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Court Remands Suit Against Stream, Reverses Earlier Dismissal
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October
6, 2010
Breaking News – Updated – 10:25 a.m. est with Stream statement
The U.S. Court of Appeals for the Fifth Circuit has reversed a district court’s dismissal of a lawsuit against Stream Gas & Electric, Ltd. and affiliates, finding that the lower court’s conclusion that the complainants had to first seek relief through arbitration, under the terms of their contracts, was in error, because the Appeals court found that, “the arbitration clause at issue is illusory.”
Stream Energy provided the following statement: "We are disappointed with the Fifth Circuit's decision and continue to be highly confident in the legal soundness of Stream Energy and Ignite's business model. We plan to aggressively defend our good name and our operations, which provide a livelihood for thousands of our associates."
In November 2009. a U.S. District Court Judge dismissed the class action lawsuit brought against Stream by two former Ignite sales agents, finding that the agents had to settle any dispute through arbitration as stated in their contracts. The agents had alleged Stream’s network marketing model was a pyramid scheme (Matters, 7/2/09).
The crux of the complainants’ appeal is that the arbitration clause in the agreement is illusory and thus unenforceable because Ignite could amend the clause “in its sole discretion” with the modification immediately effective upon notice.
The Appeals court cited several cases which, “make clear that even if an arbitration clause may be unilaterally modified, if the modification or elimination of the clause does not apply retroactively so as to allow the avoidance of arbitration, the promise to arbitrate is not illusory. Conversely, the cases do not precisely state when an arbitration agreement is illusory. However, they suggest that the lack of a notice window before any elimination of the clause becomes effective and the ability to amend the agreement retroactively so as to avoid any promise to arbitrate are factors indicating that the agreement may be illusory.”
Interpreting conflicting language in the Ignite contract, the Appeals court found that the Ignite arbitration clause may be eliminated or modified “upon notice,” and that the agreement contains no clause preventing a modification from applying to disputes arising before the modification. “Ignite essentially could renege on its promise to arbitrate by merely posting an amendment to the agreement on its website,” the Appeals court said.
“In sum, Ignite’s promise to arbitrate under the terms of this agreement was hollow. Accordingly, we hold that the arbitration provision is illusory and unenforceable,” the Appeals court said.
The Appeals court thus reversed the district court’s order dismissing the case for improper venue and remanded the case for further proceedings.
The case is No. 09-
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