Court Opinion

ID: 4275428
Source: CourtListenerOpinion
Date Created: 2018-05-16 00:00:23.567138+00
Date Added: 2024-06-11T14:33:45.475709
License: Public Domain

Case: 17-50102   Document: 00514473983   Page: 1   Date Filed: 05/15/2018

        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT United States Court of Appeals
                                                Fifth Circuit

                                                                FILED
                                                           May 15, 2018
                          Nos. 17-50088 & 17-50102
                                                           Lyle W. Cayce
                                                                Clerk
IVAN ARNOLD, an individual, on behalf of himself and all others similarly
situated,

             Plaintiff - Appellee

v.

HOMEAWAY, INCORPORATED,

             Defendant - Appellant

                                     and

DEIRDRE SEIM, Individually, and on behalf of all others similarly situated,

             Plaintiff - Appellant

v.

HOMEAWAY, INCORPORATED, A Delaware Corporation,

             Defendant - Appellee

                Appeals from the United States District Court
                      for the Western District of Texas

Before KING, DENNIS, and COSTA, Circuit Judges.
JAMES L. DENNIS, Circuit Judge:
      Plaintiffs Ivan Arnold and Deirdre Seim filed separate lawsuits against
     Case: 17-50102      Document: 00514473983        Page: 2    Date Filed: 05/15/2018

                     Nos. 17-50088 & 17-50102
Defendant HomeAway, Inc. 1 In each case, HomeAway sought to compel
arbitration. Concluding that both Seim and Arnold are bound to arbitrate
threshold arbitrability questions, we REVERSE the judgment of the district
court in Arnold’s case and AFFIRM the judgment in Seim’s. We REMAND
both cases with instructions to compel arbitration.
                                            I
      HomeAway owns and operates several websites that facilitate short-
term “vacation” rentals. HomeAway’s sites connect homeowners and property
managers with travelers who book their properties online. Arnold and Seim
are both HomeAway subscribers who list properties on HomeAway’s websites.
      Arnold filed a putative class-action complaint alleging, chiefly, that
HomeAway’s February 2016 imposition of service fees for travelers was
contrary to its prior representations and resulted in a variety of state-law
violations.   HomeAway argues that its April 2016 Terms and Conditions
govern Arnold’s action. As relevant here, the April 2016 Terms contain the
following provisions:
      Any and all Claims will be resolved by binding arbitration,
      rather than in court, except [the user] may assert Claims on an
      individual basis in small claims court if they qualify. This includes
      any Claims [the user] assert[s] against [HomeAway], [its]
      subsidiaries, users or any companies offering products or services
      through [HomeAway] (which are beneficiaries of this arbitration
      agreement). This also includes any Claims that arose before [the
      user] accepted these Terms, regardless of whether prior versions
      of the Terms required arbitration.

      There is no judge or jury in arbitration, and court review
      of an arbitration award is limited. However, an arbitrator
      can award on an individual basis the same damages and
      relief as a court (including statutory damages, attorneys’

      1  Although these appeals are not consolidated, given the similarities between these
two cases, which are on appeal from the same district court, we resolve both in a single
opinion.
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                         Nos. 17-50088 & 17-50102
      fees and costs), and must follow and enforce these Terms as
      a court would.

      Arbitrations will be conducted by the American Arbitration
      Association (AAA) under its rules, including the AAA Consumer
      Rules.

HomeAway moved to compel arbitration in reliance on these provisions.
HomeAway argued that, pursuant to the April 2016 Terms and the AAA Rules
referenced therein, the parties had agreed to arbitrate threshold questions
including “the existence, scope, or validity of the arbitration agreement.”
Arnold opposed the motion to compel, arguing that the September 2015 Terms
and Conditions, which do not contain arbitration requirements, governed. He
also claimed that, even if the April 2016 Terms applied, HomeAway’s authority
to modify any terms or conditions without providing notice rendered the
arbitration provision illusory and unenforceable under Texas law.
      The district court denied HomeAway’s motion to compel arbitration. The
court found that the April 2016 Terms applied because Arnold renewed a
subscription for one of his HomeAway accounts in May 2016. However, the
court held that, under Texas law, the arbitration provision was illusory
because HomeAway had reserved the unilateral right to avoid arbitration at
any point without notice. The court did not address HomeAway’s contention
that the April 2016 Terms contained a delegation clause requiring Arnold to
arbitrate threshold questions regarding the arbitration provision. HomeAway
filed a timely notice of appeal, as is authorized by the Federal Arbitration Act
(FAA). See 9 U.S.C. § 16(a)(1)(B).
      Although it resulted in a different outcome, the history of Seim’s case is
substantially similar. Seim also challenges HomeAway’s imposition of traveler
fees. HomeAway moved to compel arbitration under the February 2016 Terms
and Conditions, which contained the same arbitration provision the April 2016

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                         Nos. 17-50088 & 17-50102
Terms did. As in Arnold’s case, the district court did not address HomeAway’s
contention that a purported delegation clause required Seim to arbitrate
threshold questions about the arbitration provision. However, the district
court, applying Kentucky law, granted HomeAway’s motion to compel
arbitration. The court concluded that when Seim renewed a subscription for
one of her properties and agreed to the February 2016 Terms, she agreed to
arbitrate all claims against HomeAway, including any claims predating the
February 2016 Terms. The district court entered a final judgment of dismissal,
and Seim timely appealed.
                                       II
      We review a ruling on a motion to compel arbitration de novo. Kubala v.
Supreme Prod. Servs., 830 F.3d 199, 201 (5th Cir. 2016). The district court’s
factual findings in support of such ruling are reviewed for clear error. IQ
Prods. Co. v. WD-40 Co., 871 F.3d 344, 348 (5th Cir. 2017).
                                       A
      In Arnold’s case, our analysis will proceed as follows: First, we consider
whether Arnold is challenging the formation of his contract with HomeAway
or the validity of that contract. Second, we address the putative delegation
provision.   Finally, we consider the breadth of Arnold’s challenge to the
arbitration provision. This inquiry leads us to conclude that Arnold is bound
to arbitrate threshold questions relating to the arbitration provision.
      When a party seeks to compel arbitration based on a contract, the first,
and perhaps most obvious, question for the court is whether there is a contract
between the parties at all. See Kubala, 830 F.3d at 201–02. In conducting this
inquiry, we distinguish between “validity” or “enforceability” challenges and
“formation” or “existence” challenges.      See, e.g., Rent-A-Center, W., Inc. v.
Jackson, 561 U.S. 63, 70 n.2 (2010); Buckeye Check Cashing, Inc. v. Cardegna,
546 U.S. 440, 444 n.1 (2006).     “[W]here the ‘very existence of a contract’

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                        Nos. 17-50088 & 17-50102
containing the relevant arbitration agreement is called into question, the
federal courts have authority and responsibility to decide the matter.” Banc
One Acceptance Corp. v. Hill, 367 F.3d 426, 429 (5th Cir. 2004) (quoting Will-
Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 218 (5th Cir. 2003)). Though
the difference between formation and validity may be unclear at the margins, 2
the Supreme Court has suggested that the category of arguments that question
the very existence of an agreement include “whether the alleged obligor ever
signed the contract, whether the signor lacked authority to commit the alleged
principal, and whether the signor lacked the mental capacity to assent.”
Buckeye Check Cashing, 546 U.S. at 444 n.1 (citations omitted).
       Arnold contends that the arbitration provision in the April 2016 Terms
is illusory under Texas law. 3 On its surface, an illusoriness challenge would
appear to be in the nature of an existence challenge; illusory promises imply
lack of adequate consideration, which affects contract formation. See, e.g.,
RESTATEMENT (SECOND) OF CONTRACTS § 77 cmt. a (1981) (“Where the
apparent assurance of performance is illusory, it is not consideration for a
return promise.”); 3 WILLISTON ON CONTRACTS § 7:11 (4th ed.) (“Where no
consideration exists, and is required, the lack of consideration results in no
contract being formed.”). However, Arnold does not dispute the existence of a
contract with HomeAway governed by the April 2016 Terms. Instead, he
argues that the arbitration provision is an illusory promise on HomeAway’s
part and that, under Texas law, this renders the arbitration provision
unenforceable. See, e.g., J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 236

       2  See generally George A. Bermann, The “Gateway” Problem in International
Commercial Arbitration, 37 YALE J. INT’L L. 1, 32–36 (2012) (discussing treatment of various
validity and/or formation issues).
       3 For reasons made clear below, we find it unnecessary to address the conflicts-of-law

question briefed by the parties as, even assuming Arnold is correct in his assertion that Texas
law governs, he is bound to arbitrate.
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                       Nos. 17-50088 & 17-50102
(Tex. 2003). Under our precedent, Arnold’s argument is in the nature of a
validity challenge.
      In Lefoldt for Natchez Regional Medical Center Liquidation Trust v.
Horne, L.L.P., 853 F.3d 804, 813–17 (5th Cir. 2017), we explained that
Mississippi’s “minutes rule,” which requires that contracts with public entities
be memorialized in the minutes of the entity’s board meetings, sometimes
operates as a rule of contract formation and sometimes as a rule of
enforceability. With regard to one contract at issue in Lefoldt, the parties did
not dispute that there was a contract, but the party resisting arbitration
argued that the minutes rule “either foreclose[d] the possibility that there was
an agreement to arbitrate or preclude[d] enforcement of the arbitration
provision.” Id. at 814. We relied on a Mississippi Supreme Court opinion
stating, with respect to the minutes rule, that “the entire contract need not be
placed on the minutes. Instead, it may be enforced where ‘enough of the terms
and conditions of the contract are contained in the minutes for determination
of the liabilities and obligations of the contracting parties without the necessity
of resorting to other evidence.’” Id. at 812 (cleaned up). This statement, we
held, “unmistakably mean[t] that in some instances, the minutes rule is not a
matter of contract formation but instead is a rule preventing consideration of
evidence of the terms of the contract other than what is set forth in the
minutes.”   Id.   In other words, we concluded that the minutes rule was
operating as an enforceability argument. See id.
       The Texas law at issue here is similar to the minutes rule at issue in
Lefoldt inasmuch as the existence of the parties’ agreement is separate from
the enforceability of the arbitration provision. See In re AdvancePCS Health
LP, 172 S.W.3d 603, 607 (Tex. 2005) (observing that defendant had
“established the existence of an arbitration clause governing [the] dispute,”

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                          Nos. 17-50088 & 17-50102
and going on to consider “affirmative defense[s],” including illusoriness). The
Texas Supreme Court has stated that
      an arbitration provision that is part of a larger underlying contract
      may be supported by the consideration supporting the underlying
      contract. . . . But such an arbitration provision remains illusory if
      the contract permits one party to legitimately avoid its promise to
      arbitrate, such as by unilaterally amending or terminating the
      arbitration provision and completely escaping arbitration.

Royston, Rayzor, Vickery & Williams, LLP v. Lopez, 467 S.W.3d 494, 505 (Tex.
2015). Like the minutes rule in Lefoldt, Arnold’s allegation that a particular
provision of the contract is illusory is properly considered a validity challenge
rather than a formation challenge. See 853 F.3d at 814. And so, we move on
to consider the parties’ arguments concerning the purported delegation clause.
See Kubala, 830 F.3d at 202.
      Under the FAA, parties are free to delegate questions to an arbitrator,
including questions regarding the validity and scope of the arbitration
provision itself. See Rent-A-Center, 561 U.S. at 68–70. However, courts may
not assume that parties have agreed to arbitrate threshold questions absent
clear and unmistakable evidence of their intent to do so. See First Options of
Chi., Inc. v. Kaplan, 514 U.S. 938, 944–45 (1995). We have held that, generally,
stipulating that the AAA Rules will govern the arbitration of disputes
constitutes such “clear and unmistakable” evidence. See, e.g., Petrofac, Inc. v.
Dyn-McDermott Petroleum Operations Co., 687 F.3d 671, 674–75 (5th Cir.
2012). Although the April 2016 Terms plainly stipulate that the AAA Rules
will govern arbitration, Arnold resists the application of the Petrofac rule,
suggesting that Texas law controls the question of what constitutes clear and
unmistakable evidence of parties’ intent to arbitrate threshold questions.
However, the Supreme Court has explained that the clear-and-unmistakable
standard is a requirement of its own creation, framing it as a “qualification” to

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                          Nos. 17-50088 & 17-50102
the application of “ordinary state-law principles that govern the formation of
contracts.” Kaplan, 514 U.S. at 944. Thus, to the extent our precedent diverges
from Texas law, we follow our own interpretation of the “clear and
unmistakable” threshold. 4
           Arnold’s attempts to otherwise distinguish Petrofac are unpersuasive.
First, he argues that Petrofac and Cooper v. WestEnd Capital Management,
L.L.C., 832 F.3d 534, 536 (5th Cir. 2016), which followed Petrofac, are
distinguishable because both cases involved negotiated contracts between
sophisticated parties, whereas this case presents a consumer contract of
adhesion. As an initial matter, this circuit has already applied the Petrofac
rule in a case in which there was unequal bargaining power between the
parties—a national chain and locally owned drugstores—despite apparently
recognizing the adhesive nature of the contracts at issue.                  See Crawford
Professional Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 262 (5th Cir.
2014). We have also applied the rule to an individual investor without mention
of his level of sophistication. See Cooper, 832 F.3d at 546.
       Moreover, as explained by the Supreme Court, the clear-and-
unmistakable standard concerns “the parties’ manifestation of intent, not the
agreement’s validity.” Rent-A-Center, 561 U.S. at 69 n.1. Accordingly, in Rent-
A-Center, the Court rejected the plaintiff’s claim that, although the text of the
parties’ agreement was clear and unmistakable with respect to the parties’
intent to delegate, the plaintiff’s agreement to that text was not because the
arbitration provision was unconscionable. Id. While Arnold does not use the
term “unconscionable,” the premise of his argument is essentially the same as

       4 We do not mean to imply that state law is wholly irrelevant to the clear-and-
unmistakable analysis. Arnold’s contention is that the substance of the threshold itself is
governed by Texas law, a proposition squarely refuted by the Supreme Court’s explanation
in Kaplan. See 514 U.S. at 944. He does not rely on any Texas principle of contract formation
or construction.
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                          Nos. 17-50088 & 17-50102
that of the plaintiff in Rent-A-Center, namely that his intent to delegate is
unclear because he did not, in fact, assent to the purported delegation
provision. See id. We therefore cannot adopt Arnold’s proposed policy-based
exceptions to the Petrofac rule. 5
       Arnold next argues that Petrofac and its progeny are distinguishable
because he was never provided the AAA rules.                    But, again, for present
purposes, we are concerned with whether the parties manifested intent to
arbitrate threshold questions, not whether Arnold’s agreement to incorporate
the AAA rules was valid. See id. Petrofac has already answered the basic
question of textual interpretation presented here: an agreement to arbitrate
under the AAA rules constitutes express incorporation of those rules, which
constitutes clear and unmistakable evidence of the parties’ intent.                      See
Petrofac, 687 F.3d at 674–75.
       Arnold’s final argument is that the text of the April 2016 Terms is
distinguishable from the contracts at issue in Petrofac and its progeny because
those cases did not involve “an arbitration clause that expressly reserved some
categories of claims for judicial resolution rather than arbitration.” The April
2016 Terms state that “[a]ny and all Claims will be resolved by binding
arbitration, rather than in court, except [the user] may assert Claims on an
individual basis in small claims court if they qualify.” (emphasis omitted).
Arnold does not contend that his claims qualify for disposition in small claims

       5We note that, to date, no circuit court has adopted Arnold’s proposed approach. As
the Ninth Circuit observed, “the vast majority of the circuits that hold that incorporation of
the AAA rules constitutes clear and unmistakable evidence of the parties’ intent [to delegate]
do so without explicitly limiting that holding to sophisticated parties or to commercial
contracts.” Brennan v. Opus Bank, 796 F.3d 1125, 1130–31 (9th Cir. 2015) (citing Petrofac,
687 F.3d at 675; Republic of Arg. v. BG Grp. PLC, 665 F.3d 1363, 1371 (D.C. Cir. 2012); Fallo
v. High–Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d
1366, 1373 (Fed. Cir. 2006); Terminix Int’l Co. v. Palmer Ranch LP, 432 F.3d 1327, 1332 (11th
Cir. 2005); Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005); Awuah v.
Coverall N. Am., Inc., 554 F.3d 7, 10–12 (1st Cir. 2009)).
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                        Nos. 17-50088 & 17-50102
court. The mere fact that an arbitration provision does not apply to every
possible claim does not render the parties’ intent to delegate threshold
questions about that provision less clear. See Crawford Prof’l Drugs, 748 F.3d
at 262–63 (applying Petrofac where parties argued that their claims fell outside
the scope of the arbitration provision). We do not foreclose that a contract
might incorporate the AAA rules but nonetheless otherwise muddy the clarity
of the parties’ intent to delegate. See Archer & White Sales, Inc. v. Henry
Schein, Inc., 878 F.3d 488, 494 (5th Cir. 2017) (“It is not the case that any
mention in the parties’ contract of the AAA Rules trumps all other contract
language.”). However, Arnold’s arguments do not persuade us that we have
such a contract before us.
      Because the April 2016 Terms expressly incorporate the AAA rules, the
parties have clearly and unmistakably demonstrated their intent to delegate.
See Petrofac, 687 F.3d at 674. We will therefore proceed to the final piece of
our analysis: determining the breadth of Arnold’s challenge to the arbitration
provision.
      The Supreme Court has held that “a challenge to the validity of the
contract as a whole, and not specifically to the arbitration clause, must go to
the arbitrator.” Buckeye Check Cashing, 546 U.S. at 449. This is true even
when the “contract as a whole” is an arbitration agreement, and the
“arbitration clause” at issue is an agreement to delegate threshold questions
to an arbitrator. See Rent-A-Center, 561 U.S. at 71–72.
      In Rent-A-Center, the plaintiff filed an employment-discrimination claim
against his former employer, who then moved to compel arbitration based on
an arbitration agreement containing a purported delegation provision. 561
U.S. at 65. The plaintiff opposed arbitration, arguing that the arbitration
agreement was unconscionable and therefore unenforceable under state law.
Id. at 66. The defendant contended, based on the delegation provision, that

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                        Nos. 17-50088 & 17-50102
the arbitrator had exclusive authority to resolve any dispute about the
enforceability of the agreement. Id. The Court agreed, explaining that, under
its precedents, if a party challenges the validity “of the precise agreement to
arbitrate at issue, the federal court must consider the challenge,” but unless
the party resisting arbitration has “challenged the delegation provision
specifically, [a court] must treat it as valid[,] . . . leaving any challenge to the
validity of the [a]greement as a whole for the arbitrator.” Id. at 71–72. The
Court concluded that the plaintiff focused his unconscionability argument on
the arbitration agreement as a whole, rather than the delegation clause in
particular, and therefore the question of the arbitration agreement’s validity
was for the arbitrator to decide. Id. at 74–76. Thus, Rent-A-Center holds that,
in the absence of a challenge specifically to a delegation clause, validity
challenges must be sent to an arbitrator. See id. at 71–72.
      Arnold’s contention is that the arbitration provision as a whole is
unenforceable under Texas law. Because his challenge is not specific to the
delegation clause, Arnold must present it to an arbitrator. See Rent-A-Center,
561 U.S. at 71–72. Having concluded that there is a contract between the
parties that contains a putative arbitration provision, that the parties have
agreed to delegate threshold questions about the arbitration provision to an
arbitrator, and that Arnold does not specifically challenge the validity of the
delegation clause, we need not reach the remainder of the issues briefed by the
parties.
                                         B
      Under the preceding principles, the resolution of Seim’s appeal is
straightforward.     Seim states in her opening brief that when one of her
subscriptions “came up for renewal in March 2016, . . . it came under the
February [2016] Terms.” She also asserts that she “does not dispute that the

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                         Nos. 17-50088 & 17-50102
arbitration provision applied to [one of her properties], even retroactively.” 6
Thus, Seim concedes that the February 2016 Terms “contains an arbitration
clause” that “covers some set of claims.”               IQ Prods., 871 F.3d at 349.
Accordingly, she is challenging only the scope of the arbitration provision. See
id.
        Because the February 2016 Terms contain the same delegation clause as
the April 2016 Terms, they too contain clear and unmistakable evidence of the
parties’ intent to delegate gateway questions like scope to an arbitrator. See
Petrofac, 687 F.3d at 674. Seim’s only argument to the contrary is that “the
difficulty that the parties, lawyers and courts have in deciding which ‘contract’
even applies shows the lack of clear and unmistakable intent to arbitrate.” But
this argument, at most, suggests lack of clarity as to the scope of the arbitration
provision. Because there is an agreement to arbitrate some set of claims, a
delegation provision, and no specific challenge to that provision, Seim’s
additional arguments are for an arbitrator to resolve. Thus, in Seim’s case, the
district court was correct to order arbitration but should not have assessed
threshold questions itself. Consistent with our opinion, the parties may revisit
these issues in arbitration.
                                             ***
        For these reasons, we REVERSE the judgment of the district court in
No. 17-50088 and REMAND with instructions to grant the motion to compel
arbitration, and we AFFIRM the judgment of the district court in No. 17-50102
and REMAND with instructions to grant the motion to compel arbitration.

        6 In light of this clear concession, and because her opening brief challenges only the
application of the February 2016 Terms to four of her five properties, while repeatedly
acknowledging that she agreed to the February 2016 Terms, we will not address the
inconsistent arguments raised in her reply brief. Cf. Hosp. House, Inc. v. Gilbert, 298 F.3d
424, 434 n.12 (5th Cir. 2002) (finding plaintiffs abandoned their claims “by their clear
representations to the district court that they were not alleging any violations of federal
rights”).
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