Fifth Circuit Finds Arbitration Clause Trumped By Dispute Resolution Mechanisms in Parties’ Prior Agreements

The Fifth Circuit’s opinion in Sharpe v. AmeriPlan Corp. begins with a wise observation on the state of the law of arbitration.  “As the use of arbitration clauses grows, so too do the legal arguments surrounding their validity and enforceability.”  The plaintiffs in the case raised all of the traditional objections to arbitration clause, labeling it: not  supported by consideration, illusory, unconscionable, not broad enough to cover the dispute in the case, and waived.  The Fifth Circuit rejected all of these arguments and nonetheless found for plaintiffs on the ground that the arbitration agreement could not be harmonized with dispute resolutions found in earlier agreements among the parties still in effect.

The plaintiffs were “independent business owners” (IBOs) who earned their income from AmeriPlan by selling health plans and recruiting additional IBOs.  Upon recruiting the requisite number of IBOs, they earned the statue of Sales Directors, who can earn an income stream (down lines) from the commissions of the IBOs they had recruited.  All named plaintiffs were Sales Directors when AmeriPlan terminated them without cause in 2011.  In doing so, it also deprived plaintiffs of their down lines.  Plaintiffs sued, alleging that they had been promised lifetime vested residual income.

The parties relationships were governed by three agreements.  Three of the four named plaintiffs entered into Sales Director agreements with AmeriPlan that provided for mediation followed by litigation in the case of a dispute.  After a jury returned a $5.5 million verdict against AmeriPlan in favor of a Sales Director, AmeriPlan added an arbitration clause to its Policy Manual.  Plainitffs accepted this revision either by clicking an “I agree” icon on AmeriPlan’s website or because AmeriPlan sent them notice of the change in the form of a revised Policy Manual that contained the new arbitration clause on page 22.

Plaintiffs sued in California.  AmeriPlan had the case tranferred to federal court and then changed the venue to Texas.  It then moved to compel arbitration.  The District Court granted the motion while deleting two provisions that it found unconscionable.  Plaintiffs appealed to the Fifth Circuit.  The Fifth Circuit reversed as to three of the four plaintiffs.

The Court noted that an amendment to an agreement would ordinarily effectively supersede a prior, related agreement.  Here, however, the Plaintiffs’ Sales Director agreements provided they could only be amended through a written agreement executed by all parties.  As that did not occur, here, the three plaintiffs whose agreements reserved a right to litigation retained that right.  The survival of the original agreements was especially clear in that AmeriPlan had relied on language in those agreements in order to transfer the case from California to Texas.  AmeriPlan conceded as much but claimed that the agreements could be harmonized.  But the Fifth Circuit found that the detailed two-tiered plan in three of the plaintiffs’ Sales Director agreements clearly required mediation followed by litigation in Texas.  That structure could not be reconciled with the revised Policy Manual’s arbitration clause.  The Court was especially secure in its reading of three of the plaintiffs’ Sales Director agreements because the fourth plaintiff had entered into an earlier version fo the agreement which lacked such details.  The Court held that the addition of the detailed language manifested AmeriPlan’s clear commitment to its two-tiered approach of mediation followed by litigation of disputes governed by the Sales Director agreements.

The Fifth Circuit reversed and remanded with respect to three of the plaintiffs.  The fourth will have to arbitrate her claims.  The Court acknoweldged that the result might seem arbitrary, but it was in fact simply a product of the Court’s effort to give effect to the differing terms of the parties’ agreements.