Arbitration: Missouri's Supreme Court Tackles Agency Principles in ADR (Web)

In the companion cases Nitro Distributing Inc. v. Dunn, No. SC 86854, 2006 WL 1147761 (Mo. May 2, 2006), and Netco Inc. v. Dunn, No. SC 86855, 2006 WL 1147768 (Mo. May 2, 2006) (both are available at the opinions link at www.courts.mo.gov/sup/index.nsf), the Missouri Supreme Court sorted out the arbitration relationships of a variety of parties–distributorships, marketing entities, and others--organized around Amway products.

The results backed arbitration to resolve the conflicts in some instances. The opinion focuses on the contract terms governing the multiple parties and relationships, and analyzes agency law’s relationship to arbitration.

The opinions unanimously overruled the Missouri Court of Appeals' decision in Byrd v. Sprint Communications Co., L.P., 931 S.W.2d 810, 815 (Mo. Ct. App. 1996). In Byrd, the lower court had held that agents who do not sign arbitration agreements can be bound to the agreements by the signatures of their principals.

Citing basic agency principles, the Missouri Supreme Court held that Byrd was wrongly decided; while a principal can be bound by an agent’s signature because the principal controls the agent's conduct, the reverse is not true because the agent cannot control the principal's conduct. Netco, 2006 WL 1147768 at *3, Nitro, 2006 WL 1147761 at *3.

In a matter of first impression, the Court also considered whether a jury trial is required when factual disputes arise in state courts regarding the making of an arbitration agreement. Netco at *6, Nitro at *8. Citing the Missouri Uniform Arbitration Act, the Court held that a jury trial was not required. Netco at *7, Nitro at *8.

The disputes in Netco and Nitro arose from the various parties’ participation in Pro Net Global Association Inc. Pro Net was a network of businesses engaged in the sale and distribution of Amway-related motivational products, such as audiotapes and videotapes–referred to by the Court as "tools"--and seminars and conventions, which are referred to as "functions." Together, the Court noted the tools and functions are commonly referred to in the Amway world as "business support materials," or "BSMs." Netco at *1; Nitro at *1.

Amway’s standard distributorship agreement requires Amway distributors to submit disputes to arbitration through JAMS, an Irvine, Calif.-based national ADR provider. The parties joining Pro Net were required to submit applications mandating compliance with Pro Net's terms and conditions. Pro Net's terms and conditions required members to follow Amway's conduct rules, and to submit any dispute to arbitration through the American Arbitration Association. Id.

In Netco, the plaintiffs, Charles and Kim Schmitz, formed Netco to operate their Amway distributorship, and to operate a "tools" business to support their Amway products distribution business. Netco at *2.

The Schmitzes also formed Schmitz & Associates, which operated a functions business. Charles Schmitz submitted a Pro Net membership application on Netco’s behalf, but altered the terms of the application dealing with Netco's ability to distribute BSMs from suppliers or manufacturers. Schmitz claimed that his alteration of the application terms resulted in Pro Net rejecting the application, so Netco never became a member of Pro Net, and therefore couldn’t be bound by the Pro Net arbitration clause. Schmitz did not submit a membership application on behalf of Schmitz Associates.

In Nitro, plaintiff Ken Stewart, formed Nitro as a "tools" business, and West Palm Convention Services Inc.as a "functions" business, for support of his Amway distributorship Stewart & Associates. Nitro at *2.

Stewart submitted a Pro Net membership application on behalf of Nitro but not on behalf of West Palm. Id. Before Pro Net was incorporated, the Yager Group, another group of BSM distributors, supplied Stewart with tools. During the period of transition in which the Yager Group was supposed to be folded into Pro Net, Stewart signed a "Transition to Pro Net Agreement", which required him, among other things, to submit disputes arising from the transition to binding arbitration through JAMS.

In 2000 and 2001, Netco, Schmitz Associates, Nitro, and West Palm filed suit against the defendants, a large group of Amway distributors and Amway businesses, alleging that the defendants had conspired to misappropriate the plaintiffs' BSMs businesses. Netco at *2; Nitro at *2.

The defendants, some of whom were members of Pro Net, filed a motion to compel arbitration under Pro Net's terms and conditions and Amway's rules of conduct. Id. A Missouri circuit court overruled the motion, and the defendants appealed in accordance with the Missouri Uniform Arbitration Act.

In Netco, the defendants sought to compel Schmitz Associates to arbitrate its claims under the Amway rules of conduct and Pro Net terms and conditions, even though Schmitz Associates had not signed either the Amway distributorship agreement or the Pro Net membership agreement. Netco at *2.

Among their arguments, defendants claimed that Schmitz Associates was bound to arbitrate under the Amway agreement as an agent of Charles and Kim Schmitz. Id. at *3.

The Nitro defendants made an identical argument, claiming that Nitro and West Palm were bound by the Amway arbitration clause because they were agents of Ken Stewart or Stewart Associates, even though neither party had signed an agreement with Amway. Nitro at *3.

In support of their agency arguments, the defendants cited Byrd for the proposition that "non-signatory agents are bound by arbitration agreements signed by their principals." Netco at *3; Nitro at *3. The Court rejected the defendants' agency arguments and overruled Byrd, as noted above.

The Netco Court found that Netco was bound by the Amway conduct rules because it had signed an Amway distributorship agreement. Netco at *4. The Court held, however, that the Amway arbitration clause could not cover Netco's suit, because Netco's claims were not against Amway, nor were they brought pursuant to Netco's Amway distributorship. Id.

In Nitro, the Court reached the same conclusion, holding that while the arbitration agreements should be liberally construed, in this case the Amway arbitration clause was clear on its face “and cannot be stretched” to cover Nitro's suit. Nitro at *4.

In Netco, the defendants argued that Netco was bound to arbitrate under the Pro Net arbitration clause because the Schmitzes had signed and submitted a Pro Net membership application. Netco at *4. Netco argued that it never became a member of Pro Net because Pro Net had rejected Netco's application after Schmitz altered the application terms.

The Court held that Netco was estopped from denying Pro Net membership because it had received the membership benefits by purchasing BSMs through Pro Net's affiliate. Id. at *5.

Accordingly, Netco was bound to arbitrate under the Pro Net arbitration clause. The Court noted, however, that not all of the defendants were Pro Net members and thus would not have standing individually to compel arbitration. The Court held that Pro Net itself could compel arbitration.

In Nitro, the defendants argued that Nitro and West Palm were bound to arbitrate under the “Transition to Pro Net Agreement,” because Ken Stewart had signed the agreement on behalf of his "organization." Nitro at *4. In support, the defendants cited to a paragraph setting forth the arbitration forum and the disputes that could be arbitrated. The Court rejected the defendants' argument, finding that Stewart had not indicated his intent to bind Nitro and West Palm to the agreement, and that the cited paragraph did not define the agreement parties, but rather only the scope of the arbitrable claims. Id.

The Nitro defendants also argued that West Palm should be estopped from avoiding arbitration because it had received benefits from Pro Net membership. Id. at *5. The Court found that although the Missouri courts had not expressly addressed the issue whether, under estoppel principles, an agreement’s indirect beneficiary could be bound by an arbitration clause, courts in other circuits had reasoned persuasively that indirect benefits are insufficient to establish estoppel. Id, citing the Second U.S. Circuit Court of Appeals.

The Court held that because West Palm did not accept direct benefits from Pro Net, it was not estopped to deny Pro Net membership and avoid the arbitration clause. Id.

But the Court disagreed with the lower court's ruling that Nitro was not bound to arbitrate under the Pro Net agreement. Id. at *6. It noted that Ken Stewart had signed the Pro Net application under the member name "Ken Stewart/Nitro Distributing," and that he included Nitro's federal tax identification number on the application.

Nitro argued that the membership agreement should be rescinded because Stewart had made a unilateral mistake that BSM businesses such as Nitro were eligible for Pro Net memberships, when in fact only Amway distributorships were eligible for memberships. Id.

The Court found that Stewart's mistake had inured to Nitro’s benefit, because while Nitro was technically ineligible for membership, Pro Net had accepted Nitro's application and had afforded Nitro membership benefits. Id. As in Netco, the Nitro Court noted that not all of the defendants were Pro Net members and would not have standing individually to compel arbitration. Id. at *7. The Court held that Pro Net itself could compel arbitration. Id.

Both Netco and Nitro argued that if the Missouri Supreme Court were to hold that the circuit court had erred in ruling that they were not bound to arbitrate, then the Court should not order arbitration but rather should remand for a jury trial in accordance with the Federal Arbitration Act. Netco at *6, Nitro at *8.

The Court found that the FAA unambiguously provides for a jury trial when factual disputes arise in federal courts regarding the making of arbitration agreement. Id. The Court noted that neither the U.S. Supreme Court nor the Missouri Supreme Court had determined whether parties are entitled to a jury trial when factual disputes arise in state courts regarding the making of arbitration agreement.

The Court held that it would look to the Missouri Uniform Arbitration Act, rather than the FAA, to determine whether Netco and Nitro were entitled to a jury trial. Id. The Court found that the MUAA’s plain language didn’t require a jury trial on the issue of the existence of an arbitration agreement. Of note, the Court adopted the legal definition of "summary proceedings" in Black's Law Dictionary to aid it in interpreting the MUAA procedures. Id.

The Court also held that enforcing the MUAA’s plain language would not violate Netco's or Nitro's constitutional rights to trial by jury in civil actions. The Court found that because motions to compel arbitration are equitable remedies that are designed to compel specific performance of a contract term, a jury trial is not required. Netco at *6, Nitro at *8.

--By Kristien Kahn, Dewey Ballantine LLP