Nitro Distributing, Inc. v. Dunn

• Decision Date: 02 May 2006
• Docket Number: No. SC 86854.,SC 86854.
• Citation: 194 S.W.3d 339
• Parties: NITRO DISTRIBUTING, INC., et al., Respondents, v. Jimmy V. DUNN, et al., Appellants.
• Court: Missouri Supreme Court

Page 339

194 S.W.3d 339

NITRO DISTRIBUTING, INC., et al., Respondents, v.Jimmy V. DUNN, et al., Appellants.

No. SC 86854.

Supreme Court of Missouri, En Banc.

May 2, 2006.

As Modified on Denial of Rehearing June 30, 2006.

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Gaspare J. Bono, Daniel G. Jarcho, Ray M. Aragon, Washington, D.C., Larry K. Bratvold, Michael K. Cully, Springfield, for appellants.

R. Dan Boulware, R. Todd Ehlert, Sharon Kennedy, St. Joseph, John C. Holstein, William W. Francis, Brian D. Malkmus, Springfield, 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, sec. 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 Nitro Distributing, Inc.(Nitro) and West Palm Convention Services, Inc.(West Palm), both owned by Ken Stewart, though Stewart personally is not a party.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); Bill S. Childers(Childers); TNT, Inc.(TNT); Thomas D. Foley(Foley); T & C Foley, Inc.(T & C); Steven S. Woods(Woods); G.F.I. International, Inc.(G.F.I.); Parker E. Grabill(Grabill); Grabill Enterprises, Inc.(Grabill Enterprises); Pro Net; Don Brindley(Brindley); Global Support Services, Inc.(Global); Pro Net Global I, Inc.(Pro Net I); and Robert A. Blanchard(Blanchard).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 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.

Ken Stewart formed Nitro in 1988 as a tools business, and West Palm in 1992 as a functions business, for the support of his Amway distributorship, Stewart & Associates International, Inc.(Stewart Associates).In 1998, Stewart submitted a Pro Net membership application on behalf of Nitro, but neither Stewart, nor any officer or agent of West Palm signed a membership application on behalf of West Palm.

Prior to Pro Net's incorporation, BSM distributors known as the "Yager Group" supplied Stewart and other Pro Net founders with tools, and the Pro Net plan, in part, was to fold the Yager Group into Pro Net.During the period of transition from the Yager Group to Pro Net, the founders of Pro Net, including Stewart, entered into a "Transition to Pro Net" agreement.In part, the agreement required parties to submit disputes arising from the transition from the Yager Group to Pro Net to binding arbitration through JAMS/Endispute.

In 2001, Nitro and West Palm (but not Stewart 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, the Transition to Pro Net Agreement, 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 3,700 pages of documents, affidavits, deposition transcripts and other materials.After a hearing and extended argument on the matter, the court overruled the motion.This appeal followed, as authorized under the Missouri Uniform Arbitration Act (MUAA), sec. 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 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. Amway Agreement

1.Nitro and West Palm as Non-signatories

Appellants first argue that Nitro and West Palm are bound by the arbitration clause contained in the Amway Rules of Conduct.However, neither Nitro nor West Palm are signatories to any agreement with Amway.Moreover, according to Amway's own documents, Nitro and West Palm are BSM businesses that operate in an industry entirely independent of Amway.Nonetheless, appellants seek to bind Nitro and West Palm as third-party beneficiaries of Ken Stewart or Stewart Associates' distributorship agreement with Amway.

To be bound as a third-party beneficiary, the terms of the contract must clearly express 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, the Amway distributorship agreement expresses no intent whatsoever to benefit Nitro and West Palm, and any benefit obtained from the agreement, if at all, was incidental.Accordingly, Nitro and West Palm are not third-party beneficiaries.

Appellants also attempt to bind Nitro and West Palm under the theory that they acted as agents of Ken Stewart or Stewart Associates.In support, appellants cite Byrd v. Sprint Commc'ns 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 our view, though, 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 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 arbitrate a dispute that it has not agreed to arbitrate."Dunn,112 S.W.3d at 436.To the extent it is to the contrary, Byrd is overruled.

Finally, appellants claim that Nitro and West Palm are bound to arbitrate under the Amway Rules of Conduct on the basis that they agreed to be bound by Pro Net's Terms and Conditions.The rationale is that Pro Net's Terms and Conditions contain a general requirement that Pro Net members abide by the Amway Rules of Conduct, which include the Amway arbitration clause.This rationale, of course, presupposes that Nitro and West Palm are members of Pro Net, an issue that will be addressed, infra.Assuming, though, that Nitro and West are members of Pro Net and bound by Pro Net's Terms and Conditions, the Amway arbitration clause still does not apply.A separate Pro Net arbitration clause is explicitly set forth in the Terms and Conditions that is significantly different from the Amway clause and that is specific to Pro Net membership only.Under well-established contract principles, where an apparent inconsistency exists between a clause that deals with an issue specifically and one that deals with the same issue generally, the specific clause should be held to nullify the general clause.State ex rel. Smith v....