U.S. Appeals Court Affirms Dismissal of Suit Against Stream Energy

The Eleventh Circuit U.S. Court of Appeals has affirmed a lower court's decision to dismiss a lawsuit against Stream Energy and affiliated companies (collectively, Stream), finding that the contract which the plaintiff, Perry Betts, had with Stream's marketing arm Ignite was not unenforceable merely because of an illusory promise of arbitration.

The finding by the Eleventh Circuit contrasts with the recent finding of the Fifth Circuit regarding a similar lawsuit against Stream, which addressed the same arbitration question. The Fifth Circuit concluded that because the arbitration provision in a similar contract was illusory, it was unenforceable. The Fifth Circuit thus ruled that the plaintiff was not required to submit to arbitration, and overturned a lower court's dismissal for improper venue, and remanded the suit for further proceedings at the district court (see Matters, 10/6/10).

In the case before the Eleventh Circuit, Betts, a former Ignite marketing agent, filed suit alleging that Stream's business model amounted to an illegal pyramid scheme. A lower court dismissed the suit because Betts' contract requires arbitration for any disputes.

Betts appealed on the basis that the duty of arbitration was illusory since Stream could amend the contract to avoid arbitration.

The Eleventh Circuit agreed that nothing in Betts's contract would have prevented Stream from avoiding its promise to arbitrate by modifying the agreement just before filing suit, thus making the arbitration clause illusory.

However, the Eleventh Circuit concluded, "an illusory promise does not necessarily make a contract unenforceable."

Citing AdvancePCS Health L.P., 172 S.W.3d 603, 607 (Tex. 2005), the Eleventh Circuit noted that, despite an illusory promise, "when an arbitration clause is part of an underlying contract, the rest of the parties' agreement provides the consideration." Additionally, in Lyon Fin. Servs., Inc., 257 S.W.3d 228, 233 (Tex. 2008), a court found that, "arbitration clauses generally do not require mutuality of obligation so long as adequate consideration supports the underlying contract."

"Betts has not argued that the whole contract here lacked consideration, and we accept his tacit concession. He promised to pay Ignite for training and an opportunity to earn income by marketing Stream Energy's services; this 'bargained for exchange of promises' was sufficient to create a binding contract," the Court said.

"Under Texas law, as long as an arbitration agreement is 'part of a larger contractual relationship,' even provisions that create a unilateral 'right to opt out of arbitration' cannot undermine 'the consideration of the underlying contract or the promises to arbitrate.' Palm Harbor Homes, 195 S.W.3d at 677," the Eleventh Circuit said.

"Because the underlying contract containing Betts's promise to arbitrate was supported by adequate consideration, the district court rightly enforced his promise," the Eleventh Circuit held.

Stream has appealed the Fifth Circuit court's opinion reversing the earlier dismissal under the same reasoning, particularly AdvancePCS, cited by the Eleventh Circuit in its decision affirming dismissal issued yesterday.

The Eleventh Circuit case is Betts v. SGE Management, LLC, No. 10-13126.