Don’t Overreach by Retaining the Unilateral Right to Modify An Arbitration Agreement

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Who wouldn’t want to be able to dictate the terms of a contract rather than having to negotiate them with someone whose interests are not completely aligned with your own? If you ever find yourself in such a position, however, keep in mind that if a contract is too one-sided, it can be ruled illusory and unenforceable. Indeed, that is exactly what happened to the defendant in McNamara v. S.I. Logistics, Inc. when it tried to enforce its contractual right to arbitration.

Green Smoke, Inc. (which later changed its name to S.I. Logistics) was in the business of selling e-cigarettes, and it used third-party “Affiliates” to market its products. Tim McNamara became a Green Smoke Affiliate in late 2009 or early 2010, and the following year the company implemented a new (and mandatory) Affiliate Agreement. Any Affiliate who refused to sign on to the 2011 Agreement became ineligible to receive Green Smoke commissions going forward.

In 2014, McNamara was terminated from Green Smoke’s Affiliate program, and he subsequently sued Green Smoke for breach of contract and a variety of other claims. Green Smoke responded by moving to dismiss the complaint and compel arbitration. In support of its position, Green Smoke claimed that McNamara had acknowledged that he had read, understood and agreed to the 2011 Agreement, and one of its provisions mandated that disputes arising out of it had to be arbitrated.

Even though the 2011 Agreement plainly stated that disputes arising out of it “shall be resolved by arbitration,” McNamara opposed Green Smoke’s motion because, among other things, the Agreement purported to grant Green Smoke the unilateral right to modify its terms without any prior notice to McNamara. In deciding this matter, the District Court Judge highlighted the following language in the “Affiliate Program Summary” and Section 25 of the Agreement:

The Company reserves the right to change, alter, modify, and/or amend this Agreement, from time to time, at its sole discretion without serving any notice to You. You will be bound by all such amended terms and conditions. You can review the most current version of this Agreement at any time at our Web site. All amended versions of this Agreement will go into effect not earlier than thirty (30) days from the date any such amended version is displayed on Our Web site.

The Company reserves the right to change, alter, modify and/or amend this Agreement at its discretion and at any time upon thirty (30) days notice.[] When the Company amends this Agreement, the Company shall make reasonable efforts to provide You with general, not specific, notice of such changes via email, newsletter, or posting a conspicuous announcement on the Company’s Web site of such changes or amendments.

In light of this language, the District Court Judge ultimately ruled that:

Because Green Smoke had the power to require plaintiff to arbitrate the covered dispute, while simultaneously reserving the right to modify the agreement, the Court finds that the agreement was illusory from the outset and no agreement to arbitrate was formed between the parties. … Defendants are therefore not entitled to arbitration.

Any in-house counsel dealing with business people who think they can have their cake and eat it too by dictating over-bearing terms of a contract are well-advised to keep in mind another old maxim: “Pigs get fat, hogs get slaughtered.” In other words, if you impose contractual terms that are patently unreasonable, you may end up with a document that is unenforceable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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