Friday, April 23, 2010

Ninth Circuit Upholds District Court’s Finding That Quixtar Arbitration Agreement is Unconscionable: Pokorny v. Quixtar, Inc.

On April 20, 2010, the Ninth Circuit issued an opinion in Pokorny v. Quixtar, Inc., 2010 U.S. App. LEXIS 8106 (9th Cir. Cal. Apr. 20, 2010), affirming a district court finding that a multi-tiered arbitration agreement maintained by Amway successor, Quixtar Inc., was unconscionable under California law.

The plaintiffs’ action alleges that the Quixtar business model constitutes an unlawful, two-tiered pyramid scheme, and pursues class wide claims under RICO and the UCL on behalf of lower tiered “independent business owners” (“IBOs”). Quixtar sought to dismiss the action based on an arbitration agreement which would have required plaintiffs to engage in two step “conciliation” process (headed by top-tiered sales people and Quixtar itself) before being permitted to move forward with binding arbitration. The district court denied Quixtar’s motion on the grounds that both the non-binding conciliation and the binding arbitration portions of the arbitration agreement were procedurally and substantively unconscionable under California law. The Ninth Circuit affirmed, finding that substantive and procedural unconscionability were both “present to a high degree.” See Slip Opinion, at 5988.

With regard to procedural unconscionability, the Court found the agreement oppressive, reasoning that Quixtar’s practice of incorporating by reference the terms of the arbitration process in a second, undisclosed document, failed to apprise plaintiffs of the conciliation/arbitration procedures, let alone enable them to negotiate the terms. See id., at 5988-90.

Similarly, the Court upheld the district court’s finding that the agreement was “exceedingly” substantively unconscionable due to (1) the agreement applying only unilaterally to IBOs, and not Quixar itself, (2) provisions foreclosing IBOs from challenging Quixtar rules of conduct, while reserving Quixtar the right to alter such rules within the confines of the proceedings itself, (3) a shortening of the limitations period to 2 years, (4) a gag order which “forever barred [only IBOs] from disclosing to anyone not involved in the resolution of that claim the basis for it, the evidence supporting it, or the outcome of the arbitration” and (5)  terms which incentivized the use of arbitration "neutrals" which had undergone training by Quixtar without adequate disclosures of bias to IBo's. See id., at 5991-03.

Admittedly, this opinion is somewhat routine. However, having been repeatedly cornered and subjected to the “plan” in the early 90’s, there is something about it I find uniquely satisfying.

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