Federal Judge rules against Quixtar arbitration

Judge Dorr confirmed the fact that the plaintiffs, Kenny Stewart's and Brig Hart's tools business ("Nitro" and "U-can-II"), were separate businesses that never submitted to or signed the Quixtar arbitration agreement.    (Judge Dorr's Order )  

"The Court must first determine if any Plaintiff is bound to the arbitration provisions in the Amway Rules of Conduct through theories of agency or by signing in its own capacity. The Court finds that Plaintiffs are not so bound. "

"Nitro does not operate an Amway products business and likewise never signed an application to be a distributor for the products business nor any form for the automatic renewal of the products business."

"The Amway rules required the products and tools businesses to be kept separate."

Judge Door also ruled in favor of Nitro and U-can-II due to Amway's position regarding tools disputes in the past.

"Similar to Ken Stewart, Defendants also sent a letter to counsel for Brig Hart responding to correspondence between the Harts and the Defendants regarding disputes related to the Hart's tools business. In the letter, Amway was clear in saying that "we remain puzzled as to why you believe that Amway has the legal responsibility to resolve these private disputes, which do not appear to be covered by our Rules of Conduct or by Mr. Hart's Amway distributorship contract." This illustrates that there was no confusion on the Defendants' part. Defendants did not want to acknowledge any legal relationship or status with the tools businesses. When asked to get involved with the tools businesses Defendants refused. It is disingenuous for Defendants to claim in their arguments herein that somehow the tools businesses, despite Defendants' best efforts to keep them separate, are now contractually bound to Defendants' arbitration procedure."

Judge Dorr could have just ruled that the Nitro and U-can-II business must not submit to arbitration but he went out of his way to also state that Amway/Quixtar's arbitration rule is also procedurally and substantively unconscionable and therefor is unenforceable. 

On "procedural unconscionability":

In this case, the Amway arbitration provision was offered in a “take it or leave it” manner. The hallmark of “unequal bargaining position” is clear – to continue to be an Amway distributor, the agreement must be accepted. While Defendants contend that distributors had ample time to review the arbitration provisions before renewing or allowing the automatic renewal to occur, they do not refute that the arbitration provisions were given in a manner that required the distributors to accept the arbitration agreement as written or to quit the business all together.

There was no other entity with which Plaintiffs could contract to participate in a similar business. Moreover, negotiation of the arbitration clause was unheard of. Defendants admit that a distributor could not sign the distribution agreement without the arbitration provision.

Defendants’ position is that there was only one contract with all of its distributors . . . The above discussion concerns the procedural unconscionability based on the “take it or leave it” option presented to Amway distributors. The plaintiff tools businesses are one step removed from this procedure as their involvement is vicarious at best. Thus, if Plaintiffs were held to be bound by Amway’s arbitration agreement, it would be the result of a procedure where Plaintiffs never had a choice. Accordingly, the arbitration requirement is procedurally unconscionable.

On "substantive unconscionability":

Plaintiffs in this case have raised grave doubts as to the fairness of the hearing they would receive if in arbitration with JAMS and the neutrality of the arbitrators that would be chosen. Mainly, Plaintiffs oppose the selection of the arbitrators by Defendants and the training Defendants provide to the arbitrators. Plaintiffs have submitted videos and DVD’s of Defendants’ training sessions with the arbitrators and these exhibits show Defendants counseling the arbitrators on the nature of their business. It is this Court’s opinion that the procedure utilized by Defendants to screen, train and ultimately hand-pick their panel of arbitrators does not come close to passing any reasonable test of fairness and neutrality required for a legitimate arbitration proceeding.

Amway’s “training” covered a two day period and then a third day of “interviews.” The training covered subjects including profiles of the people who started and now run Amway, the benevolent and independent culture of Amway, procedures to the utilized in arbitration, and a summary of various complaints the arbitrators could anticipate. The arbitrator candidates even participated in some “role playing” as successful Amway distributors. Also included throughout the two days were assurances that Amway was not a pyramid scheme and that the business was legitimate. Defendants claim, however, that the training was not out of the ordinary nor improper as the panel was not specifically told how to resolve possible issues they would see. On the videos, the Defendants state they will not discuss the meaning of the Rules of Conduct that are not absolutely “black and white.”

It was most interesting that the issue presently before this court was included in a particular “training” discussion at one point, complete with diagrams from Defendants’ counsel regarding what was appropriate and inappropriate in the scenario. The videos run almost ten (10) hours, but suffice it to say that it appears clear to this court that the training atmosphere and content of the discussions was designed to produce a very favorable view of Defendants. Coupled with the training session was the selection process being utilized by Defendants, both to select its initial group for training, then after personal interviews, to pick the final panel of arbitrators from which all arbitrators for Amway disputes would be chosen.

While there can be basic education of arbitrators regarding specialized subject matter, there is a point where basic education can be extended to subtle manipulation on issues which could be expected to be considered by the arbitrators. This limit has been passed by Amway’s preparation of the arbitrators at JAMS. While JAMS may be a respected organization, the Defendants have called the neutrality of this particular arbitration arrangement into question. Also telling is the fact that Defendants have never lost in arbitration, with the exception of a few counterclaims. . .

While the parties are allowed to choose their own arbitrators, the pool of candidates for this choice is limited by Defendants to those arbitrators whom Defendants have already pre-selected in a process that involves an initial screening, then training with a heavy dose of goodwill for Defendants and their manner of operation, then after personal interviews, being hand-picked to be on the list of arbitrators (so long as Defendants deem them to be acceptable). Arbitrators are to be neutral, and allowing such training and influence over the arbitrators as Defendants have in this situation is both unreasonable and unfair.

Although this court has found that none of the Plaintiffs have submitted to arbitration, the court also finds that, in the alternative, arbitration with pre-selected JAMS arbitrators as presently set up by Defendants is unconscionable.

The Lawblog has a good article detailing Judge Dorr's statements about the unconscionability of the arbitration provision.

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