Court Opinion

ID: 176647
Source: CourtListenerOpinion
Date Created: 2010-10-05 23:13:35+00
Date Added: 2024-06-11T17:25:39.244594
License: Public Domain

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

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

                                                   FILED
                                                                             October 5, 2010

                                          No. 09-20778                        Lyle W. Cayce
                                                                                   Clerk

JUAN RAMON TORRES; EUGENE ROBISON,

                                                     Plaintiffs–Appellants,
v.

S.G.E. MANAGEMENT, L.L.C.; STREAM GAS & ELECTRIC, L.T.D.;
STREAM S.P.E. G.P. L.L.C.; STREAM S.P.E., L.T.D.; IGNITE HOLDINGS,
L.T.D; CHRIS DOMHOFF; ROB SNYDER; PIERRE KOSHAKJI; DOUGLAS
WITT; STEVE FLORES; MICHAEL TACKER; DONNY ANDERSON; TREY
DYER; STEVE FISHER; RANDY HEDGE; BRIAN LUCIA; LOGAN STOUT;
PRESLEY SWAGERTY,

                                                     Defendants–Appellees.

                      Appeal from the United States District Court
                           for the Southern District of Texas
                                     (09-CV-2056)

Before GARZA and BENAVIDES, Circuit Judges, and LYNN, District Judge.*
LYNN, District Judge:**
        Juan Ramon Torres and Eugene Robison appeal the district court’s order
dismissing their claims for improper venue based on the parties’ agreement to

        *
            District Judge of the Northern District of Texas sitting by designation.
       **
         Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
   Case: 09-20778    Document: 00511254109     Page: 2   Date Filed: 10/05/2010

                                  No. 09-20778

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

                                        I
      This appeal concerns a dispute over the enforceability of an arbitration
clause. Stream Energy is a retail provider of electricity in Texas. It markets its
product through its subsidiary, Ignite, which operates a multilevel marketing
program.   The program operates by recruiting persons to invest money to
purchase the Ignite Services Program (ISP), which can only be purchased
through a current member of Ignite. Once a person purchases an ISP, he
becomes an Independent Associate (IA).
      Torres and Robison purchased ISPs and became IAs. In doing so, they
signed an agreement with Ignite. The agreement was comprised of three parts:
a Compensation Plan, the Policies and Procedures, and the Terms and
Conditions. The Policies and Procedures contained the following arbitration
clause:
      IAs agree that any claim, dispute or other difference between IAs
      and Ignite or among IAs and Ignite will be exclusively resolved by
      binding arbitration . . . with arbitration to occur at Dallas, Texas.

      Torres and Robison sued Chris Domhoff; Rob Snyder; Pierre Koshakji;
Douglas Witt; Steve Flores; Michael Tacker; Donny Anderson; Trey Dyer; Steve
Fisher; Randy Hedge; Brian Lucia; Logan Stout; Presley Swagerty; S.G.E.
Management, LLC; Stream Gas & Electric, Ltd.; Stream SPE GP, LLC; Stream
SPE, Ltd.; and Ignite Holdings, Ltd. (collectively, the defendants), alleging that
the defendants’ marketing program was an illegal pyramid scheme in violation
of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.
§ 1961 et seq. The defendants moved to dismiss the case for improper venue
under Federal Rule of Civil Procedure 12(b)(3). Specifically, they contended that

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                                         No. 09-20778

venue in federal district court was improper because Torres and Robison had
agreed to arbitrate all disputes. The district court granted the motion and
dismissed the case. Torres and Robison now appeal.
                                               II
       We review the district court’s dismissal under Federal Rule of Civil
Procedure 12(b)(3) de novo.1 We similarly review the enforceability of a forum-
selection or arbitration clause de novo.2
                                               III
       Torres and Robison argue that the arbitration clause in the agreement is
illusory and thus unenforceable. The determination of whether an arbitration
agreement is valid “is generally made on the basis of ordinary state-law
principles that govern the formation of contracts.”3 The parties do not dispute
that Texas law governs the enforceability of the arbitration clause here.
       Under Texas law, a stand-alone arbitration agreement requires binding
promises on both sides as consideration for the contract.4                    “But when an
arbitration clause is part of an underlying contract, the rest of the parties’
agreement provides the consideration.”5 Still, an arbitration agreement may be
illusory if a party can unilaterally avoid the agreement to arbitrate.6 Here,
Torres and Robison assert that the arbitration clause is illusory because Ignite
could amend the clause “in its sole discretion” and because the modification

       1
           See Ambraco, Inc. v. Bossclip B.V., 570 F.3d 233, 237 (5th Cir. 2009).
       2
           Afram Carriers, Inc. v. Moeykens, 145 F.3d 298, 301 (5th Cir. 1998).
       3
        Morrison v. Amway Corp., 517 F.3d 248, 254 (5th Cir. 2008) (internal quotation marks
and citation omitted).
       4
           In re AdvancePCS Health, L.P., 172 S.W.3d 603, 607 (Tex. 2005).
       5
           Id.
       6
           See J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 230-31 (Tex. 2003).

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would become immediately effective upon notice to the IAs or upon posting to
Ignite’s website.
                                              A
      As a preliminary matter, the parties dispute whether Ignite was required
to give the IAs 30 days’ notice before any modifications to the arbitration clause
went into effect. Torres and Robison concede in their reply brief that if Ignite is
required to give them 30 days’ notice of any amendments, then the arbitration
clause is enforceable.       Thus, we must consider whether 30 days’ notice is
required under the agreement. The interpretation of a contract is a matter of
law reviewed de novo.7
      Amendments or modifications to the agreement are discussed in both the
Terms and Conditions and the Policies and Procedures, but the agreement states
that “in the case of any conflict” between the Policies and Procedures and other
parts of the agreement, “these Policies and Procedures will prevail.” In the
Terms and Conditions, Paragraph 1 states that Ignite may amend the Terms
and Conditions and the Policies and Procedures at its “sole discretion.”
Paragraph 1 further states that “[n]otification of amendments shall be posted in
Ignite’s website” and that “[a]mendments shall become effective 30 days after
publication.” Paragraph 13 also discusses amendments to the agreement. It
provides:
      Ignite reserves the right to modify its Policies and Procedures,
      Compensation Plan, and applicable program and renewal fees from
      time to time. Such modifications shall become a binding part of this
      Agreement. Publication of such changes in official Ignite materials,
      Ignite corporate Website or by other means as Ignite determines is
      appropriate shall be deemed notice to me. The continuation of my
      Ignite Independent Associate position or my acceptance of
      commissions or bonuses shall constitute my acceptance of any and
      all amendments.

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

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                                     No. 09-20778

In the Policies and Procedures, the agreement provides that:
      IAs understand and acknowledge that in order to maintain a viable
      marketing program and to comply with changes in federal, state or
      local laws or economic conditions, Ignite may modify existing
      Policies and Procedures and provide updated Policies and
      Procedures and rules and regulations for IAs from time to time, as
      well as modify its Compensation Plan, customer services and
      charges at its sole discretion. Such modifications to the Policies and
      Procedures, the rules and regulations, the Compensation Plan or
      any customer services, and all charges thereto, will, upon notice to
      the IA or by publication by Ignite in the Power Center, become a
      binding part of the Independent Associate Agreement. IAs accept
      publication of these Policies and Procedures in the Power Center as
      notice of such modifications and assume responsibility for
      periodically reviewing these Policies and Procedures in the Power
      Center for such modifications.8

      Torres and Robison contend that these parts of the agreement conflict and
that, as such, the 30-day notice provision in the Terms and Conditions is
trumped by the Policies and Procedures, thereby leaving the agreement without
a notice requirement for amendments.
      We agree that these notice provisions conflict. While the Terms and
Conditions provide that amendments are effective upon 30 days’ notice, the
Policies and Procedures provide that amendments “become a binding part” of the
agreement “upon notice.” They do not reference any time frame for notice, but
rather, suggest that amendments become effective immediately. Accordingly,
these provisions conflict, and the provision in the Policies and Procedures
governs. Thus, any amendment to the agreement binds the IAs “upon notice.”
                                            B
      We must now determine whether the agreement to arbitrate is illusory.
The Texas Supreme Court has considered whether an arbitration clause not

      8
         R. at 314 (emphasis added). The Power Center is Ignite’s password secured website
that it uses to notify IAs of changes to the ISP agreement.

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                                       No. 09-20778

supported by consideration is illusory in three recent cases. In In re Halliburton
Co., the court held that an arbitration agreement between an employer and an
at-will employee was not illusory, despite the company’s right to modify or do
away with the arbitration program.9 The court reasoned that two clauses saved
the arbitration provision from being illusory. For one, the agreement provided
that any modification to the arbitration clause was not to apply retroactively to
a dispute of which Halliburton had notice on the day of the amendment.10 In
addition, the agreement stated that if Halliburton terminated the arbitration
program, “termination shall not be effective until 10 days after reasonable notice
of termination is given to Employees or as to Disputes which arose prior to the
date of termination.”11 The court explained that, because of these two provisions,
Halliburton could not “avoid its promise to arbitrate by amending the provision
or terminating it altogether.”12 Accordingly, it held that the provision was not
illusory.
      In J.M. Davidson, Inc. v. Webster, the Texas Supreme Court indicated that
an employer’s right to unilaterally abolish or amend an arbitration clause
without notice could render the arbitration clause in an employment agreement
illusory.13 There, the court considered an agreement to arbitrate contained in
an employer’s personnel policy.14 The employer had “reserve[d] the right to
unilaterally abolish or modify any personnel policy without prior notice.” 15 The

      9
          80 S.W.3d 566, 569-70 (Tex. 2002).
      10
           Id.
      11
           Id. at 570.
      12
           Id.
      13
           128 S.W.3d at 230-31.
      14
           Id. at 228.
      15
           Id. at 229.

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                                        No. 09-20778

court ruled that the contract was ambiguous since it was unclear whether the
right to unilaterally abolish personnel policies applied to the arbitration clause.16
In doing so, the court noted “that most courts that have considered this issue
have held that, if a party retains the unilateral, unrestricted right to terminate
the arbitration agreement, it is illusory.”17 This circuit has since explained that
in Davidson, “the court plainly held that if the defendant-employer retained the
right to ‘unilaterally abolish or modify’ the arbitration program, then the
agreement to arbitrate was illusory and not binding on the plaintiff-employee.” 18
      Lastly, in In re AdvancePCS Health L.P., the Texas Supreme Court
considered the validity of an arbitration clause contained in a provider
agreement between a pharmacy benefits management company and member
pharmacies.19 AdvancePCS Health (PCS) could modify the arbitration clause
upon 30 days’ notice to a member pharmacy, and it could terminate the
agreement immediately if the member pharmacy failed to perform or breached
a provision in the contract.20 The court found that PCS’s ability to modify the
clause did not render it illusory, since it “provides a 30-day window during which
the arbitration clause cannot be cancelled.”21 The court also determined that
PCS’s ability to terminate the clause upon breach did not make the clause
illusory, since the contract provided that “any obligations that arise prior to the
termination of the Agreement shall survive such termination.” 22 The court

      16
           Id. at 230-31.
      17
           Id. at 231 n.2.
      18
           Morrison v. Amway Corp., 517 F.3d at 255 (emphasis in original).
      19
           172 S.W.3d at 605.
      20
           Id. at 607.
      21
           Id.
      22
           Id.

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                                           No. 09-20778

explained that because of this provision, “[h]ad the pharmacies invoked
arbitration rather than filing suit, PCS could not have avoided arbitration by
terminating the Provider Agreement.” 23
      In addition, this circuit recently considered the validity of an arbitration
clause under Texas law in Morrison v. Amway Corp.24 There, we held that an
arbitration clause was illusory in light of Davidson. The clause at issue was in
a distributorship contract, and Amway had the right to modify it unilaterally,
as long as it published notice.25 In holding the arbitration agreement illusory,
we explained that the documents did not preclude elimination of the arbitration
program and that the agreement contained “no Halliburton type savings clauses
which preclude application of such amendments to disputes which arose (or of
which Amway had notice) before the amendment.” 26
      In sum, these cases make clear that even if an arbitration clause may be
unilaterally modified, if the modification or elimination of the clause does not
apply retroactively so as to allow the avoidance of arbitration, the promise to
arbitrate is not illusory. Conversely, the cases do not precisely state when an
arbitration agreement is illusory. However, they suggest that the lack of a
notice window before any elimination of the clause becomes effective and the
ability to amend the agreement retroactively so as to avoid any promise to
arbitrate are factors indicating that the agreement may be illusory.
      Here, the arbitration clause may be eliminated or modified “upon notice,”
and the agreement contains no clause preventing a modification from applying
to disputes arising before the modification. The circumstances are similar to

      23
           Id. at 607-08.
      24
           517 F.3d 248 (5th Cir. 2008).
      25
           Id. at 254.
      26
           Id. at 257.

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                                    No. 09-20778

those in Morrison. As in Morrison, “[t]here is nothing in any of the relevant
documents which precludes amendment to the arbitration program . . . from
eliminating the entire arbitration program or its applicability to certain claims
or disputes.”27 And like Morrison, “[t]here are no Halliburton type savings
clauses which preclude application of such amendments to disputes which arose
. . . before the amendment.”28 Ignite essentially could renege on its promise to
arbitrate by merely posting an amendment to the agreement on its website.
      The defendants contend that Morrison is distinguishable because the
agreement here provides for notice of amendments and states that IAs may
accept any amendments by continuing their business with Ignite and accepting
bonuses or commissions. We do not find this argument persuasive. As noted
previously, Ignite’s Policies and Procedures govern and provide that
amendments are binding and effective immediately, “upon notice.” This is
similar to the agreement in Morrison, in which amendments became effective
upon “published notice.”29 Consequently, because amendments become binding
“upon notice,” the provision allowing IAs to accept modifications by continuing
their business with Ignite is effectively meaningless. The IAs would have no
opportunity to reject the modification and invoke their right to arbitration before
any elimination of the program became effective.
      In sum, Ignite’s promise to arbitrate under the terms of this agreement
was hollow. Accordingly, we hold that the arbitration provision is illusory and
unenforceable.

      27
           Id.
      28
           Id.
      29
           Id. at 254.

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                                   No. 09-20778

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

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