Fifth Circuit Reverses in Part N.D. of Texas’ Order Compelling Arbitration in Health Plan Sales Dispute

The United States Court of Appeals for the Fifth Circuit has reversed portions of a district court’s order compelling arbitration in a contract dispute. In Sharpe v. AmeriPlan Corp., No. 13-10922, (5th Cir., October 16, 2014), four independent business owners (“IBOs”) sold health plans and recruited other IBOs through a network for AmeriPlan Corporation. Under the company’s sales plan, the IBOs became sales directors who were entitled to collect residual income for life based on the sales generated by their IBO recruits. Prior to joining the network, each IBO signed three agreements. One of the agreements incorporated the company manual and stated the manual could be amended by AmeriPlan at any time. Neither the original manual nor the sales director agreements contained an arbitration clause.

Although each agreement provided that it would be construed under the laws of Texas, several different court venues were selected by AmeriPlan. Plaintiffs Sharpe and Downward signed a sales director agreement that required non-binding mediation except for certain claims and stated any disputes would be decided by the Northern District of Texas, Dallas Division. Plaintiff Moen’s agreement was the same except that it stated any disputes must be decided in Collin County, Texas. Finally, Plaintiff Guarisco signed an earlier sales director agreement which provided only that all disputes would be heard in Dallas County, Texas.

In November 2010, AmeriPlan revised its manual to include an arbitration clause following an unfavorable jury verdict against the company. The arbitration provision stated any disputes between AmeriPlan and a sales director or IBO must be resolved through binding arbitration in Plano, Texas. AmeriPlan also made each sales director’s continued use of company software contingent on his or her agreement with the manual revision. Because neither Downward nor Guarisco logged on to the system or agreed to comply with the new policies set forth in the manual, AmeriPlan mailed them each a copy of the changes.

In February 2011, AmeriPlan terminated the contract of about 800 individuals without cause. The company issued a final commission check to each person terminated and ceased all residual income payments. In May 2012, the four sales director plaintiffs filed a class-action lawsuit against AmeriPlan in a Los Angeles, California Superior Court.  In their lawsuit, the plaintiffs claimed the company committed breach of contract and engaged in misrepresentation. After AmeriPlan used the venue provisions in the sales agreements to successfully transfer the case to the Northern District of Texas, the plaintiffs filed a motion to certify the class. In response, AmeriPlan moved to compel the dispute to arbitration. The district court granted the company’s motion but severed two arbitral provisions it deemed to be unconscionable from the agreement. The plaintiffs then appealed the trial court’s order compelling arbitration to the nation’s Fifth Circuit.

On appeal, the Fifth Circuit first stated the standard of review was de novo. Next, the court said it must consider whether a valid agreement to arbitrate existed and, if so, determine whether the parties’ dispute fell within the scope of that agreement. After that, the appeals court addressed the plaintiffs’ argument that the arbitral agreement could not “be harmonized with the preexisting dispute resolution provisions contained in the Sales Director Agreements.”

According to the court, “whether an arbitration provision conflicts with other dispute resolution provisions is properly analyzed under the validity step of the arbitration analysis.” Since the parties agreed that Texas law controlled the dispute, the Fifth Circuit said the FAA was not at issue. Next, the court addressed AmeriPlan’s claim that the sales director agreements could “be harmonized with the later-added mandatory arbitration provision.” The court said although a later amendment to a contract would normally supersede a previous conflicting provision, that was not the case in this instance. Instead, the court stated the entire writing must be examined in order to resolve the harmonization issue.

The Fifth Circuit noted the “significant differences” between the plaintiffs’ sales director agreements before stating it would address each separately. After finding that Guarisco’s agreement was merely a forum selection clause that could be harmonized with the dispute resolution provision, the court said:

The dispute resolution provisions in the Sharpe/Moen/Downard Sales Director Agreements therefore are not simply forum selection clauses like the one we addressed in Personal Security & Safety Systems Inc. v. Motorola Inc. , 297 F.3d 388 (5th Cir.2002), and they do not merely impose a prearbitration mediation requirement like the one at issue in Klein. Instead, the Sales Director Agreements provide a two-step dispute resolution process in which any claims, controversies or disputes which are not finally resolved through mediation [are] submit to the non-exclusive jurisdiction of particular state and federal courts. Those expansive dispute resolution provisions cannot be harmonized with the similarly expansive arbitration provision without rendering the dispute resolution provisions meaningless. Accordingly, we hold that because the Sales Director Agreements signed by Sharpe, Moen, and Downard expressly allow litigation of these claims, these three Plaintiffs are not compelled to arbitrate their claims. See Klein, 710 F.3d at 237 (An agreement that allows for disputes to be resolved through either an arbitral or a judicial forum can hardly be considered a ‘valid agreement to arbitrate’ because the parties would not have agreed to submit any dispute to arbitration-they would have simply agreed that they had the option available.).

The Court of Appeals next addressed Guarisco’s other challenges to the lower court’s order compelling the case to arbitration. After dismissing each of the woman’s arguments, the Fifth Circuit held that she must arbitrate her claims. The court added:

It may seem arbitrary that Guarisco must arbitrate her claims while her otherwise similarly situated coplaintiffs have the option of pursuing litigation. But that result flows from the basic contract law principle that different contractual language should be read differently.

Because only one sales director agreement could be harmonized with AmeriPlan’s dispute resolution agreement, the Fifth Circuit Court of Appeals affirmed the district court’s order compelling arbitration as to her and reversed its order for the remaining three.

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