Morrison v. Amway Corp.

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

FILED
February 6, 2008
No. 06-20138
Charles R. Fulbruge III
Clerk

DR JOE MORRISON; ET AL
Plaintiffs

DR JOE MORRISON; DAWN MORRISON; RANDY COUNCILL; JANET COUNCILL;
DAN HIGGINS; HELEN HIGGINS; RON GREEN; KAREN GREEN; VICTOR
BROOK; CATHY BROOK; RICHMOND EAGLE CORP; DAVE ROBERTS; ROSE
ROBERTS; TONY CUTAIA; MARY CUTAIA; WARREN BIRD; DONNA BIRD;
KYE YEAMAN; WADE MCKAY; DEBBIE MCKAY; ROBERT PRICE; BARBARA
PRICE; CLAY YOUNG; LISA YOUNG

Plaintiffs - Appellants

HERBERT HAMILTON; MARILYN HAMILTON; DONALD MAY; CELESTE MAY;
MICHAEL CUTAIA; KAREN CUTAIA; RANDALL LAINE; DIANE LAINE;
FRANK MAZZOLA; KAREN MAZZOLA; LARRY ROGERS; SUZANNE ROGERS;
ROBERT SCHMANSKI; DANA SCHMANSKI

Appellants

versus

AMWAY CORPORATION; ET AL
Defendants

AMWAY CORPORATION; DEXTER YAGER, INDIVIDUALLY, DOING BUSINESS AS
YAGER ENTERPRISES AND INTERNET SERVICES CORP; DONALD
R WILSON, INDIVIDUALLY, DOING BUSINESS AS WOW INTERNATIONAL INC;
RANDY HAUGEN, INDIVIDUALLY, DOING BUSINESS AS FREEDOM
ASSOCIATES INC; FREEDOM TOOLS INC; JOHN SIMS, INDIVIDUALLY,
DOING BUSINESS AS SIMS ENTERPRISES; INTERNET SERVICES CORP; YAGER
ENTERPRISES
Defendants - Appellees

versus

PAMELA GALE JOHNSON, JOE & DAWN MORRISON BANKRUPTCY ESTATE;
WILLIAM G WEST, TONY & MARYANN CUTAIA BANKRUPTCY ESTATE;
ROBERT NEWHOUSE, HERBERT & MARILYN HAMILTON BANKRUPTCY
ESTATE; HELEN G SCHWARTZ, WADE & DEBBIE MCKAY BANKRUPTCY
ESTATE; CHRISTOPHER MOSER, WARREN & DONNA BIRD BANKRUPTCY
ESTATE; WILLIAM G WEST, RANDY & JANET COUNCIL BANKRUPTCY
ESTATE; BEN FLOYD, MICHAEL & KAREN CUTAIA BANKRUPTCY ESTATE;
W STEVE SMITH, RON & KAREN GREEN BANKRUPTCY ESTATE; BEN
FLOYD, FRANK & KAREN MAZZOLA BANKRUPTCY ESTATE; JANET
CASCIATO-NORTHRUP, DAVE & ROSE ROBERTS BANKRUPTCY ESTATE;
BEN FLOYD, DANA & ROBERT SCHMANSKI BANKRUPTCY ESTATE; JANET
CASCIATO-NORTHRUP, DONALD AND CELESTE MAY BANKRUPTCY ESTATE

Trustees - Appellants

Appeal from the United States District Court
for the Southern District of Texas

Before GARWOOD, SMITH, and DEMOSS, Circuit Judges.

GARWOOD, Circuit Judge:

Appellants (collectively, “Distributors”) appeal the district

court’s final judgment confirming and entering judgment on the

arbitration award. Appellants seek reversal of the district

court’s judgment and vacatur of the arbitration award, reversal of

the district court’s prior order compelling arbitration, and remand

for a trial. They argue five issues on appeal: (1) the district

court erred by not vacating the arbitration award due to the

arbitrator’s evident partiality and bias; (2) the district court

erred by compelling arbitration since the arbitration agreement was

not valid and enforceable due to Amway’s retention of a unilateral

right to modify it; (3) the district court erred by compelling

2
arbitration since the arbitration agreement was unconscionable; (4)

the district court erred by compelling arbitration even if the

agreement was valid and enforceable because the arbitration

agreement did not cover all of the Distributors’ asserted claims;

and (5) the district judge lacked jurisdiction to confirm the

arbitration award.

CONTEXT FACTS AND PROCEEDINGS

The disputes comprising the core of this appeal have been in

contention for more than ten years, and have been heard in several

courts and other dispute resolution fora. Distributors’ complaints

center upon their relationships with appellee Amway Corporation and

distributorships within Amway Corporation (collectively, “Amway”),

a multinational seller of household products in existence since

1959. Amway distributes products by means of a vast network of

independent distributors who, in turn, continuously recruit new

distributors (also called “down-liners”).1 All distributors in

this case were in the “down-line” of the distributor appellee

Dexter Yager.

Based on their success selling products, distributors may earn

entry into particular levels, with the Diamond level being among

the highest levels of success. Many of the Distributors worked

1
Each new distributor is in the “down-line” of the distributor who
recruited him and so on all the way up the “down-line” to one of the relatively
few distributors who is not in any other distributor’s “down-line.”

3
full-time as distributors, regarding Amway as their sole source of

income. Distributors earn their income based on commissions from

their own sales and those generated by their down-liners. In order

to distribute Amway products, every Amway distributor signs Amway’s

standard distributorship agreement, which “confer[s] a right to

distribute Amway products, and the right to receive sales

commissions or ‘bonuses’ on any products sold, for a period of one

year.” Among other things, the distributor agrees to pay an annual

fee and to abide by Amway’s Code of Ethics and Rules of Conduct “as

amended and published from time to time in official Amway

literature.” This agreement must be renewed annually, “no later

than December 31 ” for the following calendar year. Many

distributors renew automatically while others submit a renewal form

each year entitled “Notice of Intent to Continue.” Business

Support Materials (BSM) complement the Amway network, and consist

of “rallies, tapes, books, and functions designed to motivate

distributors.”

In June 1997, according to the essentially undisputed showing

in this respect of the Distributors, the disputes at the heart of

this case, which had been festering for some time, came to a head.2

2
The Distributors’ claims that later became subject to the January 13,
2005 arbitration award contested here include: disparagement and defamation;
violation of the Texas Free Enterprise Act; violation of the Texas State Bribery
Act; fraud; breach of contract (against Amway Corporation only); tortuous
interference with current and prospective business relationships; conspiracy;
“[i]mplied [b]reach of [i]mplied [c]ontract”; express and implied warranties;

4
Among other things, Distributors complained about how profits were

determined regarding sales of BSM materials.

In September 1997, Amway informed Distributors it was amending

the Rules of Conduct to include an arbitration program,

communicating through publication in its official magazine, the

Amagram, and other media sent directly to distributors. The

arbitration provision, added to the 1998 Rules of Conduct, provided

for arbitration 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).” The acknowledgment form mailed to the automatic

renewal Distributors, containing information of the newly installed

arbitration program, also stated, inter alia: “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 sign the

acknowledgment on the back of this letter. While these changes

intentional infliction of emotional distress; violation of Texas Deceptive Trade
Practices Act; breach of fiduciary duty; and violation of Texas Business
Opportunities Act. The Distributors prayed for compensatory damages in excess
of $10,000,000.00 in addition to punitive damages, attorney fees and costs, pre-
and post-judgment interest, treble damages as provided by statute, and any other
relief to which they might be entitled.

5
automatically become part of your agreement with Amway, we wanted

to make sure you are aware of them.” The announcements also

included a separate, optional BSM arbitration agreement. The

parties disagree as to whether the Distributors needed to sign and

return an “acknowledgment form” before October 3, 1997, in order to

be considered subject to the arbitration agreement. There is no

dispute that all Distributors renewed their distributorship

agreements after Amway gave notice of implementation of the

arbitration program.

On January 8, 1998, a group of Distributors (the Morrison

group) sued Amway and other defendants (including Dexter Yager) in

Texas state court alleging a number of federal and state law

claims, ranging from defamation to RICO. Amway (and the other

defendants) on February 6, 1998 timely removed the case to the

district court under 28 U.S.C. § 1441(b), and then filed a motion

to stay the suit pending arbitration. Distributors argued against

the stay, contending, inter alia, that the Arbitration Agreement

was not binding on them. On October 15, 1998, the district court

granted Amway’s motion and stayed the suit pending arbitration.

Morrison v. Amway Corp., 49 F. Supp. 2d 529 (S.D. Tex. 1998).3

3
On December 8, 1998 the district court denied the Distributors’ motion
to certify its October 15, 1998 stay order for appeal under 28 U.S.C. § 1292(b).
See 9 U.S.C. § 16(b)(1); Terrebonne v. K-Sea Transp. Corp., 477 F.3d 271, 277 n.9
(5th Cir. 2007).

6
 While all this transpired in federal district court, another

group of Distributors (the Hamilton group), shortly after removal

of the Morrison group’s state suit, filed a state court action

against Amway and other defendants with substantially similar state

law claims as those of the Morrison group but lacking all the

federal causes of action. Thereafter, on July 1, 1998, the

Morrison group joined the Hamilton group in the second state suit.

Amway moved in the state court to stay the proceedings in that suit

pending arbitration pursuant to the arbitration agreement.

Approximately one month after the federal district court stayed its

proceedings, the state court stayed the state litigation pending

arbitration of the Hamilton group’s claims. The state court abated

the Morrison group's claims because they were already sub judice in

federal court, and the claims were subsequently dismissed for want

of prosecution by the state court on October 23, 2003.

On May 18, 2001, the Distributors requested arbitration under

the arbitration agreement. On June 14, 2001, Amway and other

defendants filed counterclaims in the arbitration. On August 17,

2001, the Distributors filed a motion for “Summary Disposition” in

the arbitration, contending, inter alia, that there was no valid

agreement to arbitrate, that if there were such an agreement it did

not apply, or could not properly apply, to disputes, such as those

involved in the instant proceeding, which arose and were on-going

and known to Amway prior to the September 1997 amendment to Amway

7
Rules of Conduct which introduced the arbitration program,4 and,

further, that the arbitration program “is inherently unfair”

because Amway “selected and trained the arbitrators” and “hold[s]

the exclusive power to remove unwanted” arbitrators. Amway and the

other defendants filed a response and their own motion for summary

disposition. On October 15, 2001, the arbitrator Anne Gifford

denied (without explanation) both motions for summary disposition.

JAMS, the arbitration services provider for Amway, provided

the parties with the names and biographical information of five

neutrals “who had ‘completed the training course for Arbitrators

offered by [JAMS/Endispute], and conducted by Amway and the Amway

Distributors Association[, ADA]5.’” From among those so listed, the

parties ultimately selected Anne Gifford to arbitrate the dispute

and she was appointed as Arbitrator June 14, 2001. On October 9,

2001, Gifford disclosed to the parties that she had attended a 1998

training session conducted by Amway and had subsequently conducted

mediation training of certain Amway employees. Gifford held a

teleconference with the parties where she invited any questions

about her 1998 training. Following the teleconference, Gifford and

4
And, “[o]nly after the possibility of litigation between the parties was
obvious to both sides, did Amway unilaterally incorporate the arbitration clause
in the distributors’ renewals and acknowledgment forms.”
5
The Amway Distributors Association (ADA) is the nonprofit trade
association of Amway distributors, and all Distributors were, it seems, voting
members. However, Distributors contest this, claiming, “Nothing in the record
shows Distributors ever had or exercised the right to vote on who would represent
them on the ADA.” No Distributor served on the ADA Board.

8
JAMS requested that any questions/objections concerning Gifford’s

service as arbitrator be raised by October 12, 2001. However, none

were forthcoming from any party.

After allowing discovery, a three-week evidentiary hearing

from January 5-24, 2004 in Houston, Texas, and post-hearing briefs,

Gifford on January 13, 2005 ruled in favor of the Distributors on

all of Amway’s claims and in Amway’s favor on all of Distributors’

claims; fees and costs were awarded to each prevailing party,

thereby resulting in an award of $7 million to Amway offset by an

award to Distributors of $1 million.6 The ruling (in common with

all others in this arbitration) contains no analysis and states no

reasons. Distributors on January 27, 2005 moved in the district

court to vacate the award alleging, inter alia, Gifford’s evident

partiality and corruption as well as the unenforceability of the

arbitration agreement. On March 31, 2005, Amway and the other

defendants moved the district court to confirm the award and enter

judgment on it. The district court, after a largely non-evidentiary

hearing on May 20, 2005, allowed discovery on the matter of

Gifford’s alleged partiality, but on September 15, 2005, after

filings by the parties as to the discovery results, ultimately

6
On May 6, 2004, Gifford entered an interim award “on liability and
damage eligibility” in which Amway and the other defendants prevailed as all the
Distriburtors’ claims against them and the Distributors prevailed on all
counterclaims against them, and each set of parties was ruled entitled to
attorneys’ fees and costs. Thereafter, fee and cost bills were submitted; an
interim award of fees and costs was made on January 5, 2005.

9
denied the motion to vacate and confirmed the award. Distributors

moved for rehearing on September 21, 2005, which the district court

denied without a hearing on October 4, 2005. Distributors

thereafter timely filed their notice of appeal to this court.

DISCUSSION

The Distributors assert, among other complaints on appeal,

that the district court erred in its October 15, 1998 order

staying their suit pending arbitration. The parties do not

dispute the applicability of the Federal Arbitration Act. “This

Court reviews de novo the grant or denial of a motion to compel

arbitration.” Fleetwood Enterprises, Inc. v. Gaskamp, 280 F.3d

1069, 1073 (5th Cir. 2002).7

In this respect, the Distributors contend, among other

things, that the district court erred by compelling arbitration

because an enforceable arbitration agreement never existed.

There is no disagreement that there was a written arbitration

policy in effect between the Distributors and Amway at the time

the suit was filed. However, Distributors claim the arbitration

agreement was not valid and enforceable for several reasons

including the following. Distributors argue that the provision

7
Under the circumstances here, the fact that after the stay order
Distributors, under protest, commenced arbitration in which an award was made,
does not of itself preclude or render moot their challenge to the district
court’s stay order, an order which was not previously appealable. See note 3
above and Terrebonne v. K-Sea Transp. Corp., 477 F.3d 271, 279 n.9 (5th Cir.
2007). Appellees do not contend otherwise.

10
in the distributorship agreement that the distributor agreed “to

comply with the Amway Sales and Marketing Plan, Code of Ethics,

and Rules of Conduct as they are amended and published from time

to time in official Amway literature,” by virtue of which Amway

in September 1997 amended its Rules of Conduct to for the first

time include provisions for arbitration (which provisions Amway

claims are applicable to disputes, such as those alleged in the

instant lawsuit, which arose out of events occurring before the

referenced September 1997 Rules of Conduct amendment), renders

the arbitration agreement contained in the 1998 distributorship

agreements illusory, lacking in consideration, and unenforceable.

This, the Distributors assert, is because Amway, by virtue of its

power to thus amend the Rules of Conduct, could unilaterally

repeal or amend the arbitration provisions so that they were

inapplicable even as to disputes, such as those here involved, of

which Amway was aware and that arose out of events occurring

prior to such an amendment.

The “federal policy favoring arbitration does not apply to

the determination of whether there is a valid agreement to

arbitrate between the parties.” Fleetwood Enterprises Inc., 280

F.3d at 1073. That determination “is generally made on the basis

of ‘ordinary state-law principles that govern the formation of

contracts.’” Id. (quoting First Options of Chicago Inc. v.

Kaplan, 115 S.Ct. 1920, 1924 (1995)). As did the district court,

11
49 F. Supp. 2d at 533-34, we make that determination based on

Texas law, which is the law of the forum, there having been no

showing that the law of any other arguably more appropriate state

materially differs in respect to the present issue.

Every Distributor in entering his or her 1998 annual

contract with Amway agreed

“to conduct [his or her] business according to the
Amway Code of Ethics and Rules of Conduct, as they are
amended and published from time to time in official
Amway literature. . . .

I agree I will give notice in writing of any claim or
dispute arising out of or relating to my Amway
distributorship, or the Amway Sales and Marketing Plan
or Rules of Conduct to the other party or parties . . .
. I will then try in good faith to resolve the dispute
using the Amway Conciliation and Enforcement Procedures
contained in the Rules of Conduct for Amway
Distributors. If the claim or dispute is not resolved
to [his or her] satisfaction within 80 days, or after
the Amway Conciliation process is complete, whichever
is later, I agree to submit any remaining claim or
dispute arising out of or relating to any Amway
distributorship, the Amway Sales and Marketing Plan, or
the Amway Rules of Conduct . . . to binding arbitration
in accordance with the Amway Arbitration rules, which
are set forth in the Amway Business Compendium.”

There is no express exemption of the arbitration provisions from

Amway’s ability to unilaterally modify all rules, and the only

express limitation on that unilateral right is published notice.

While it is inferable that an amendment thus unilaterally made by

Amway to the arbitration provision would not become effective

until published, there is nothing to suggest that once published

12
the amendment would be inapplicable to disputes arising, or

arising out of events occurring, before such publication.

In In Re Halliburton Co., 80 S.W.3d 566 (Tex. 2002), an at-

will employee sued his employer in 1999 claiming that his

demotion during 1998 was based on race and age discrimination.

In November 1997 the employer had sent all employees written

notice that if they continued their employment after January 1,

1998, they would be governed by the arbitration “program”

included with the notice. The Texas Supreme Court held that the

employee, who had continued his employment past January 1, 1998,

after receiving the notice in 1997, was required to arbitrate his

claim against his employer. The employee asserted that the

arbitration program was “illusory because the company retained

the right to modify or discontinue” it. The Supreme Court

rejected that contention stating:

“‘But the Program also provided that no amendment shall
apply to a Dispute of which the Sponsor [Halliburton]
had actual notice on the date of amendment.’ As to
termination, the plan stated that ‘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.’
Therefore, Halliburton cannot avoid its promise to
arbitrate by amending the provision or terminating it
altogether. Accordingly, the provision is not
illusory.” Id. at 569-70 (emphasis added).

The Texas Supreme Court again addressed a similar issue in

J.M. Davidson Inc. v. Webster, 128 S.W.3d 223 (Tex. 2003).

13
There, the at-will employee, Webster, was injured on the job in

November 1998, filed a worker’s compensation claim and shortly

thereafter was terminated. He then sued his employer, Davidson,

claiming his discharge was wrongful as being in retaliation for

his filing the worker’s compensation claim. Davidson claimed it

was entitled to arbitrate pursuant to a written agreement Webster

signed when he was hired by Davidson in December 1997. The first

paragraph of the agreement dealt with arbitration; the second

(and longer) paragraph largely dealt with a number of other

employment related matters and stated in its next to last

sentence that “The ‘Company’ reserves the right to unilaterally

abolish or modify any personnel policy without prior notice.”

Id. at 226. The Supreme Court held that the contract was

ambiguous with respect to whether the above quoted sentence of

the second paragraph applied to the arbitration agreement

contained in the first paragraph, and thus remanded the case to

the trial court to resolve that ambiguity. Id. at 230-31. 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.8 The Court expressly

8
Eight of the nine justices agreed with this, although two were of the
view that the agreement was not ambiguous in this respect and was illusory as a
matter of law. One justice took the view that as a matter of law the agreement
to arbitrate was not illusory.

14
distinguished Halliburton by noting that the contract there

“stated that any such amendment [to the arbitration program]

would apply prospectively only” and that “[t]he termination

provision in this case does not contain similar limitations.”

Id. at 230. The Court also stated 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.” Id. at 230 n.2 (citing numerous

cases).9

Other Texas authorities are in accord. In Re C&H News Co.,

133 S.W.3d 642 (Tex. App. – Corpus Christi 2003, no writ),

involved an employee’s one page agreement stating he and the

9
Among the authorities so cited are the following:

“Dumais v. Am. Golf Corp., 299 F.3d 1216, 1219 (10th Cir. 2002) (“We
join other circuits in holding that an arbitration agreement
allowing one party the unfettered right to alter the arbitration
agreement’s existence or its scope is illusory.”); Floss v. Ryan’s
Family Steak Houses, Inc., 211 F.3d 306, 315-16 (6th Cir. 2000)
(arbitration agreement was ‘fatally indefinite’ and illusory because
employer ‘reserved the right to alter applicable rules and
procedures without any obligation to notify, much less receive
consent from,’ other parties) . . . Snow v. BE & K Constr. Co., 126
F. Supp. 2d 5, 14-15 (D.Maine 2001) (citations omitted) (arbitration
agreement illusory because employer ‘reserve[d] the right to modify
or discontinue [the arbitration] program at any time’; ‘Defendant,
who crafted the language of the booklet, was trying to “have its
cake and eat it too.” Defendant wished to bind its employees to the
terms of the booklet, while carving out an escape route that would
enable the company to avoid the terms of the booklet if it later
realized the booklet’s terms no longer served its interests.’);
Trumbull v. Century Mktg. Corp., 12 F. Supp. 2d 683, 686 (N.D. Ohio
1998) (no binding arbitration agreement because ‘the plaintiff would
be bound by all the terms of the handbook while defendant could
simply revoke any term (including the arbitration clause) whenever
it desired. Without mutuality of obligation, a contract cannot be
enforced.’) . . . .” Id.

15
employer have “agreed to submit all claims or disputes between us

to binding arbitration as provided in the Handbook.” The

handbook, a separate document, provided that the employer

reserved the unilateral right to amend it. The court concluded

that arbitration agreement was “illusory” and “unenforceable”

because the handbook allowed the employer to amend its terms and

thus “to unilaterally amend the types of claims subject to

arbitration.” Id. at 647.

Amway relies on In Re Advance PCS Health L.P., 172 S.W.3d

603 (Tex. 2003). There several pharmacies had entered into a

Provider Agreement with Advance PCS health, a pharmacy benefits

management company, to process and adjudicate claims for

reimbursement between member pharmacies and customers’ health

care plans. The Provider Agreement contained an arbitration

clause which PCS invoked when several of the pharmacies sued it

asserting that PCS had for many years underpaid them what they

were owed under the Provider Agreement. The pharmacies asserted

that the arbitration agreement was illusory because the Provider

Agreement allowed PCS to amend or cancel it at will. The court

rejected that contention. It first observed that “[a]s the

pharmacies’ suit is based on that Agreement, they cannot enforce

all of it except the arbitration clause” and that “[h]aving used

PCS’s services and network to obtain reimbursements for 10 years,

the pharmacies cannot claim this agreement to arbitrate was

16
without consideration.” Id. Here, by contrast, Amway seeks to

enforce an arbitration agreement with respect to a dispute which

arose, and concerns matters which occurred, before the

arbitration provision was first introduced in September 1997; and

the Distributors are not suing on the basis of any

distributorship agreement which contains an arbitration clause.

Further, in Advance PCS the court relied on the fact that the

Provider Agreement not only stated that any amendments thereto

made by PCS would not be effective prior to thirty days after

notice thereof but also that with respect to termination “any

obligations that arise prior to the termination of the Agreement

shall survive such termination.” Id. No such provision is

present here. Moreover, nothing in Advance PCS suggests any

intention to repudiate or narrow the then so recent Davidson

opinion.10

10
Nothing in Re Dillard Dept. Stores, Inc., 198 S.W.3d 778 (Tex. 2006),
is to the contrary. There, the plaintiff Garcia, while an employee of the
defendant, was furnished in August 2000 a form agreeing to be bound by the
employer’s arbitration program also then furnished him. In 2002 Garcia was fired
and then brought suit claiming the firing was illegal. The court held Garcia was
bound by the arbitration agreement, rejecting her contention that it was illusory
because the employer retained a right to unilaterally modify it. The court noted
that no provision in the arbitration agreement purported to give the employer
that right. Id. at 782. It further observed that although the employer in 2002
“draft[ed] a new arbitration policy” nothing in the record supported the view
that the new policy – as opposed to that in effect since August 2000 – was
applicable or sought to be applied to Garcia’s claim. Here, by contrast, there
is an express reservation by Amway of the right to change the rules, and the
claims in question arose prior to any arbitration provision or notice thereof.

17
 Here, the Distributors’ suit, filed January 8, 1998, was not

to any extent based on the 1998 distributorship agreement, which

for the first time contained an arbitration clause, but rather

asserted claims arising (and based on facts occurring) prior to

September, when Amway unilaterally amended its rules of conduct

to provide for arbitration. None of the distributorship

agreements prior to that for 1998 contained anything about

arbitration. But all the distributorship agreements, both those

for 1997 and prior years and those for 1998 and subsequent years,

contained the distributor’s agreement to comply with Amway’s

Rules of Conduct as amended by Amway from time to time. That

right of unilateral amendment extends to providing for (and, by

necessary implication, to modifying or repealing) arbitration.

This is made clear from the affidavit of David Bamborough,

Amway’s Manager of Business Administration, filed in the district

court by Amway in support of its motion to stay pending

arbitration. This affidavit states:

“In September 1997, Amway Corporation, in consultation
with the Amway Distributors Association “(ADA)”,
amended the company’s Rules of Conduct for its
distributors to include an arbitration provision, by
which Amway and its distributors agree to submit to
arbitration ‘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,’ if good faith efforts within the organization
failed to resolve the dispute. . . . This language

18
 became effective for existing distributors January 1,
1998.” (emphasis added).11

There is nothing in any of the relevant documents which

precludes amendment to the arbitration program – made under

Amway’s unilateral authority to amend its Rules of Conduct – from

eliminating the entire arbitration program or its applicability

to certain claims or disputes so that once notice of such an

amendment was published mandatory arbitration would no longer be

available even as to disputes which had arisen and of which Amway

had notice prior to the publication. There are no Halliburton

type savings clauses which preclude application of such

11
The affidavit goes on to state:

“When they first became distributors, each Plaintiff named in the
present lawsuit signed an Amway Distributor Application, agreeing
among other things to comply with Amway’s Sales and Marketing Plan,
Code of Ethics, and Rules of Conduct ‘as they are amended and
published from time to time in official Amway literature.’ . . . in
Order to continue as Amway distributors, each distributor is
required to renew his or her distributorships at the first of every
year, pay a renewal fee and renew the commitment to abide by the
Amway Sales and Marketing Plan, Code of Ethics, and Rules of
Conduct.
. . . All Plaintiffs suing Amway have opted for ‘automatic
renewal,’ by which their distributorships are continued
automatically each yeaar (without the need to sign an annual renewal
form each year) unless they notify Amway in writing to discontinue
the automatic renewal process . . . .
Seventeen Plaintiffs in this litigation at some point in the
past signed Automatic Renewal Forms, which specifically reiterated
their commitment ‘to observe and abide by the . . . 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.’ . . .
The remaining Plaintiffs sent in Automatic Renewal Forms, . .
. which had the effect of renewing their pledges to conduct their
distributorships in accordance with Amway’s Rules of Conduct, Sales
and Marketing Plan, and Code of Ethics.”

19
amendments to disputes which arose (or of which Amway had notice)

before the amendment.

We accordingly hold that the arbitration agreement was

illusory and unenforceable under Davidson as applied to the

claims asserted in the instant suit.12 We thus reverse the

district court’s October 15, 1998 order staying the case pending

arbitration and its September 15, 2005 final judgment denying the

Distributors’ motion to vacate the award, granting Amway’s motion

to confirm the award, and entering judgment based upon the award;

and we remand the case for further proceedings not inconsistent

herewith.

REVERSED and REMANDED

12
It hence being unnecessary to do so, we do not address any other of the
Distributors’ issues on appeal.

20