Motion to Compel Arbitration Enforced if Clause Harmonized With Prior Agreement's Dispute Resolution Clause: Fifth Circuit | Practical Law

Motion to Compel Arbitration Enforced if Clause Harmonized With Prior Agreement's Dispute Resolution Clause: Fifth Circuit | Practical Law

In Sharpe, et. al v. AmeriPlan Corporation, the US Court of Appeals for the Fifth Circuit held that a mandatory arbitration clause can be enforced when it can be harmonized with dispute resolution clauses in prior agreements. The Fifth Circuit further held that a motion to compel compliance with a mandatory arbitration clause could not be enforced when the clause was incompatible with those agreements containing express dispute resolution instructions.

Motion to Compel Arbitration Enforced if Clause Harmonized With Prior Agreement's Dispute Resolution Clause: Fifth Circuit

by Practical Law Labor & Employment
Published on 21 Oct 2014 • USA (National/Federal)
In Sharpe, et. al v. AmeriPlan Corporation, the US Court of Appeals for the Fifth Circuit held that a mandatory arbitration clause can be enforced when it can be harmonized with dispute resolution clauses in prior agreements. The Fifth Circuit further held that a motion to compel compliance with a mandatory arbitration clause could not be enforced when the clause was incompatible with those agreements containing express dispute resolution instructions.
On October 16, 2014, in Sharpe, et. al v. AmeriPlan Corporation, the US Court of Appeals for the Fifth Circuit held that a mandatory arbitration clause can be enforced when it can be harmonized with dispute resolution clauses in prior agreements. The Fifth Circuit further held that a motion to compel compliance with a mandatory arbitration clause could not be enforced when the clause was incompatible with those agreements containing express dispute resolution instructions. (769 F.3d 909 (5th Cir. 2014).)

Background

Plaintiffs Sharpe, Moen, Downard, and Guarisco worked as independent business owners (IBOs) for AmeriPlan, selling health plans and recruiting additional IBOs. IBOs can reach the rank of Sales Director and generate "lifetime residual income" through commissions earned by their recruitment of IBOs. The entire agreement between the parties was represented by three contracts:
  • The Broker Application and Agreement.
  • The Sales Director Agreement.
  • The Policies and Procedures Manual.
The Broker and Sales Director Agreements (which incorporate the Manual) included an amendment provision which stated that they "may not be changed except by written amendment duly executed by all parties, except as otherwise provided in this Agreement." The Broker Agreement stated that the Manual could be modified by AmeriPlan and that the Broker agreed to comply with those amendments or modifications.
The Sales Director Agreements were signed by the plaintiffs at different times and contained varying language. Sharpe, Moen and Downard's contracts stated that:
  • Disputes arising out of the agreement would be submitted to mediation prior to filing a claim in court.
  • For disputes not resolved through mediation, the sales director would submit to the jurisdiction of the state courts of Dallas County, and the Federal District Court for Northern District of Texas, Dallas Division.
  • Venue for any legal proceeding would be Dallas County (Moen's stated Collin County instead).
Guarisco's agreement, signed several years earlier, contained a provision stating, "This agreement is to be governed by and construed in accordance with the laws of the State of Texas. Any action brought on matters relating to this Agreement shall be maintained in Dallas, Dallas County, Texas."
In 2010, after a $5.5 million verdict in favor of a Sales Director due to AmeriPlan's failure to pay the lifetime residual income, AmeriPlan issued a revised Policy Manual, containing an arbitration clause. The clause stated that any claims arising out of the Policies and Procedures Manual, "shall be resolved by binding arbitration" and "shall be governed by the laws of the State of Texas." The Manual had a clause providing that unenforceable provisions would not invalidate the rest of the agreement.
On February 14, 2011, AmeriPlan terminated the contracts of 800 Sales Directors, including those of the four plaintiffs. AmeriPlan stopped paying the lifetime residual income.
The plaintiffs filed a suit in California state court, alleging that AmeriPlan had:
  • Misrepresented its promise to pay lifetime vested residual income.
  • Breached their contracts by stopping the payments.
The plaintiffs also challenged the arbitration clause, claiming that the clause:
  • Could not be harmonized with other dispute resolution procedures found in earlier agreements still in effect.
  • Was not supported by consideration.
  • Was illusory.
  • Was unconscionable.
  • Did not cover the dispute in this case.
  • Was waived by Ameriplan because it was not raised early enough in the lawsuit.
AmeriPlan:
  • Removed the case to federal court.
  • Transferred the case to the Northern District of Texas.
  • Moved to compel arbitration and stay or dismiss the plaintiffs' claims pursuant to the Federal Arbitration Act (FAA).
The magistrate judge recommended that:
  • The claims be dismissed in favor of arbitration.
  • Two clauses were substantively unconscionable and would not be governed by the arbitration.
The district court:
  • Adopted the magistrate judge's recommendation.
  • Ordered the case dismissed in favor of arbitration.
  • Ordered the two unconscionable provisions severed from the arbitration provisions.
The plaintiffs appealed to the Fifth Circuit.

Outcome

The Fifth Circuit reversed the decision by the district court to deny Sharpe, Moen and Downard's claims and compel arbitration in their matters. In addition, the Fifth Circuit affirmed the district court's order dismissing Guarisco's claims and compelling arbitration on her claims (aside from two severed unconscionable provisions of the arbitration clause). In reaching these conclusions, the Fifth Circuit found that:
  • Ordinarily, a contract amendment supersedes prior conflicting provisions, but that was not the case here because:
    • the Broker and Sales Director Agreements containing the original dispute resolution provisions could not be changed without a written agreement executed by all parties, except when otherwise provided in the agreement. If the amendment superseded the prior conflicting provisions, it would have undone the Broker and Sales agreements and nullified the requirement of the amendment being agreed to in writing; and
    • AmeriPlan relied on the venue clause in the dispute resolution provisions of the Sales Director agreements (which was not in the arbitration provision) to transfer the case from California to the Northern District of Texas, so it could not argue that the dispute resolution provisions of the Sales Director agreements were no longer in effect. AmeriPlan instead argued that those provisions could be harmonized with the arbitration provision.
  • The arbitration clause harmonized with the dispute resolution provisions of Guarisco's Sales Director Agreement because her agreement:
    • contained only a choice of law clause requiring that any lawsuit be maintained in Dallas. This is not incompatible with an arbitration requirement; and
    • lawsuits often precede or follow an arbitration.
  • In addition, the arbitration amendment:
    • did not lack consideration, since bilateral promises to arbitrate constitute valid consideration; and
    • was not illusory, because the amendment included a savings clause that tracks one approved by the Supreme Court of Texas in In re Halliburton Co., 80 S.W.3d 566, 569-70 (Tex. 2002).
  • Although Guarisco argued that she filed her lawsuit after her termination, and the arbitration clause only applied to active IBOs, the FAA's presumption favoring arbitration covered this dispute.
  • The arbitration clause was not unconscionable. The two unconscionable portions were removed, and the entire clause was not invalidated by individual unenforceable provisions.
  • AmeriPlan did not waive its right to compel arbitration by indicating an intent to litigate (rather than arbitrate) by seeking a transfer to another federal district. AmeriPlan provided notice of its intent to arbitrate in its first answer and the delay between the answer and the motion to compel was not unreasonable.
  • The arbitration clause did not harmonize with the dispute resolution provisions of Sharpe, Moen and Downard's Sales Director Agreements because their agreements establish a two tiered approach to claim resolution:
    • one provision stated that parties agreed to submit claims to mediation prior to filing such claims, controversies or disputes in court; and
    • the second provision stated that claims would be adjudicated in court if mediation fails.
  • AmeriPlan's argument that the Sales Director Agreements' dispute resolution provisions applied only to a limited scope not governed by arbitration failed because the claim categories in the arbitration provision are similar to those in the Sales Director Agreements:
    • the Sales Director Agreements stated that "any claim, controversy or dispute" would be submitted to mediation and then to state or federal court; and
    • the arbitration clause stated that "any issue, dispute, claim or controversy" would be resolved by arbitration.
  • The mandatory resolution process in the dispute resolution provisions (requiring mediation and court) could not be harmonized with the arbitration provisions without the dispute resolution provisions becoming meaningless.
  • In contrast with Guarisco's agreement which just stated that actions should be maintained in Dallas, the language in Sharpe, Moen, and Downward's agreements demonstrated intent for litigation of claims.
  • Since Sharpe, Moen, and Downward's sales director agreements expressly allowed litigation of these claims, they were not compelled to arbitrate their claims.

Practical Implications

In this case, the Fifth Circuit made it clear that despite the fact that four different employees had the same job and signed similar agreements, the contract language varied enough that one plaintiff was compelled to follow the mandatory arbitration clause and three were not. This serves as a reminder to employers that contracts are read and enforced by their precise wording and that application of an expansive dispute resolution clause could lead to different results in a potential litigation if they are not consistently drafted throughout different agreements.