterprise consisted of their guiding, managing, directing or otherwise exercising some control of the affairs of the enterprise.
Through acts of mail and wire fraud, Defendants participated in the affairs of the illegal enterprise which was comprised of a large international corporation (Amway), Defendants, and their vast network of millions of individual distributors. The cloak of legitimacy provided to Defendants by this seemingly legitimate enterprise afforded said Defendants’ acts as to an influence over huge numbers of Amway distributors, thus enabling Defendants to exercise their scheme to defraud Plaintiffs and others.
Defendants’ pattern of racketeering activity, was consisted of mail and wire fraud, was perpetuated through direct telephone communications, the Am Vox telephone voice mail system, and the mails, pursuant to and for the purpose of executing Defendants’ scheme to defraud Plaintiffs and others by communicating false and fraudulent information as set out above.
Plaintiffs are persons injured by reason of Defendants’
violations and are entitled to three times their actual damages sustained,
as well as punitive damages and attorneys’ fees.
XV. FRAUD
Defendants made or caused to be made knowingly and
fraudulent misrepresentations to Plaintiffs and others as set out above
when in fact, these Defendants were engaged in the systematic violation
of the Amway rules and were operating an illegal scheme for their own profit
through the sales of motivational materials and the conduct of seminars,
rallies and other events. These representations were made or caused
to be made by Defendants knowingly and continued to the present day.
These misrepresentations and omissions were made or caused to be made by
Defendants with the intent that they be relied upon and acted upon by Plaintiffs
and others for the purpose of generating larger profits for these Defendants
from their illegal selling scheme which was and is prohibited by the Amway
rules and Texas law. But for the aforesaid fraudulent representations,
upon which Plaintiffs and others justifiably relied to their detriment,
and but for the aforesaid omissions and material facts, Plaintiffs would
not have entered into or maintained their Amway distributorship businesses.
Plaintiffs, in justifiable reliance upon Defendants’ fraudulent misrepresentations,
were damaged in an amount difficult to measure, but Plaintiffs believe
in excess of Two Hundred Million Dollars ($200,000,000.00).
XVI. BREACH OF CONTRACT
As more particularly described above, Plaintiffs entered into and continued in the renewal of a distributorship agreement with Defendant, Amway, based in significant part upon representations made to them concerning the Amway marketing system, including the rules and regulations promulgated by Amway.
Amway’s failure and refusal after notice of numerous
violations to enforce the rules and regulations promulgated by it to govern
its marketing system, and for colluding in improper actions against Plaintiffs
by Plaintiffs’ upline distributors including Defendants, which actions
were in direct violation of Amway’s rules and regulations, constitutes
a breach by Amway of its contract with Plaintiffs, as a direct result of
which Plaintiffs’ suffered considerable economic loss and continue to suffer
such loss for which Amway should be held liable.
XVII. TORTUOUS INTERFERENCE WITH CURRENT AND PROSPECTIVE BUSINESS RELATIONSHIPS
Defendants, individually and conspiring among themselves
and others, tortuously interfered with Plaintiffs’ contractual relationship
with Amway by selling both Amway and non-Amway products directly without
Plaintiffs’ permission to Plaintiffs’ downline distributors. Further,
Defendants, acting individually and conspiring among themselves and with
others, tortuously interfered with Plaintiffs’ contractual relationship
with Amway and Plaintiffs’ respective own downline independent distributors
by contacting certain of Plaintiffs’ downline distributors for the purpose
of making false defamatory and damaging statements to them about Plaintiffs
and such interference with those relationships has resulted in actual damages
suffered by Plaintiffs.
XVIII. IMPLIED BREACH OF IMPLIED CONTRACT AND EXPRESS AND IMPLIED WARRANTIES
Defendants engaged in devious and reprehensible conduct in perpetuating their fraud upon Plaintiffs and pursuing their course of action intended to gain control of Plaintiffs’ businesses solely for the financial enrichment of themselves and to the financial, psychological and spiritual detriment of Plaintiffs. When Plaintiffs entered into their Amway businesses and as they developed these businesses, they were told by Defendants that it was very important to be "plugged in" and "associated with" their upline distributors, including Defendants, in order to achieve success in the Amway business. Defendants represented to Plaintiffs that they were not only Plaintiffs’ upline distributors and business associates, but also Plaintiffs were encouraged by Defendants to believe that Defendants were financial and personal advisors, counselors, friends, and even ministers. In fact, defendants instructed Plaintiffs that they should not make any financial or significant personal decision without consulting with Defendants first. Defendants encouraged and instructed Plaintiffs to immerse themselves in the Amway business to the exclusion of all other activities. Defendants instructed Plaintiffs that they should "give up" and "retire" from their respective jobs, successful professions and other businesses in order to demonstrate to Plaintiffs’ downline how successful they were becoming in the Amway business.
In reality, Defendants’ purpose in doing this was to increase Defendants’ control over Plaintiffs in every aspect of Plaintiffs’ lives. Defendants instructed Plaintiffs on the sale of their businesses, the borrowing of money, the entering into and dissolving of business relationships and transactions, persons with whom and not with whom to associate, and virtually every other aspect of Plaintiffs’ lives in order to gain control of Plaintiffs and their businesses solely for the purpose of financially enriching Defendants at the expense and exclusion of Plaintiffs.
Because of these activities, Defendants established
a fiduciary and special relationship with Plaintiffs which gave rise to
an extraordinary duty on the part of Defendants to give Plaintiffs accurate
and sound advice and instruction for the purpose of benefiting Plaintiffs
and without regard to any affects such advice and instruction might have
on Defendants. Defendants did not do so. Defendants were acting and
instructed Plaintiffs that they be allowed to act in the role of Plaintiffs’
attorneys, accountants, business advisors, financial consultants, personal
psychologist and minister for the purpose of gaining control over Plaintiffs’
personal lives and businesses for the sole purpose of financially enriching
Defendants at the expense of Plaintiffs. All of the above gave rise
to an implied contract and extraordinarily high duty of care on the part
of Defendants toward Plaintiffs which Defendant have breached in every
regard and such breach has caused Plaintiffs serious and irreparable injury
and harm for which Plaintiffs now sue.
XIX. DEFENDANTS’ WILLFUL CONDUCT
In committing the acts of which reference is made
in this Original Petition, Defendants have acted willfully, maliciously,
wantonly, oppressively, intentionally, knowingly, fraudulently, in bad
faith, and with reckless disregard of the consequences and with such entire
want of care as raises the presumption of conscious indifference and malice
toward Plaintiffs such as to entitle Plaintiffs to punitive damages under
Texas law; further, that Defendants acted with the specific intent to cause
serious harm to Plaintiffs.
XX. ATTORNEYS’ FEES
Plaintiffs seek recovery of their reasonable attorney
fees and expenses in the prosecution of this litigation and any related
litigation caused by Defendants’ wrongful conduct.
XXI. DEFAMATION
Defendants published or allowed to be published false, malicious and nonprivileged statements concerning Plaintiffs, their executives and employees. The foregoing false statements concerning Plaintiffs are slanderous, libelous and/or defamatory. The foregoing false statements concerning Plaintiffs are further, slanderous, libelous and/or defamatory per se. Defendants knowingly, intentionally and/or maliciously uttered or published such false and defamatory statements and/or allowed, permitted and/or acquiesced in the uttering or publication of such statements.
The false, malicious, nonprivileged statements proximately caused harm and damage to Plaintiffs’ reputation, prestige and standing as well as Plaintiffs’ respective businesses. As a proximate result of Defendants’ conduct, Plaintiffs have suffered damages in an amount to be determined at trial.
Further, Defendants’ conduct was undertaken
in bad faith, was malicious and manifested a wanton disregard of and/or
reckless indifference toward the rights of Plaintiffs thereby entitling
Plaintiffs to punitive or exemplary damages.
XXII. INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS
Defendants’ conduct as set out above in this Original
Petition was intentional and/or reckless and designed to cause severe damage
to Plaintiffs. Further, Defendants’ conduct was extreme and outrageous
as those terms are defined in Texas law and without justifiable legal excuse.
Plaintiffs have suffered severe emotional distress because of Defendants’
actions and have been unable to maintain or develop their respective businesses.
XXIII. TEXAS DECEPTIVE TRADE PRACTICES ACT
Defendants’ actions described more completely above
constitute unfair methods of competition, unconscionable acts or practices,
and unfair and deceptive acts and practices in the conduct of the Amway
related business in violation of the Texas Deceptive Trade Practices Act.
Plaintiffs have been damaged by the Defendants’ deceptive and unfair trade
practices in an amount exceeding Two Hundred Million Dollars ($200,000,000.00).
Plaintiffs are entitled to recover their actual damages, additional damages
to be proven at the trial of this matter, post costs, interests, and reasonable
attorney fees from the Defendants’ further deceptive and unfair trade practices.
XXIV. BREACH OF FIDUCIARY DUTY
The relationship of Amway personal direct distributor and distributor, and the relationship between an Amway distributor and those who the distributor helps train and counsel in his or her downline network is a relationship of trust and confidence. In the network, the distributor-sponsor acquires influence over the distributors-recruits and is in a position of superior knowledge and information. These relationships of trust and confidence impose fiduciary obligations upon an Amway distributor.
At the time the Plaintiffs were recruited to become Amway distributors and throughout their time as active distributors, they made their decision to become and continue as distributors based in large part on their reliance on the representations made by their direct upline distributors including Defendants. Among the representations these Defendants made, are the following:
A. That Amway follows certain ethical guidelines and rules which are imposed by contract upon each distributor and which Defendants were committed to following.
B. That Defendants were committed to abiding by Rule 4 of §B of the Rules of Conduct of Amway Distributors – which prohibits an Amway distributor from selling non-Amway products to another Amway distributor whom he or she does not personally sponsor as applied on a Diamond to Diamond basis in accordance with the course of dealing and past business practices recognized by all distributors in the Amway network;
C. That Defendants would treat Plaintiffs fairly in the business support materials business by compensating Plaintiffs for all sales of business support materials due distributors in their downline network;
D. That Defendants are committed to Amway’s partnership principal in that Plaintiffs can place their trust and confidence in these Defendants; and,
E. That Defendants are committed to Amway’s principals of teamwork, commitment, and communication.
Defendants, individually and conspiring among themselves and others, have abused and betrayed Plaintiffs’ trust and confidence by, among other things:
A. Seeking to acquire and take over Plaintiffs’ Amway related business support materials business by violating Rule 4 of §B of the Rules of Conduct of Amway Distributors as applied on a Diamond to Diamond basis in accordance with the parties course of dealing and past business practices;
B. Fraudulently inducing Plaintiffs to allow these Defendants to continue to directly serve a certain distributor in their downline organizations with Internets business support materials;
C. On information and belief, misrepresenting the volume of business support materials distributed to distributors in the Plaintiffs’ downline by Defendants; and,
D. Agreeing and/or conspiring with Defendants and others and their respective companies, to engage in an illegal group boycott of Plaintiffs in the market for Amway related business support materials, motivational seminars, rallies and other events and sponsorship of prospective Amway distributors.
E. Some of Defendants are members of the Amway Distributor’s Association Board. This Board is the representative of all Amway Distributors before the Amway Corporation itself. It and its members have a duty to all Amway distributors to represent each individual independent Amway distributor’s best interests in their dealings with the Amway Corporation and this includes Plaintiffs. Several of the Defendants by virtue of their membership on this Board have used their position on this Board to enrich themselves at the expense of Plaintiffs and other independent Amway distributors. This is a breach of the fiduciary duty these Board members and the Board itself owes to Plaintiffs and other independent Amway distributors and has caused serious irreparable financial harm to Plaintiffs for which they now sue.
Defendants’ actions described above and throughout
this Petition constitute breaches of their fiduciary duties to the Plaintiffs
and are tortuous conduct separate and independent from their contractual
breaches alleged above. Plaintiffs have been damaged and continue to be
damaged by Defendants’ breaches of their fiduciary duties to Plaintiffs
in an amount exceeding Two Hundred Million Dollars ($200,000,000.00).
Plaintiffs are entitled to recover this sum, additional damages proven
at the trial of this matter, sufficient punitive damages to deter Defendants
from similar future conduct, plus costs, interest and reasonable attorney
fees from these Defendants for their breaches of fiduciary duty.
XXV. ACCOUNTING
Plaintiffs demand that an accounting against Defendants
be done to determine and recover monies owed Plaintiffs by Defendants.
Plaintiffs’ remedy at law for Defendants’ actions is inadequate because
without an accounting, Plaintiffs are unable to determine the precise amount
of money that Defendants owe them.
XXVI. INJUNCTIVE RELIEF
Plaintiffs are also entitled to an order from the Court that compels Defendants to abide by their contractual commitments to Amway, and to Plaintiffs as third party intended beneficiaries to those contracts and as parties to the various implied agreements between the parties, which agreements provide that Rule 4 will be applied to the distribution network for business support materials on a Diamond to Diamond basis. If Amway allows Defendants to violate Rule 4 of the Rules of Conduct, Plaintiffs will continue to suffer immediate and irreparable injury, loss and damage. While Plaintiffs bring this action to remedy past violations of the Rules of Conduct of Amway distributors, Plaintiffs have no adequate remedy of law to prohibit future violations by Defendants. If a preliminary injunction is granted, the injury, if any, to Amway and the other Defendants, by simply forcing them to comply with contractual obligations they promulgated themselves and bargained for with Plaintiffs and others, will be minimal.
WHEREFORE, PREMISES CONSIDERED, Plaintiffs demand a trial by jury that on the evidence shown before this Court may show the Plaintiffs recover damages:
A. Actual damages of at least Two Hundred Million Dollars ($200,000,000.00);
B. Exemplary damages in an amount to be determined by the jury;
C. Attorneys’ fees and costs of Court;
D. Pre-judgment and post-judgment interest as provided by law; and,
E. An accounting as described in this Petition;
F. Injunctive relief as described above;
G. For such other equitable and
legal relief to which Plaintiffs may justly entitled.
Respectfully submitted,
PHILLIPS & AKERS
By:
Brock C. Akers
State Bar No. 00953250
Kevin G. Corcoran
State Bar No. 04819250
3400 Phoenix Tower
3200 Southwest Freeway
Houston, Texas 77027
(713) 552-9595
FAX (713) 552-0231
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
DR. JOE AND DAWN MORRISON, KELLY
)
ROBBINS, RANDY AND JANET COUNCILL,
)
DAN AND HELEN HIGGINS, RON AND
)
KAREN GREEN, VICTOR AND CATHY
)
BROOK, DR. MARION AND JEAN
)
MCMURTREY, DAN AND HELEN HIGGINS,
)
DR. T.M. AND CYNTHIA HUGHES,
)
RICHMOND EAGLE CORP., DAVE AND ROSE
)
ROBERTS, DR. RICHARD AND LINDA
)
WERNER, TONY AND MARY ANN CUTAIA,
)
WARREN AND DONNA BIRD, TOM AND KYE
)
YEAMAN, AND WADE AND DEBBIE MCKAY
)
Plaintiffs,
)
)
vs.
) CIVIL ACTION NO. 11-98-0352
) CONSOLIDATED WITH
AMWAY CORPORATION, RICH DEVOS, JAY
)
VANANDEL, DICK DEVOS, STEVE VAN
)
ANDEL, DOUG DEVOS, BOB KERKSTRA,
)
JA-RI CORPORATION, DEXTER YAGER
)
INDIVIDUALLY AND D/B/A YAGER
)
ENTERPRISES AND INTERNET SERVICES
)
CORPORATION, JEFF YAGER, DONALD R.
)
WILSON, INDIVIDUALLY AND D/B/A WOW
)
INTERNATIONAL AND WILSON
)
ENTERPRISES, INC., RANDY AND VALORIE
)
HAUGEN, INDIVIDUALLY AND D/B/A
)
FREEDOM ASSOCIATES, INC., FREEDOM
)
TOOLS, INC. AND ALL STAR PRODUCTION
)
COMPANY, JOHN SIMS, INDIVIDUALLY
)
AND D/B/A SIMS ENTERPRISES, RANDY
)
AND SUSAN WALKER, INDIVIDUALLY AND
)
D/B/A WALKER, INTERNATIONAL, MARK
)
AND MARTHA HUGHES, BILL AND ALYSSA
)
BERGFELD, INDIVIDUALLY AND D/B/A AS
)
BERGFELD INTERNATIONAL, ING., JODY
)
VICTOR, INDIVIDUALLY AND D/B/A JEVI
)
CORPORAITON, MARK CORDNER, BILLY
)
ZEOLI, INDIVIDUALLY AND D/B/A GOSPEL
)
FILMS, AND DENNIS JAMES
)
Defendants.
)
MEMORANDUM OPINION AND ORDER
Pending before the Court is Defendants' Motion to Stay Pending arbitration. (Instrument #51.) Upon reviewing the record, the memorandum in support, (Instrument #52), the responses (Instruments #57-59), and the applicable law, the Court concludes that the motion to stay should be GRANTED.
I. BACKGROUND
The Plaintiffs1
are distributors ofAmway Corporation ("Amway"). Amway is a multinational
company with sales in excess of $5 billion that sells household products.
Amway distributes these products a "network marketing" method by which
hundreds of thousands of independent distributors constantly recruit new
distributors, or "down-liners." The down-liners are encouraged to purchase
and use Amway products and motivational materials themselves and to recruit
their own new distributors. A distributor's success is thus dependent upon
building a large base of down-liners. See, e.g., Amway Distributors
Benefits Ass'n v. Federal Ins. Co., 990 F.Supp. 936, 939 (W.D. Mich.
1997); Hanrahan v. Britt, 174 F.R.D. 356, 359 (E.D. Pa. 1997).
In this case, the Plaintiffs, inter alia, have a disagreement with how profits are determined with regard to the motivational and other business support materials. The Plaintiffs have sued Amway as well as other distributors in their respective "up-line" for a myriad of claims ranging from defamation to RICO. Three suits filed in this District have been consolidated.
The Defendants have moved to stay this litigation based upon an arbitration clause they contend is in force between the parties. In response, the Plaintiffs concede that the clause was entered into by roughly one-third of the Plaintiffs, but that it is not in effect as to all the Defendants. The Defendants also contend that even if it was entered into, it does not apply, and in any event, it is unconscionable.
II. DISCUSSION
The Federal Arbitration Act ("FAA") "create[s]
a body of federal substantive law of
arbitrability, applicable to any arbitration agreement within the
coverage of the Act," which requires that "questions of arbitrability ...
be addressed with a healthy regard for the federal policy favoring arbitration,"
and that "any doubts concerning the scope of arbitrable issues ... be resolved
in favor of arbitration." Moses H. Cone Memorial Hospital v. Mercury
Construction Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 941-942, 74
L. Ed. 2d 765 (1983); Mouton v. Metropolitan Life Ins. Co., 147
F.3d 453, 456 (5th Cir. 1998). "The preeminent concern of Congress in passing
the Act was to enforce private agreements into which parties had entered,"
a concern that "requires that we rigorously enforce agreements to arbitrate."
Dean
Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221, 105 S. Ct. 1238, 1242,
84 L. Ed. 2d 158 (1985).
Pursuant to § 3 of the FAA, 9 U.S.C. § 3,2 a court must generally stay proceedings pending arbitration. "[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants. How this can best be done calls for the exercise of judgment, which must weigh competing interests and maintain an even balance." Air Line Pilots Ass'n v. Miller, -- U.S. --, 118 S.Ct. 1761, 1769 n.6, 140 L. Ed. 2d 1070 (1998) (quoting Landis v. North American Co., 299 U.S. 248, 254-255, 57 S. Ct. 163, 166, 81 L. Ed. 153 (1936)). A district court's decision whether to grant a stay is ordinarily reviewed for abuse of discretion. Save Power Limiled v. Syntek Finance Corp., 121 F.3d 947, 948 (5th Cir. 1997). The FAA, however, does not require arbitration unless the parties to a dispute have agreed to refer it to arbitration. Zimmerman v. Internalional Companies & Consulting, Inc., 107 F.3d 344, 346 (5th Cir. 1997). Likewise, the mandatory stay provision of the FAA does not apply to those who are not contractually bound by the arbitration agreement. Id.
Thus, the Court must "first determine whether there is a written agreement to arbitrate"; then, "whether any of the issues raised are within the reach of that agreement." Complaint of Hornbeck Offshore (1984) Corp., 981 F.2d 752, 754 (5th Cir. 1993); see also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625, 105 S. Ct. 3346, 3353, 87 L. Ed. 2d 444 (1985) (a court is required to determine whether the parties agreed to arbitrate that dispute).
A. Was there a written agreement to arbitrate?
In this case, the Plaintiffs concede that about one-third of them signed the arbitration agreement. There is no dispute that a written agreement to arbitrate exists as to these Plaintiffs. The rest of the Plaintiffs contend that they did not enter into a written agreement to arbitrate. There is no dispute, however, that each entered into a written distributorship agreement.
An Amway distributorship agreement distributor must be renewed annually and comes in three forms: (1) an original distributorship agreement for new distributors; (2) an automatic renewal form executed only once, but renewed pursuant to an agreement that Amway will thereafter bill the distributor's credit card the appropriate annual fees; and (3) a written continuation form that is executed annually.
In all three instances, the Plaintiffs agreed
"to comply with the Amway Sales and Marketing Plan and to observe and abide
by the Code of Ethics and Rules of Conduct of Amway Distributors, and all
other rules, requirements and regulations as they are set forth from
time to time in official Amway literature." See, e.g. Instrument
#26, Ex. "D," "F," "G" (emphasis added). In September 1997, Amway amended
the Rules of Conduct to include arbitration3
and modified the original application and intent to continue forms to include
an arbitration provision for "any ... claim or dispute arising out of or
relating to [an] Amway distributorship, the Amway Sales and Marketing Plan,
or the Amway rules of Conduct (including any claim against another Amway
distributor, or any such distributor's officers, directors, agents or employees,
or against Amway Corporation, or any of its officers, directors, agents
or employees)." See Instrument #26, Ex. "A," "B." Amway also mailed an
acknowledgment form to the automatic renewal Plaintiffs that stated:
Dear Distributor,Every year you and thousands of other distributors enjoy the convenience of having you Amway business renewed automatically. It's easy, of course, and you get the benefit of timely renewal without the papenvork.
Because of some recent changes to the Intent to Continue (renewal) Form as well as the introduction of the new Business Support Material Arbitration Agreement (BSMAA), we need you to review the changes and sing the acknowledgment on the back of this letter. While these changes automatically become part of your agreement with Amway, we wanted to make sure you are aware of them.
(Instrument #43, Ex. "1.") (emphasis added).
In response, the automatic renewal Plaintiffs argue that Amway had superior bargaining power and made this modification unilaterally. Plaintiffs argue that the contract was in effect an unconscionable contract of adhesion. However, adhesion contracts are not automatically void. Dillard v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 961 F.2d 1148, 1154 (5th Cir. 1992). Absent a well-founded claim that an arbitration agreement resulted from the sort of fraud or excessive economic power that "would provide grounds 'for the revocation of any contract,'" the Arbitration Act "provides no basis for disfavoring agreements to arbitrate statutory claims by skewing the otherwise hospitable inquiry into arbitrability." Mitsubishi Motors Corp., 473 U.S. at 627, 105 S. Ct. at 3354; Dillard, 961 F.2d at 1154 (party seeking to avoid adhesion contract generally must show that it is unconscionable).
"Unconscionability'' has no precise legal definition because it is not a concept but a determination to be made in light of a variety offactors. Southwestern Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 498-99 (Tex. 1991) (Gonzalez, J., concurring); Pony Express Courier Corp. v. Morris, 921 S.W.2d 817, 820 (Tex.App.--San Antonio 1996, no writ) To determine whether a contract is unconscionable a court must look to the circumstances surrounding the agreement, the alternatives, if any, which were available to the parties at the time of making the contract, the nonbargaining ability of one party, and whether the contract is illegal or against public policy.
Although no single test exists to determine if a contract is unconscionable, two questions can provide guidance: (1) How did the parties arrive at the terms in controversy?; and (2) Are there legitimate commercial reasons which justify the inclusion of these terms? DeLanney, 809 S.W.2d at 499 (Gonzalez, J., concurring); Pony Express, 921 S.W.2d at 821. The first question, described as the procedural aspect of unconscionability, is concerned with assent and focuses on the facts surrounding the bargaining process. See Lindemann v. Eli Lilly and Co., 816 F.2d 199, 203 (5th Cir. 1987); DeLanney, 809 S.W.2d at 499 (Gonzalez, J., concurring); Pony Express, 921 S.W.2d at 821. The second question, described as the substantive aspect of unconscionability, is concerned with the fairness of the resulting agreement. See Lindemann, 816 F.2d at 203, DeLanney, 809 S.W.2d at 499 (Gonzalez, J., concurring); Pony Express, 921 S.W.2d at 821. Under Texas law, Plaintiffs must prove both substantive and procedural unconscionability to avoid the arbitration provision. Arkwright-Boston Mfrs. Mut. Ins. Co. v. Westinghouse Elec. Corp., 844 F.2d 1174, 1184 (5th Cir. 1988).
The answers to these two questions demonstrate that Plaintiffs' unconscionability claim fails. First, the Plaintiffs have failed to demonstrate procedural unconscionability. The Plaintiffs make much of the overwhelming bargaining position of Amway, but, "the principle of unconscionability is one of preventing oppression and unfair surprise, not the disturbance of allocation of risks because of superior bargaining power." Id.; DeLanney, 809 S.W.2d at 498 (Gonzalez, J., concurring) (Disparity of bargaining power, while relevant, is not the litmus test for unconscionability).
Furthermore, unlike the classic unconscionability case, the Plaintiffs are not unsophisticated parties that were beguiled into entering a fundamentally outrageous contract that they now wish to avoid. See Lindemann, 816 F.2d at 204. To the contrary, the Plaintiffs are rather sophisticated business people who have for some time operated an Amway distributorship. See id. The plaintiffs have presented no evidence that the arbitration provision was not only a result of Amway's alleged "overreaching or sharp practices" but also as a result of the Plaintiffs' own "ignorance or inexperience." Westinghouse Elec. Corp., 844 F.2d at 1184. Although Plaintiffs make much of the automatic renewal procedure, there is nothing in the record that would suggest that these business people were either ignorant or inexperienced. See id.; Lindemann, 816 F.2d at 204.
Similarly, with regard to substantive unconscionability, the Plaintiffs have failed to produce any evidence that the agreement to arbitrate itself was somehow unfair or oppressive. See Dillard, 961 F.2d at 1154. Substantive unconscionability only "results when 'no man in his senses and not under a delusion would enter into and ... no honest and fair person would accept' a contract on such terms." Lindemann, 816 F.2d at 204. Plaintiffs have failed to demonstrate that the arbitration provision at issue falls within that category.
At bottom, the Plaintiffs have not demonstrated that the arbitration provision is unconscionable. Thus, a viable written agreement to arbitrate exists between Amway and the Plaintiffs.
B. Are the claims subject to the arbitration clause?
In determining whether the issues raised are within the reach of the arbitration agreement, this circuit distinguishes between broad and narrow arbitration clauses. Complaint ofHornbeck Offshore (1984) Corp., 981 F.2d 752, 754 (5th Cir. 1993). If the clause is broad, the action should be stayed and the arbitrators permitted to decide whether the dispute falls within the clause, Id. (citing Sedco v. Petroleos Mexicanos Mexican Nat'l Oil, 767 F.2d 1140, 1145 n. 10 (5th Cir. 1985)). If the clause is narrow, the matter should not be referred to arbitration or the action stayed, unless the court determines that the dispute falls within the clause. Id. However, "whenever the scope of an arbitration clause is fairly debatable or reasonably in doubt, the court should decide the question of construction in favor of arbitration," and "[t]he weight of this presumption is heavy" Id. (quoting Mar-Len of La., Inc. v. Parsons-Gilbane, 773 F.2d 633, 635-36 (5th Cir. 1985)).
In the case subjudice, the arbitration provision requires that distributors, after completing the Amway conciliation process:
submit any remaining claim or dispute arising out of or relating to my Amway distributorship, the Amway Sales and Marketing Plan, or the Amway Rules of Conduct (including any claim against another Amway distributor ... or against Amway Corporation, or any of its officers, directors, agents or employees) to binding arbitration in accordance with the Amway Arbitration rules ....(Instrument #13 (from Adversary 98-3291), Exhibit A-1, p. 66.)
The above arbitration clause contains the "any dispute" language; thus, it is of the broad type. Complaint of Hornbeck Offshore, 981 F.2d at 755; see also Sedco, 767 F.2d at 1144 (clause governed "any dispute or difference between the parties"); Mar-Len, 773 F.2d at 634 (clause governed "any dispute ... with respect to the interpretation or performance of" the contract). Furthermore, it is undisputed that this suit involves claims brought by distributors against distributors and against Amway Corporation.4 Because Plaintiffs' "allegations of fraud in the inducement of the arbitration clause itself" have failed, as discussed supra, arbitration must proceed because "the arbitration clause on its face appears broad enough to encompass the party's claims." Complaint of Hornbeck Offshore, 981 F.2d at 755; Sedco, 767 F.2d at 1148.5 Accordingly, the Court
ORDERS that:
A. Defendants' Motion to Stay Pending Arbitration is GRANTED;
B. This case is STAYED pending arbitration;
C. This case is administratively closed.
D. The parties may reinstate this case to the Court's active docket with an appropriate motion within thirty days of the disposition of the arbitration.
SIGNED at Houston, Texas, this 13 a day ofOctober, 1998.
MELINDA HARMON
UNITED STATES DISTRICT JUDGE
1Although some of the distributors
were defendants in the actions recently consolidated, they will be aligned
and referred to as Plaintiffs in this Memorandum Opinion.
2 § 3. Stay of proceedings where issue therein referable to arbitration
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.
3 See Instrument #13 (from Adversary 98-3291), Exhibit A-1, p. 66.
4 It appears that the Plaintiffs' claims against the unserved defendants, Billy Zeoli and Gospel films, are based upon an agency theory; and thus, the arbitration clause equally applies. However, even if the claims were somehow not in that capacity, the case should still be stayed until resolution of the entire matter. M&I Elec. Indus., Inc. v. Rapistan Demag Corp., 814 F.Supp. 545 (E.D. Tex. 1993) (stays of nonarbitrable causes of action are within the court's discretion to control its docket) (citing Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 856 (2d Cir. 1987)).
5 Amway's promulgation of a separate
arbitration provision specifically for business materials does not impact
this holding. The scope of the two provisions overlap and are not mutually
exclusive. The business material arbitration clause does not impact
the fact that "the [general] arbitration clause on its face appears broad
enough to encompass the [Plaintiffs'] claims." See Complaint of
Hornbeck Offshore, 981 F.2d at 755.
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN OF TEXAS
HOUSTON DIVISION
DR. JOE AND DAWN MORRISON
§
KELLY ROBBINS, RANDY AND JANET
§
COUNCILL, DAN AND HELEN HIGGINS,
§
RON & KAREN GREEN, VICTOR & CATHY
§
BROOK, DR. MARION & JEAN MCMURTREY,
§
DAN & HELEN HIGGINS, DR. T. M. &
§
CYNTHIA HUGHES, RICHMOND EAGLE
§
CORP., DAVE & ROSE ROBERTS, DR.
§
RICHARD & LINDA WERNER, TONY &
§
MARYANN CUTAIA, WARREN & DONNA
§
BIRD, TOM & KYE YEAMAN, and WADE &
§
DEBBIE MCKAY
§
§
VS.
§ C. A. NO. H-98-0352
§
AMWAY CORPORATION, RICH DeVOS,
§
JAY VANANDEL, DICK DeVOS, STEVE VAN §
ANDEL, DOUG DeVOS, BOB KERKSTRA,
§
JA-RI CORPORATION, DEXTER YAGER,
§
INDIVIDUALLY AND D/B/A YAGER
§
ENTERPRISES AND INTERNET SERVICES
§
CORPORATION, JEFF YAGER, DONALD R.
§
WILSON, INDIVIDUALLY AND D/B/A WOW
§
INTERNATIONAL AND WILSON
§
ENTERPRISES, INC., RANDY & VALORIE
§
HAUGEN, INDIVIDUALLY AND D/B/A
§
FREEDOM ASSOCIATES, INC., FREEDOM
§
TOOLS, INC. AND ALL STAR PRODUCTION §
COMPANY, JOHN SIMS, INDIVIDUALLY AND §
D/B/A SIMS ENTERPRISES, RANDY & SUSAN §
WALKER, INDIVIDUALLY AND D/B/A
§
WALKER, INTERNATIONAL, MARK &
§
MARTHA HUGHES, BILL & ALYSSA
§
BERGFELD, INDIVIDUALLY AND D/B/A AS §
BERGFELD INTERNATIONAL, INC., JODY
§
VICTOR, INDIVIDUALLY AND D/B/A JEVI §
CORPORATION, MARK CORDNER, BILLY
§
ZEOLI, INDIVIDUALLY AND D/B/A GOSPEL §
FILMS, DENNIS JAMES
§
PLAINTIFFS' REQUEST FOR REHEARING OF STAY OF LITIGATION PENDING ARBITRATION, OR IN ALTERNATIVE, A STATEMENT BY COURT THAT THIS ISSUE SHOULD BE SUBJECT TO INTERLOCUTORY APPEAL PURSUANT TO 28 U.S.C. SEC. 1292(b)
TO THE HONORABLE UNITED STATES DISTRICT JUDGE: COMES NOW, DR. JOE
and DAWN MORRISON, KELLY
ROBBINS, RANDY and JANET COUNCILL, DAN and HELEN HIGGINS, RON &
KAREN GREEN, VICTOR & CATHY
BROOK, DR. MARION & JEAN MCMURTRY, DAN & HELEN HIGGINS,
DR. T. M. & CYNTHIA HUGHES, RICHMOND
EAGLE CORP., DAVE & ROSE ROBERTS, DR. RICHARD & LINDA WERNER,
TONY & MARYANN CUTAIA, WARREN &
DONNA BIRD, TOM & KYE YEAMAN, and WADE & DEBBIE MCKAY,
Plaintiffs in the above-entitled and
numbered cause and files this, their Request for Rehearing of the
Court's Stay of Litigation
Pending Arbitration, or in the Alternative, a Statement from this
Court that this subject
matter should be subject to Interlocutory Appeal, and in support
thereof would show unto the
Court the following:
I. With all due respect to this court's opinion and order of October
13, 1998, the result of
staying this case pending arbitration would result in a tragic
denial of Plaintiffs'
substantive rights and in particular, their inherent constitutional
right to a trial by jury.
While the notion of arbitration may seem reasonable on its face,
the entire means and manner of Defendant Amway's conduct leading up to
the arbitration provision, coupled with the prior
refusal of the vast majority of the Plaintiffs to participate in
an Amway sponsored and
sanctioned resolution process, makes the court's ruling requiring
this process a substantial
impediment to the opportunity of Plaintiffs to have their disputes
equitably and fairly
determined. Quite frankly, Plaintiffs believe that the arguments
against the arbitration weigh
so heavily in Plaintiffs' favor that it must surely be a failure
of Plaintiffs' counsel to
adequately enunciate the various arguments against enforcing this
arbitration claim. It is for
that reason, that Plaintiffs beg this court to revisit this critical
issue, permit oral
argument, and have the opportunity to reconsider this ruling.
II. SUMMARY OF ARGUMENT There is no agreement to arbitrate. Even
the few that signed the
purported arbitration agreement should not be bound by the agreement
because 1. They did not
know what they were allegedly agreeing to since the arbitration
rules had not yet been
drafted, 2. There was no consideration for the agreement, and importantly
3. They did not know
the agreement could be interpreted to relate to issues that had
already developed. For those
that did not sign the agreement, such was a conscious decision
to reject arbitration.
Moreover, the Federal Arbitration Act specifies that any agreement
to arbitrate relates only to controversies which arise after the agreement,
unless one specifically agrees to submit then
existing controversies. No such agreement exists. The automatic
renewal forms, signed in some
cases ten years ago, speak to changes in rules, not fundamental
contract changes such as losing your constitutional right to trial by jury.
The issue which this court should revisit is
whether or not an agreement exists. The arbitration provision is
unconscionable per se if it
is to be enforced even when a party refuses to enter into such
an agreement. But, whether or
not the provision is unconscionable should not be the threshold
issue, as it appears the
court's memorandum order seems to make it.
III. WAS THERE AN AGREEMENT AS TO THOSE WHO SIGNED THE AGREEMENT?
Of the original 30
plaintiffs, six signed the purported arbitration agreement: Dan
and
Helen Higgins, Marion and
Jean McMurtrey, Tom and Kye Yeaman. A fourth couple sent the agreement
into Amway, but did not
sign the agreement: Wade and Debbie McKay. Fundamental contract
principles must apply as to
whether or not the agreement to arbitrate exists as to these parties.
As to the McKays, the
failure to sign the agreement is tantamount to failing to agree.
There is nothing within the
document which purports to be the agreement that indicates the
McKays gave their assent to the
agreement. The form therefore is meaningless as to them. For the
Higgins, McMurtreys and
Yeamans, other contract principles need to be addressed.
A. Consideration.
There is no consideration given in exchange for this arbitration
agreement. The only
consideration which is even plausible is that somehow the individual
distributors derive some
benefit from arbitrating. However, the very thing which the parties
dispute as being valid and
enforceable cannot be at the same time the consideration upon which
the bargain is made.
Consideration that a party doesn't desire is no consideration at
all. This issue has been
recently addressed in Tenet Healthcare Ltd v. Cooper, 960 S.W.2d
386 (Tex. App.—Houston (14th
Dist.), writ dism'd w.o.j), where an arbitration provision in an
employment agreement was found to be unenforceable because of lack of consideration.
The agreement is void as to lack of specificity. The Amway Arbitration
rules and regulations
were not even written at the time the request was made for everyone
to sign the agreement. In
fact, the earliest that any of the Plaintiffs had notice of what
the terms of the arbitration
agreement might be was when Dr. Joe Morrison, (who did not sign
the agreement) received a
"Draft" copy of the arbitration rules in November, 1997. None of
the signers had any idea
what they were agreeing to, because the terms of the agreement
were not spelled out. They did
not know, for instance, the arbitrators would be hand selected
and trained by the Amway
Distributors Association. They did not know that this same group,
on whose board sits many of
the Defendants herein, would have the right and power to remove
the arbitrators from the
process. The signers cannot be held to an agreement they did not
make.
The agreement is prospective only. Pursuant to the arbitration provisions,
the Federal
Arbitration Act is supposed to apply. The court should therefore
look carefully at the Act and
its provisions relating to written arbitration agreeements:
A written provision…to settle by arbitration a controversy thereafter
arising out of such
contract…or an agreement in writing to submit to arbitration an
existing controversy arising
out of such a contract…shall be valid, irrevocable, and enforceable,
save upon such grounds as
exist at law or in equity for the revocation of any contract. 9
U.S.C. §2
The agreement in question was signed some time in the fall of 1997.
All of the fact and
circumstances to this claim relate to matters which occurred long
before the execution of the
arbitration agreement. The FAA then, relates to matters which arise
after the execution of
the agreement, unless there is an agreement to submit existing
controversies to arbitration.
There is absolutely NO evidence, no matter how strained one looks
through this agreement, to
conclude that the parties agreed to submit existing controversies
to arbitration. Such an
agreement must be clearly and unequivocally made, and it is no
where to be found. To the
contrary, those who signed the agreement did not know they were
being asked to submit existing
controversies to arbitration. Please see the affidavits of the
agreement signers, attached as
Exhibit A.
IV. WAS THERE AN AGREEMENT AS TO THOSE WHO DID NOT SIGN THE AGREEMENT?
Twenty-two Plaintiffs
herein signed no arbitration agreement. Plaintiff Joe Morrison
specifically wrote Amway about
the agreement and refused to sign the agreement. The others simply
failed to sign the
agreement, thinking that alone would be enough indication of their
lack of assent to the
arbitration process. Please see Exhibit B, wherein each of these
parties says by way of
affidavit they never agreed to an arbitration agreement. The failure
to sign should have been
enough, however, Defendants take the position the automatic renewals
signed by the Plaintiffs
cause them to agree by default. In so doing, Defendants have confused
the process so as to
make it appear the arbitration provision is agreed to. However,
nothing could be further from
the truth, in fact or at law, even if the two concepts are different.
The arbitration provision is a modification of a contract, not a rule change.
A primer on how the Amway distributorship
process exists and is formulated is necessary, so as to not confuse
terms. When an individual
originally becomes anAmway Distributor, he or she signs a contract.
Within that contract, the
relationship between the parties is defined, as well as their rights
and responsibilities.
The contract in question is called "Amway Distributor Application."
There are rules which
relate to conduct and other matters which are specific to the business
relationship. These
rules change from time to time. The contract, which is the agreement
between the parties,
does not. Each year, an Amway Distributor renews his or her contract
by way of an "Intent to
Continue" form. As a convenience, Amway offered the option of automatic
renewal for parties
that chose that mechanism. The "Intent to Continue" form extended
the original contract for
another year. Within the automatic renewal agreement is the following
language which Defendants contend is the "bootstrap" of the arbitration
provision:
I agree to comply with the Amway Sales and Marketing
Plan and to
Observe and abide by the Code of Ethics and
Rules of Conduct of
Amway Distributorships, and all other rules,
requirements and
Regulations as they are set forth from time
to time in official
Amway literature.
The arbitration provision is a change of the contract, it isn't
just a change of the rules.
Publishing this in their trade magazine and sending out letters
doesn't make this fundamental
change in the manner in which the parties have to resolve their
legal disputes a rule change.
One ought not sacrifice their constitutional rights by way of a
unilateral rule change.
Indeed, in the history of Amway, or at least as far back as any
of the Plaintiffs have been
associated with Amway, this is the first time that a purported
rule change has come along with
a form for a signature. Why? The answer is simple: this is a change
of the contract between
the parties. As such, there needs to be a written agreement to
change or modify the terms of
the contract.
To establish a contract under Texas state law, there must be a meeting
of the minds as to all
essential terms. See Solis v. Evans, 951 S.W.2d 44, 49 (Tex.App.—Corpus
Christi 1997,
n.w.h.). Any modification of a contract must possess the essential
elements of a contract.
See Mandril v. Kasishke, 620 S.W.2d 238, 244 (Tex.Civ.App.—Amarillo
1981, writ ref'd n.r.e.).
One party cannot unilaterally modify the terms of the original
contract. See Tex. Workers'
Comp. V. State Bd. Of Ins., 894 S.W.2d 49 (Tex.App.—Austin 1995,
app. Dism'd. 910 S.W.2d
176). In this case there was no meeting of the minds as to the
arbitration agreement and the
essential elements of a contract are nowhere to be found. Amway
has unilaterally modified the
terms of the original agreement.
Amway argues that the original agreement was not unilaterally modified
because the
distributors were bound by the rules "as they are amended from
time to time." This flies in
the face of contract law as well as basic principles of equity
and justice. While the
Plaintiffs concede that sometimes parties may agree to have the
power to amend or change the
terms of a contract, there is no authority for the proposition
that a party (Amway) can add a
completely new provision (arbitration) that bears no relation to
the original contract. This
line of reasoning was recognized by the Texas Supreme Court in
Ashford Development, Inc. v.
USLife Real Estate Services Corporation, 661 S.W.2d 933 (Tex. 1983).
The court recognized that if a contract provides that conditions
may be added by one of the
parties to the contract, any added condition must flow naturally
from the terms of the
contract. See id. at 935. Even as a more practical matter however,
it can not be a rule that
if one party agrees that another party can unilaterally amend or
change the terms of a
contract, that this power is absolute. Such a contract would be
unconscionable at the very
best. This is especially so when the provision acts to deprive
a group of people their
constitutional right to a trial by jury.
The FAA relates to prospective controversies. As discussed above,
the Federal Arbitration Act
relates to controversies which arise after the agreement is entered,
unless the parties agree
to submit existing controversies to arbitration. The automatic
renewal became effective at
the start of the new year, January 1, 1998. All of the controversies
which form the basis of
this lawsuit arose before that day. The lawsuit was filed on January
5, 1998. All of the
controversies arose before the arbitration form was sent to Plaintiffs.
On its face then, the
FAA cannot apply to this lawsuit. Surely, no one could argue with
a straight face that the
automatic renewal, executed in some cases in the 1980's, qualifies
as an agreement to submit
then existing controversies to arbitration.
V. THE ARBITRATION AGREEMENT DOESN'T APPLY TO THIS CONTROVERSY
The arbitration agreement, even if enforceable, is not enforceable
as to all aspects of the
disputes between these parties. A substantial portion of Plaintiffs'
lawsuit relates to
issues concerning Business Support Materials, and the handling
of same by various Defendants.
The area of Business Support Materials is one for which, interestingly,
Amway claims no
responsibility. In the same 1998 form sent to all distributors,
Amway has a separate section
relating to Business Support Materials which contains the following
pronouncement: Offered
independently of Amway Corporation. Independently produced Business
Support Materials are
offered independently of Amway Corporation and have not been endorsed
or approved by Amway
Corporation. Business Support Materials should be clearly labeled
to show they do not come
from Amway. Distributors who choose to sell Business Support Materials
must make it clear to
their customers that such materials are produced and sold independently
of Amway.
Now, Defendants want their cake and to eat it too. On the one hand,
they want an
acknowledgement, fallacious as it may be, that Business Support
Materials have nothing to do
with Amway, but if you have a dispute relating to Business Support
Materials, you must submit
to arbitration. It is surely an interesting coincidence that this
pronouncement by Amway
Corporation comes, for the first time, after the discussions with
Plaintiffs relative to the
complaints and problems they have had which ultimately resulted
in this lawsuit.
Plaintiffs are mindful of the "any dispute" language discussed in
the order. However, a
substantial amount of this lawsuit is between parties that are
not even in privity to the
purported arbitration agreement. When Joe Morrison sues Dexter
Yeager and Internet, Yeager's
company, where and how have these parties agreed to an arbitration
agreement between them? If
this lawsuit involved, for instance, some land deal gone sour between
them, would the Amway
arbitration provision apply? Of course not. Amway takes extraordinary
pains to distance
itself from the business supply materials game. They should not
be permitted to invoke this
arbitration provision and still disclaim responsibility for the
conduct of the co-Defendants
such as Yeager.
VI. THE ARBITRATION PROVISION IS UNCONSCIONABLE
Though the issue of unconscionability need not be reached, since
there is no contract or
agreement to arbitrate, Plaintiffs cannot concede this court's
determination that the
arbitration provision is not unconscionable. Plaintiffs believe
it is. The court points out
that the decision at issue is one where the court should exercise
judgment weighing all of the
competing interests and maintaining an even balance. (Page 4 of
Memorandum Order). With that
in mind, where is the equity in enforcing a purported arbitration
agreement as against people
who not only didn't sign it but specifically protested it?
How can it be fair for one party
to potential litigation to unilaterally completely change the landscape
as to how disputes may
be resolved, and in the process deny a party their right to trial
by jury? The Plaintiffs
are inherently concerned about a process which their adversary
has drafted, drafted at a time
the dispute was ripe but not yet filed, and in which their adversary
not only makes all of the
rules, but hand picks the umpire and then has the power to "fire"
the umpire if they are
dissatisfied. That is the Amway Arbitration process. That is not
a system promoting "even
balance."
Plaintiffs acknowledge that adhesion contracts are not automatically
void. See Dillard v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 961 F.2d 1148,
1154 (5th Cir. 1992). As this
Court points out, a party seeking to avoid an arbitration agreement
must have a well-founded
claim of fraud or excessive economic power that "would provide
grounds 'for the revocation of
any contract."' Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,
Inc., 473 U.S. 614, 627
(1985). A party seeking to avoid an adhesion contract must generally
show that it is
unconscionable. See Dillard, 961 F.2d at 1154. The Court then looks
at the factors that
determine "unconscionability." The factors the court points to
are the following, with a
brief application of the facts surrounding the disputed arbitration
"agreement." To determine
whether a contract is unconscionable a court must look to: "…the
circumstances surrounding the
agreement…" The two groups of parties had operated under a contract
for years that allowed
them to pursue their Amway businesses. Never had arbitration been
a term of the contract.
Never had any of the distributors agreed to give up their rights
to have a dispute settled
before a jury. Several years before the arbitration "agreement"
was forced onto the
distributors a dispute arose with respect to their businesses.
When it became inevitable that
litigation might ensue, Amway incorporated the arbitration "agreement"
into their contracts.
They were asked to sign a form acknowledging they agreed to arbitration,
but were told that
was just a formality—that the arbitration "agreement" is automatically
incorporated into
their contracts. In short, they had absolutely nothing to do with
the arbitration
"agreement," other than their diputes with the Defendants are what
triggered the new
provision. "…the alternatives, if any, which were available to
the parties at the time of
making the contract…" The distributors had no alternatives. According
to Amway, the
arbitration "agreement" was automatically incorporated into their
contracts. They were asked
to sign the acknowledgement, but told that that was just a formality.
"… the nonbargaining
ability of one party…" Again, the Plaintiffs had absolutely zero
bargaining power. The
arbitration "agreement" was added to their contracts without their
consent and against their
will. "…whether the contract is illegal or against public policy…"
This contract, such that it
is, is certainly against public policy if not illegal, for depriving
another party of its day
in court. Surely it can not be in favor of public policy to give
one party complete and
absolute power to adjust the terms of an already existing contract,
in any way it sees fit,
for its own benefit. Why would anyone ever enter into a contract
such as this? This Court
then discusses the questions that provide guidance as to whether
or not a contract is
unconscionable: (1) How did the parties arrive at the terms in
controversy?; and (2) Are there
legitimate commercial reasons which justify the inclusion of these
terms? See Southwestern
Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 499 (Gonzalez, J., concurring).
It is pointed out
that the first question, described as the procedural aspect of
unconscionability, deals with
assent and focuses on the facts surrounding the bargaining process.
See Lindemann v. Eli
Lilly & Co., 816 F.2d 199, 203 (5th Cir. 1987); DeLanney, 809
S.W.2d at 499 (Gonzalez, J.,
concurring); Pony Express Courier Corp. v. Morris, 921 S.W.2d 817,
821 (Tex.App.—San Antonio
1996, no writ). The second question, the substantive prong of unconscionability,
deals with
the fairness of the resulting agreement. See Lindemann, 816 F.2d
at 203; DeLanney, 809 S.W.2d
at 499 (Gonzalez, L., concurring); Pony Express, 921 S.W.2d at
821. As required by Texas law,
Plaintiffs prove both substantive and procedural unconscionability
in this case.
This Court quotes DeLanney by pointing out that, "the principle
of unconscionability is one of
preventing oppression and unfair surprise, not the disturbance
or allocation of risks because
of superior bargaining power." See DeLanney, 809 S.W.2d at 498
(Gonzalez, J., concurring).
If unilaterally forcing one to forfeit their constitutional right
to a trial by jury in the
middle of a disagreement, and after years of doing business together
isn't oppression and
unfair surprise, one might wonder what is. This is not comparable
to a situation like that in
DeLanney, where there was a clause in a contract limiting liability
for errors or omissions in
the performance of a contract. See id. First and foremost, there,
the clause in question
was present when the contract was signed. See id. As such, the
parties knew the terms, and
understood the effects of those terms, even if the bargaining power
was skewed. Secondly, and
as the court in DeLanney pointed out, the clause in question there
was not completely one-sided because it benefited both parties. See id.
at 499. Finally, unlike our situation, the
Plaintiff in DeLanney had other alternatives. The Plaintiffs in
the instant case had no such
luxury. They had operated their businesses for years without any
thought of giving up their
right to a trial by jury. Many of them had retired from their former
professions and jobs to
pursue their Amway businesses, which often represented their sole
sources of income. Again,
the arbitration provision was quite literally "forced" onto them
without any notice,
opportunity to bargain or alternatives. In its memorandum the court
explains that, "the
Plaintiffs are not unsophisticated parties that were beguiled into
entering a fundamentally
outrageous contract that they now wish to avoid." See Lindemann,
816 F.2d at 204. This is
absolutely correct. The Plaintiffs are indeed rather sophisticated
business people and when
they entered into their contracts with Amway, they knew exactly
what they were doing.
Further, the Plaintiffs do not argue that the contract they entered
into, when they entered
into it, was unconscionable. It is the interpretation of the contract
to allow Amway to
unilaterally add a completely new provision that makes it unconscionable.
With regard to the
substantive prong of unconscionability, the Plaintiffs respectfully
disagree that they have
failed to produce any evidence that the agreement to arbitrate
itself is unfair or
oppressive. First and foremost, it is the Plaintiffs constitutional
right to have their case
heard before a jury of their peers, unless they agree otherwise.
They have not. To force them
to forego this right is unfair and oppressive in and of itself.
Secondly, when Amway
announced the rule that everyone had to arbitrate their disputes,
they did not even know how
the process would work. It was a hurried attempt to prevent what
they saw coming—a big
lawsuit. Further, Amway controls everything about the whole process.
Amway picks the
arbitrators. Amway trains the arbitrators. Amway has the power
to remove the arbitrator.
Such a system implemented, designed and controlled by one party
can not be fair to an
adversary of that party.
VII. REQUEST FOR ORAL ARGUMENT
This issue is fundamentally important to the parties. Plaintiffs
respectfully request the
privilege of making its arguments directly to the court by way
of oral argument at a time
convenient to the court.
VIII. ALTERNATIVELY, PLAINTIFFS REQUESTS THIS COURT CERTIFY THIS
CASE FOR INTERLOCUTORY APPEAL
Given the importance of this issue to Plaintiffs which potentially
involves a denial of their
right to a jury trial, and given the fact that this is surely a
matter upon which reasonable
people may have a difference of opinion relative to the controlling
law, Plaintiffs
respectfully request the opportunity to present these issues on
interlocutory appeal pursuant
to 28 U.S.C. § 1292. Plaintiffs request that this court issue
an order indicating that its
ruling on arbitration issues is one involving a controlling question
of law as to which there
is substantial ground for difference of opinion on and that an
immediate appeal from the
order may materially advance the ultimate termination of the litigation.
This is surely true,
inasmuch as it would be far more efficient to deal with the arbitration
issue now than at the
conclusion of the arbitration process.
IX. ALTERNATIVELY, THIS COURT SHOULD DISMISS THIS CASE
As the court knows, this current lawsuit is just one part of a
larger piece of litigation
which is currently pending in the 129th Judicial District Court
of Harris County, Texas. In
that case, there are an additional 51 people who are currently
involved in litigation with the
same Defendants herein, but over whom this court has no jurisdiction.
All of the parties in
this case are also in the state court litigation. The state court
litigation involves people
who did not even have an automatic renewal agreement to allegedly
bootstrap the arbitration
agreement. The arbitration issue has been briefed and argued in
that court. Plaintiffs had
previously moved to dismiss this lawsuit so that the state court
matter might proceed, where
all of the parties are before one court, where there is no chance
of conflicting court rulings, and where judicial economy would be best
served. This is as true today as before the court's
ruling on the arbitration issues. Plaintiffs still desire that
this case be dismissed so that
this and all other issues incident to this litigation may be decided
in a common forum.
CONCLUSION
Plaintiffs respectfully pray that this Court reconsider its prior
order and instead deny the
Motion to Stay Pending Arbitration of the Defendants. Alternatively,
Plaintiffs pray that this
court certify the case for interlocutory appeal, or alternatively,
that is court grant the
previously filed Motion to Dismiss.
Respectfully submitted,
By:
Brock C. Akers
SBOT #: 00953250
FED ID. #2046
3400 Phoenix Tower
3200 Southwest Freeway
Houston, Texas 77027
Phone #713\552-9595
Fax #713\552-0232
OF COUNSEL:
PHILLIPS & AKERS, P.C.
3200 Phoenix Tower
3400 Southwest Freeway
Houston, Texas 77027
Phone 713\552-9595
Fax 713\552-0232
Certificate of Service
I hereby certify that a true and correct copy of the foregoing instrument
has been forwarded to all counsel of record, on October 23, 1998.
Brock C. Akers