Netco, Inc. v. Dunn, No. SC 86855.

CourtUnited States State Supreme Court of Missouri
Writing for the CourtStephen N. Limbaugh, Jr.
Citation194 S.W.3d 353
Docket NumberNo. SC 86855.
Decision Date02 May 2006
PartiesNETCO, INC., et al., Respondents, v. Jimmy V. DUNN, et al., Appellants.

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194 S.W.3d 353
NETCO, INC., et al., Respondents,
v.
Jimmy V. DUNN, et al., Appellants.
No. SC 86855.
Supreme Court of Missouri, En Banc.
May 2, 2006.
As Modified on Denial of Rehearing June 30, 2006.

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COPYRIGHT MATERIAL OMITTED

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COPYRIGHT MATERIAL OMITTED

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Gaspare J. Bono, Ray M. Aragon, Washington, DC, Larry K. Bratvold, Robert B. Hankins, Springfield, MO, for appellants.

R. Dan Boulware, R. Todd Ehlert, Sharon Kennedy, St. Joseph, MO, for respondents.

STEPHEN N. LIMBAUGH, JR., Judge.


Appellants seek reversal of the judgment of the circuit court overruling their motions to compel arbitration and stay litigation. After opinion by the Court of Appeals, Southern District, this Court granted transfer. Mo. Const. art. V, § 10. The judgment of the trial court is affirmed in part and reversed in part, and the case is remanded.1

I. Facts and Procedural History

This case concerns the business relationships between respondents and appellants arising from their participation in Pro Net Global Association, Inc. (Pro Net), a network of businesses engaged in the sale and distribution of Amway-related business support materials (BSMs). Respondents are Netco, Inc. (Netco) and Schmitz & Associates, Inc. (Schmitz Associates), both owned by Charles and Kim Schmitz, though the Schmitzes, personally, are not parties. The eleven appellants are: Jimmy V. Dunn (Dunn); Jimmy V. Dunn & Associates, Inc. (Dunn Associates); Harold Gooch, Jr. (Gooch); Gooch Support Systems, Inc. (Gooch Systems); Gooch Enterprises, Inc. (Gooch Enterprises); William Childers (Childers); TNT, Inc. (TNT); Jim Evans (Evans); J.L. Evans & Associates, Inc. (Evans Associates); Pro Net; and Global Support Services, Inc. (Global). As best as can be discerned, appellants are all Amway Corporation (Amway) distributors, Amway related businesses, or their respective principals.

Amway is not a party in this case, but the questions raised require a brief explanation of Amway's business practices as they relate to the parties that are involved. Amway is a multi-level marketing corporation consisting of a network of independent distributors structured in a pyramid-like hierarchy. As part of Amway's standard

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distributorship agreement, there are "Rules of Conduct" that include a mandatory arbitration clause requiring Amway distributors to submit any dispute to arbitration through JAMS/Endispute, Inc., an independent arbitration entity.

As a method of improving sales, Amway produces and distributes motivational products called "tools" and "functions" aimed at training and motivating distributors. "Tools" are audiotapes, videotapes and published materials, and "functions" are seminars, rallies and conventions. Together, the tools and functions are commonly referred to as BSMs. A number of other businesses affiliated with Amway distributors sell their own Amway-related BSMs, though Amway distributors themselves are prohibited from doing so under the Rules of Conduct. As used in the Amway corporate culture, an Amway "organization" is a term of art for the conglomeration of an Amway distributorship, its owner(s), and their independent tools and functions businesses.

Pro Net was formed in 1998 to "facilitate the sale of Amway-related BSMs to its members," apparently as a kind of clearinghouse. Those wishing to join Pro Net were required to submit applications mandating compliance with Pro Net's "Terms and Conditions." This not only required members to abide by Amway's Rules of Conduct, but also required members to submit any dispute to arbitration under a separate arbitration clause in which arbitrations were to be administered by the American Arbitration Association.

The Schmitzes formed plaintiff Netco in 1990 to operate their Amway distributorship and to operate a tools business for the support of the distributorship. In 1998, Charlie Schmitz submitted a Pro Net membership application on behalf of Netco, but Schmitz altered the terms of the application relating to Netco's ability to distribute BSMs from supplier or manufacturers. The result, according to Schmitz, was that Pro Net rejected the application, and for that reason Netco never became a member of Pro Net and cannot be bound by the Pro Net arbitration clause. According to appellants, on the other hand, the application was accepted, or at least Netco is estopped from claiming that it was not accepted and, as a result, Netco is bound by the Pro Net arbitration clause.

The Schmitzes also own Schmitz Associates, which is engaged solely in the functions business. Neither Schmitz, nor any officer or agent of Schmitz Associates signed a Pro Net membership application on behalf of Schmitz Associates.

In 2000, Netco and Schmitz Associates filed lawsuits alleging, inter alia, that appellants were involved in a conspiracy to misappropriate respondents' businesses. Appellants — some, but not all, of whom are members of Pro Net — filed a motion to compel arbitration under Pro Net's Terms and Conditions and Amway's Rules of Conduct. After considerable discovery, the parties submitted a voluminous amount of evidence to the motion court consisting of more than 4,000 pages of documents, affidavits, deposition transcripts and other materials, and after an evidentiary hearing and extended argument on the matter, the court overruled the motion. This appeal followed, as authorized under the Missouri Uniform Arbitration Act (MUAA), § 435.440, RSMo 2000.

II. Analysis

When faced with a motion to compel arbitration, the motion court must determine whether a valid arbitration agreement exists and, if so, whether the specific dispute falls within the scope of the arbitration agreement. Dunn Indus. Group, Inc. v. City of Sugar Creek, 112 S.W.3d 421, 427-28 (Mo. banc 2003). In

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making these determinations, the court should apply the usual rules of state contract law and canons of contract interpretation. Id. at 428. Appellate review is de novo. Id.

A. Schmitz Associates

Appellants seek to compel Schmitz Associates to arbitrate its claims under both the Amway Rules of Conduct and the Pro Net Terms and Conditions, despite the fact that Schmitz Associates was not a signatory to the Amway distributorship agreement nor the Pro Net membership agreement. Though appellants offer several theories in support — third-party beneficiary, estoppel, agency and an alter ego-like argument — none is persuasive.

To be bound as a third-party beneficiary, the terms of the contract must clearly express an intent to benefit that party or an identifiable class of which the party is a member. Peters v. Employers Mut. Cas. Co., 853 S.W.2d 300, 301 (Mo. banc 1993). In cases where the contract lacks an express declaration of that intent, there is a strong presumption that the third party is not a beneficiary and that the parties contracted to benefit only themselves. State ex rel. William Ranni Assocs., Inc. v. Hartenbach, 742 S.W.2d 134, 141 (Mo. banc 1987). Furthermore, a mere incidental benefit to the third party is insufficient to bind that party. Id. at 140.

Here, neither the Amway distributorship agreement nor the Pro Net agreement express any intent to benefit Schmitz Associates, and any benefits actually obtained from the agreement were merely incidental. Although appellants cite Schmitz Associates' acknowledgment that "it relied on and profited from Netco's Amway relationship, a relationship predicated on the Amway Rules of Conduct and Netco's status as an Amway distributor," the mere fact that Schmitz Associates had a mutually beneficial relationship with Netco does not make Schmitz Associates a third-party beneficiary. Schmitz Associates' reliance and profits from that relationship are the kind of insufficient incidental benefits to which the rule refers. Thus, because Schmitz Associates in not a third-party beneficiary to the agreements, it cannot be bound to the arbitration clauses in those agreements.

The equitable estoppel argument, under both the Amway agreement and the Pro Net agreement, is that Schmitz Associates has asserted rights under those agreements in bringing this lawsuit, so it cannot now disavow the obligations that the agreements impose and, in particular, the obligation to arbitrate the claims. However, a close reading of the petition shows that Schmitz Associates is not seeking to enforce any provision in the Amway or Pro Net agreements. Appellants are being sued, instead, under conspiracy theories, not because they breached any contractual term.

Appellants next claim that Schmitz Associates is bound to arbitrate under the Amway distributorship agreement (though not under the Pro Net agreement) as an agent of Charlie and Kim Schmitz. In support, appellants cite Byrd v. Sprint Communications Co., L.P., 931 S.W.2d 810, 815 (Mo.App.1996), for the proposition that "non-signatory agents [are] bound by arbitration agreements signed by their principals." In this Court's view, however, Byrd was wrongly decided. Under hornbook rules of agency, it is the principal that can be bound by the signature of the agent, not the agent that can be bound by the signature of the principal. This is so because the principal can control the conduct of the agent, which is the essence of the agency relationship. State ex rel. Bunting v. Koehr, 865 S.W.2d

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351, 353 (Mo. banc 1993). It is not the other way around, that the agent can control the principal. Otherwise the principal would be the agent for the agent. Thus, without the benefit of Byrd, the agency theory is to no avail, and the rule controls that "[a] party cannot be required to...

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27 practice notes
  • In re Heartland Payment Sys., Inc., MDL No. 09–2046.
    • United States
    • United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
    • December 1, 2011
    ...court concluded that the contract “expresse[d] no intent whatsoever to benefit” the asserted third parties. Id. In Netco, Inc. v. Dunn, 194 S.W.3d 353 (Mo.2006), decided on the same day, the state supreme court again limited its consideration to the contract language. See id. at 358. In tha......
  • State ex rel. Hewitt v. Kerr, No. SC 93846
    • United States
    • Missouri Supreme Court
    • April 28, 2015
    ...signatory by a non-signatory on grounds that “arbitration is ultimately a matter of agreement between the parties.” Netco, Inc. v. Dunn, 194 S.W.3d 353, 361–62 (Mo. banc 2006). But Netco observed, as have the federal courts, that “a non-signatory may, in some instances, compel a signatory t......
  • Dodson v. Ferrara, No. SC 95151
    • United States
    • United States State Supreme Court of Missouri
    • April 19, 2016
    ...right to trial by jury attaches only to actions at law for which damages may be awarded, not to suits in equity.”); Netco, Inc. v. Dunn, 194 S.W.3d 353, 362 (Mo. banc 2006) (same). This distinction was not applied, however, when the Court approached the decidedly different question of wheth......
  • Jimenez v. Cintas Corp., No. ED 101015 & ED 101241
    • United States
    • Court of Appeal of Missouri (US)
    • January 13, 2015
    ...the arbitrator, not the courts, with the authority to determine whether the agreement was unconscionable); see also Netco, Inc. v. Dunn, 194 S.W.3d 353, 360 (Mo. banc 2006) (recognizing the scope of arbitration agreements is to be liberally construed under the Federal Arbitration Act).2 For......
  • Request a trial to view additional results
27 cases
  • In re Heartland Payment Sys., Inc., MDL No. 09–2046.
    • United States
    • United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
    • December 1, 2011
    ...court concluded that the contract “expresse[d] no intent whatsoever to benefit” the asserted third parties. Id. In Netco, Inc. v. Dunn, 194 S.W.3d 353 (Mo.2006), decided on the same day, the state supreme court again limited its consideration to the contract language. See id. at 358. In tha......
  • State ex rel. Hewitt v. Kerr, No. SC 93846
    • United States
    • Missouri Supreme Court
    • April 28, 2015
    ...signatory by a non-signatory on grounds that “arbitration is ultimately a matter of agreement between the parties.” Netco, Inc. v. Dunn, 194 S.W.3d 353, 361–62 (Mo. banc 2006). But Netco observed, as have the federal courts, that “a non-signatory may, in some instances, compel a signatory t......
  • Dodson v. Ferrara, No. SC 95151
    • United States
    • United States State Supreme Court of Missouri
    • April 19, 2016
    ...right to trial by jury attaches only to actions at law for which damages may be awarded, not to suits in equity.”); Netco, Inc. v. Dunn, 194 S.W.3d 353, 362 (Mo. banc 2006) (same). This distinction was not applied, however, when the Court approached the decidedly different question of wheth......
  • Jimenez v. Cintas Corp., No. ED 101015 & ED 101241
    • United States
    • Court of Appeal of Missouri (US)
    • January 13, 2015
    ...the arbitrator, not the courts, with the authority to determine whether the agreement was unconscionable); see also Netco, Inc. v. Dunn, 194 S.W.3d 353, 360 (Mo. banc 2006) (recognizing the scope of arbitration agreements is to be liberally construed under the Federal Arbitration Act).2 For......
  • Request a trial to view additional results

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