In re Morrison, Case No. 05-45926 (Bankr. S.D. Tex. 6/26/2009)
| Decision Date | 26 June 2009 |
| Docket Number | Case No. 05-45926.,Adversary No. 08-03260. |
| Parties | IN RE: F. JOSEPH MORRISON; aka MORRISON UNLIMITED; aka RELIEF PHYSICIANS OF TEXAS, et al, Chapter 7, Debtor(s). F. JOSEPH MORRISON, et al, Plaintiff(s), v. AMWAY CORPORATION, ET AL, et al, Defendant(s). |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Plaintiffs are former distributors for Amway Corporation ("Amway"). Distributors sold Amway's line of household products and recruited additional distributors. Distributors derived profits from their individual sales and from the sales of the recruited distributors. Recruited distributors are called "down-liners" and the recruiting distributors are called "up-liners."
In January of 1998, Plaintiffs filed a state court lawsuit alleging that Amway, related entities, and up-liners were improperly calculating distributions ("the Amway Defendants").1 Plaintiffs' claims ranged from defamation to RICO. The Amway Defendants removed the lawsuit to the Federal District Court and sought to stay the lawsuit to enforce the arbitration clause in their contracts with Plaintiffs.2
All distributors had to execute a Distributorship Agreement Application. Under the Distributorship Agreement, distributors agreed to abide by Amway's Regulations and Rules of Conduct for Distributors, and any amendments to those Rules and Regulations. Distributors were required to renew the agreement annually by signing either an automatic renewal agreement or an annual "Intent to Continue" form.
In September of 1997, Amway announced it was instituting a new arbitration program. Amway required distributors to sign an "Acknowledgment Form" or "Intent to Continue Form" containing a new arbitration provision. The arbitration provision required mandatory arbitration of "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)." However, the Acknowledgment Form also stated that the arbitration provision "automatically became part of your agreement with Amway." Most Plaintiffs did not sign the Acknowledgment Form.
In the Federal District Court, Plaintiffs challenged the enforceability of the arbitration provisions. Plaintiffs alleged that only one-third of Plaintiffs had executed the Acknowledgment Form and that even if Plaintiffs had executed an agreement that incorporated the arbitration provision, the provision was unconscionable and therefore unenforceable. The District Court rejected Plaintiffs' arguments and issued a memorandum opinion and order staying the lawsuit pending arbitration. Morrison v. Amway Corp., 49 F. Supp. 2d 529 (S.D. Tex. 1998). The District Court found that Plaintiffs had agreed to the arbitration provision through execution of the Distributorship Agreements. Id. at 533. The District Court noted that the Distributor Agreements required distributors to abide by Rules of Conduct and other rules, requirements, and regulations, as amended from time to time. Id. The District Court reasoned that the arbitration provision constituted a rule, requirement, or regulation under the Distributor Agreement. Id.
The District Court also held that the arbitration provision was not unconscionable. Id. at 533-34. The District Court found that Plaintiffs failed to demonstrate that Amway coerced the arbitration provision upon Plaintiffs through excessive bargaining power or greater sophistication. Id. at 534. Nor did Plaintiffs demonstrate that the substance of the arbitration provision was without any legitimate commercial purpose such that no reasonable person would agree to such a provision. Id.
The parties pursued arbitration from 2001 to 2004. After three weeks of evidentiary hearings and post-hearing briefing, the arbitrator found for Plaintiffs on the Amway Defendants' counterclaims and for the Amway Defendants on Plaintiffs' claims. Accordingly, the arbitrator found that both Plaintiffs and the Amway Defendants were prevailing parties entitled to legal fees. After an evidentiary hearing on legal fees, the arbitrator awarded legal fees of approximately $1,000,000.00 to Plaintiffs and legal fees of approximately $7,000,000.00 to the Amway Defendants. The arbitrator awarded the Amway Defendants a judgment in the amount of the difference, approximately $6,000,000.00. The judgment was awarded against all Plaintiffs, with joint and several liability.
Plaintiffs filed a motion to vacate the $6,000,000.00 judgment, alleging that the arbitrator had an impermissible conflict because she was trained by the Amway Defendants. On September 15, 2005, the District Court issued an order denying the motion. Morrison v. Amway, Civil Action No. H-98-0352 (S.D. Tex. Sept. 15, 2005). The District Court reasoned that Plaintiffs knew or should have known that the arbitrator was selected and trained by the Amway Defendants. Id. Because Plaintiffs knew or should have known of a potential conflict before the arbitrator awarded the judgment, the District Court held that Plaintiffs waived their objections. Id.
Numerous Plaintiffs filed individual bankruptcy petitions in response to the judgment. Amway or its successor in interest, Alticor, filed proofs of claim in the individual bankruptcy cases for the full amount of the judgment.
Plaintiffs also appealed the District Court orders staying litigation and denying the motion to vacate. On February 6, 2008, the Fifth Circuit reversed the District Court's orders. Morrison v. Amway Corp., 517 F.3d 248 (5th Cir. 2008). The Fifth Circuit held that the arbitration provision was unenforceable because Amway could unilaterally amend the provision and make the amendment retroactive. Id. at 254-57. The Fifth Circuit remanded the lawsuit back to the District Court. Id. at 258.
On July 21, 2008, Plaintiffs filed this adversary proceeding. Plaintiffs allege that the Amway Defendants:
• Conspired to insulate themselves from liability to Plaintiffs by establishing an arbitration scheme that ensured Plaintiffs' claims would be denied.
• Selected and indoctrinated the arbitrator to ensure a favorable ruling.
• Failed to disclose the nature of the selection or training process or the fact that Plaintiffs could be held liable for the Amway Defendants' arbitration costs.
Plaintiffs allege that if they had known these undisclosed facts, that they would have dismissed their claims rather than pursuing them in arbitration. After the arbitrator awarded the judgment, Plaintiffs allege that the Amway Defendants' attempts to enforce the judgment caused Plaintiffs' bankruptcy filings and associated financial losses. Plaintiffs allege that the Amway Defendants offset the now-vacated judgment by refusing to pay Plaintiffs' commissions and thereafter refused to renew Plaintiffs' Distributor Agreements.
Based on the Amway Defendants' alleged scheme to defraud Plaintiffs of their claims and the Amway Defendants' subsequent attempts to enforce the vacated arbitration judgment, Plaintiffs assert the following causes of action: fraud, misrepresentation, negligent misrepresentation, breach of contract, breach of fiduciary duty, breach of duty of good faith and fair dealing, conspiracy, joint enterprise, and conversion. Plaintiffs seek actual damages, legal fees and costs, and exemplary damages.
In response to Plaintiffs' complaint, the Amway Defendants filed motions to withdraw the reference and motions to dismiss. On December 8, 2008, the Court held a hearing on the motions. Various supplemental briefs and an amended complaint were filed after the hearing. The Court has issued a Report and Recommendation recommending denial of the Amway Defendants' motions to withdraw the reference. This Memorandum Opinion considers only the Amway Defendants' motions to dismiss. For the reasons set forth below, the Court denies the Amway Defendants' motions to dismiss.
The Amway Defendants seek dismissal for multiple reasons, but focus on two arguments. First, the Amway Defendants contend that the Noerr-Pennington doctrine immunizes them from liability from Plaintiffs' complaint. The Noerr-Pennington doctrine and the First Amendment right to petition the government generally protect a party from liability allegedly stemming from a lawsuit. Second, the Amway Defendants contend that the Court lacks subject matter jurisdiction over Plaintiffs' claims because the claims will have no effect on Joseph Morrison's bankruptcy estate.
The Court rejects the Amway Defendants' arguments. Plaintiffs' complaint essentially contends that the Amway Defendants defrauded them of various contract and tort claims and obtained a fraudulent judgment against them by creating a fraudulent arbitration scheme. For the purposes of this opinion, this Court must assume the accuracy of Plaintiffs' allegations. Accordingly, the balance of this opinion assumes — without finding — that the arbitration scheme was fraudulently designed.
The damages at issue arise from the creation and implementation of the alleged fraudulent arbitration scheme, not from a petition to the arbitrator or the District Court. Noerr-Pennington immunizes petitions to a public adjudicative body; it protects neither fraudulent conduct that ultimately leads to the filing of a petition nor does it protect private adjudications carried out before a privately selected arbitrator rather than carried out before a governmental entity. Secondly, even if Noerr-Pennington applied, the "sham" exception to Noerr-Pennington also applies in this case. The "sham" exception removes Noerr-Pennington protection when a petition was...
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