W. D. of Texas Holds Dell Arbitration Agreement Illusory and Unenforceable

The Western District of Texas has dismissed a case for lack of personal jurisdiction after holding an arbitration clause in a reseller agreement was illusory and unenforceable.

In Dell Mktg., L.P. v. Incompass IT, Inc., No. A-10-CA-590-SS, (W.D. Tex., February 9, 2011), Incompass IT, Inc., a reseller of Dell Marketing, L.P. products, purchased items from Dell totaling more than $75,000 and allegedly failed to pay for the products. Dell sued Incompass in a Travis County, Texas court to collect on the debt. Incompass subsequently removed the case to the Western District of Texas and filed a motion to dismiss for lack of personal jurisdiction and improper venue. In order to determine the matter of personal jurisdiction, the Western District requested more information and allowed both parties to file supplemental memoranda.

To establish personal jurisdiction over Incompass, Dell relied in part on an arbitration clause contained in the parties’ contract. According to U.S. District Judge Sam Sparks,

Here, Dell has provided evidence of an arbitration agreement between Incompass and Dell providing that arbitration would take place in Austin, Texas and be governed by Texas law. . . . This agreement was incorporated by reference through a statement on the front of each invoice that read:

“PLEASE REVIEW DELL’S TERMS & CONDITIONS OF SALE AND POLICIES AT www.dell.com/us/policy OR UPON REQUEST, WHICH GOVERN THIS TRANSACTION.”

With regard to personal jurisdiction, Judge Sparks stated,

The final contact, and the one most significant to the Court’s personal jurisdiction analysis, is the arbitration clause in the Reseller Agreement between Dell and Incompass. As noted above, personal jurisdiction is a defendant’s privilege and may be waived. This waiver can be express or implied. Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 703 (1982). An agreement to arbitrate in a particular forum is one means by which a litigant can impliedly accept personal jurisdiction in that forum. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 n.14 (1985); Ins. Corp. of Ireland, 456 U.S. at 703; PaineWebber, 260 F.3d at 461.

The Court therefore concludes if Incompass agreed to arbitrate this dispute in Austin, Texas, and if the arbitration clause was valid, then Incompass impliedly consented to personal jurisdiction by this Court.

According to the court,

Under Texas law, the arbitration clause at issue in this case is illusory and therefore not legally binding. In Morrison v. Amway Corp., 517 F.3d 248 (5th Cir. 2008), the Fifth Circuit found an arbitration clause was illusory where there was “no express exemption of the arbitration provisions from Amway’s ability to unilaterally modify all rules, and the only express limitation on that unilateral right [was] published notice.” Morrison, 517 F.3d at 254.

Here, those who contracted with Dell had to agree to terms and conditions that stated, in part:

“These terms and conditions are subject to change at any time in Dell’s sole discretion without prior written notice.” See FAC, Ex. A at 43, 54, 66. Unlike in Morrison, in this case Dell did not even have to provide published notice of its unilateral modification of the arbitration clause. Thus, the argument for finding Dell’s arbitration clause illusory is even stronger in this case than in Morrison.

Further, with respect to the arbitration clause in Morrison, the Fifth Circuit stated: “While it is inferable that an amendment thus unilaterally made by Amway to the arbitration provision would not become effective until published, there is nothing to suggest that once published the amendment would be inapplicable to disputes arising, or arising out of events occurring, before such publication.” Morrison, 517 F.3d at 254. Here, this Court was likewise unable to find language in the Reseller Agreement precluding amendment with retroactive effect. The possibility of such amendment at Dell’s sole discretion strengthens the Court’s conclusion the arbitration clause is illusory.

After holding the arbitration clause in the parties’ contract was illusory and unenforceable pursuant to Texas law, the Western District of Texas dismissed the case without prejudice.

Disputing discussed Morrison v. Amway when it was decided here.

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