On October 26, 2009, United States District Court Judge Bruce Jenkins ruled that Amway was enjoined from requiring a group of former distributors into arbitration concerning disputes between the two parties. The decision stems from a class action lawsuit filed by 27 former Amway salespeople (independent business owners) requesting declaratory and injunctive relief – arguing that Amway was in effect using the arbitration as a tool for harassment.

The federal court’s procedural ruling is the latest development in a series of legal actions between Amway and a group of former distributors. Amway has sought to keep the former distributors from using Amway sales and training materials in their new business ventures.

As part of their distributor agreement, potential Amway independent business owners sign a registration form containing Amway’s Rules of Conduct (ROC) that requires arbitration as a means for of resolving disputes.

George and Jill Guzzardo, together with twenty-six other named plaintiffs (the “Guzzardo Plaintiffs”), filed a class-action complaint for declaratory and injunctive relief against the Amway defendants (“Amway”) under the Class Action Fairness Act (“CAFA”), 28 U.S.C. §1332(d), which grants federal district courts subject-matter jurisdiction over class actions with at least five million dollars in controversy. They seek a class-wide determination that Amway’s arbitration agreement, non-competition, non-solicitation, and trade secret rules are unenforceable, and injunctive relief precluding Amway from proceeding in arbitration upon claims against the Guzzardo Plaintiffs and the plaintiff class.

The parties have briefed, offered evidence and argued a series of motions pertaining to this lawsuit, consolidated into the above-captioned proceeding upon this court’s own motion. Following an extensive Pretrial Conference, Amway’s attempted interlocutory appeal, and a seven-day evidentiary hearing, the motions were submitted to this court for decision.

Inapplicability of Federal Arbitration Act to Post-Termination Disputes Involving Former IBOs

The decision of this case largely centered on the Federal Arbitration Act (FAA), 9 U.S.C. § 3. Under the FAA, it was necessary for Amway to show the following three elements were met in order to be granted a motion to stay the plaintiffs’ action (declaratory and injunctive relief) in favor of arbitration:

(1) There existed an agreement in writing between the Guzzardo plaintiffs and Amway calling for arbitration;

(2) The claims asserted in this action by the Guzzardo plaintiffs were referable to arbitration under the terms of that agreement; and

(3) Amway was not in default in proceeding with the arbitration of claims asserted in this action.

Judge Jenkins found that the FAA was not applicable to the plaintiffs, due to the fact that under Amway’s (ROC) for its independent business owners, “[t]here is no provision which even ostensibly commits a former IBO to arbitrate” (p. 11). The judge also noted that Amway recently amended its ROC (which do not apply to the plaintiffs) to explicitly include former IBOs in the arbitration process (p. 12).

Judge Jenkins went on to state “[t]his court having found that in each instance, the parties’ written agreements to arbitrate do not encompass post-termination disputes involving former IBOs who are no longer operating an Amway “Independent Business,” this court likewise finds that the Guzzardo Plaintiffs have demonstrated a likelihood of success on the merits, at least on that specific ground” (p. 17).