Deidre Seim v. HomeAway, Incorporated

Case: 17-50102 Document: 00514473983 Page: 1 Date Filed: 05/15/2018

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

May 15, 2018

Nos. 17-50088 & 17-50102

Lyle W. Cayce

Clerk

IVAN ARNOLD, an individual, on behalf of himself and all others similarly

situated,

Plaintiff - Appellee

v.

HOMEAWAY, INCORPORATED,

Defendant - Appellant

and

DEIRDRE SEIM, Individually, and on behalf of all others similarly situated,

Plaintiff - Appellant

v.

HOMEAWAY, INCORPORATED, A Delaware Corporation,

Defendant - Appellee

Appeals from the United States District Court

for the Western District of Texas

Before KING, DENNIS, and COSTA, Circuit Judges.

JAMES L. DENNIS, Circuit Judge:

Plaintiffs Ivan Arnold and Deirdre Seim filed separate lawsuits against

Case: 17-50102 Document: 00514473983 Page: 2 Date Filed: 05/15/2018

Nos. 17-50088 & 17-50102

Defendant HomeAway, Inc. 1 In each case, HomeAway sought to compel

arbitration. Concluding that both Seim and Arnold are bound to arbitrate

threshold arbitrability questions, we REVERSE the judgment of the district

court in Arnold’s case and AFFIRM the judgment in Seim’s. We REMAND

both cases with instructions to compel arbitration.

I

HomeAway owns and operates several websites that facilitate short-

term “vacation” rentals. HomeAway’s sites connect homeowners and property

managers with travelers who book their properties online. Arnold and Seim

are both HomeAway subscribers who list properties on HomeAway’s websites.

Arnold filed a putative class-action complaint alleging, chiefly, that

HomeAway’s February 2016 imposition of service fees for travelers was

contrary to its prior representations and resulted in a variety of state-law

violations. HomeAway argues that its April 2016 Terms and Conditions

govern Arnold’s action. As relevant here, the April 2016 Terms contain the

following provisions:

Any and all Claims will be resolved by binding arbitration,

rather than in court, except [the user] may assert Claims on an

individual basis in small claims court if they qualify. This includes

any Claims [the user] assert[s] against [HomeAway], [its]

subsidiaries, users or any companies offering products or services

through [HomeAway] (which are beneficiaries of this arbitration

agreement). This also includes any Claims that arose before [the

user] accepted these Terms, regardless of whether prior versions

of the Terms required arbitration.

There is no judge or jury in arbitration, and court review

of an arbitration award is limited. However, an arbitrator

can award on an individual basis the same damages and

relief as a court (including statutory damages, attorneys’

1 Although these appeals are not consolidated, given the similarities between these

two cases, which are on appeal from the same district court, we resolve both in a single

opinion.

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fees and costs), and must follow and enforce these Terms as

a court would.

Arbitrations will be conducted by the American Arbitration

Association (AAA) under its rules, including the AAA Consumer

Rules.

HomeAway moved to compel arbitration in reliance on these provisions.

HomeAway argued that, pursuant to the April 2016 Terms and the AAA Rules

referenced therein, the parties had agreed to arbitrate threshold questions

including “the existence, scope, or validity of the arbitration agreement.”

Arnold opposed the motion to compel, arguing that the September 2015 Terms

and Conditions, which do not contain arbitration requirements, governed. He

also claimed that, even if the April 2016 Terms applied, HomeAway’s authority

to modify any terms or conditions without providing notice rendered the

arbitration provision illusory and unenforceable under Texas law.

The district court denied HomeAway’s motion to compel arbitration. The

court found that the April 2016 Terms applied because Arnold renewed a

subscription for one of his HomeAway accounts in May 2016. However, the

court held that, under Texas law, the arbitration provision was illusory

because HomeAway had reserved the unilateral right to avoid arbitration at

any point without notice. The court did not address HomeAway’s contention

that the April 2016 Terms contained a delegation clause requiring Arnold to

arbitrate threshold questions regarding the arbitration provision. HomeAway

filed a timely notice of appeal, as is authorized by the Federal Arbitration Act

(FAA). See 9 U.S.C. § 16(a)(1)(B).

Although it resulted in a different outcome, the history of Seim’s case is

substantially similar. Seim also challenges HomeAway’s imposition of traveler

fees. HomeAway moved to compel arbitration under the February 2016 Terms

and Conditions, which contained the same arbitration provision the April 2016

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Terms did. As in Arnold’s case, the district court did not address HomeAway’s

contention that a purported delegation clause required Seim to arbitrate

threshold questions about the arbitration provision. However, the district

court, applying Kentucky law, granted HomeAway’s motion to compel

arbitration. The court concluded that when Seim renewed a subscription for

one of her properties and agreed to the February 2016 Terms, she agreed to

arbitrate all claims against HomeAway, including any claims predating the

February 2016 Terms. The district court entered a final judgment of dismissal,

and Seim timely appealed.

II

We review a ruling on a motion to compel arbitration de novo. Kubala v.

Supreme Prod. Servs., 830 F.3d 199, 201 (5th Cir. 2016). The district court’s

factual findings in support of such ruling are reviewed for clear error. IQ

Prods. Co. v. WD-40 Co., 871 F.3d 344, 348 (5th Cir. 2017).

A

In Arnold’s case, our analysis will proceed as follows: First, we consider

whether Arnold is challenging the formation of his contract with HomeAway

or the validity of that contract. Second, we address the putative delegation

provision. Finally, we consider the breadth of Arnold’s challenge to the

arbitration provision. This inquiry leads us to conclude that Arnold is bound

to arbitrate threshold questions relating to the arbitration provision.

When a party seeks to compel arbitration based on a contract, the first,

and perhaps most obvious, question for the court is whether there is a contract

between the parties at all. See Kubala, 830 F.3d at 201–02. In conducting this

inquiry, we distinguish between “validity” or “enforceability” challenges and

“formation” or “existence” challenges. See, e.g., Rent-A-Center, W., Inc. v.

Jackson, 561 U.S. 63, 70 n.2 (2010); Buckeye Check Cashing, Inc. v. Cardegna,

546 U.S. 440, 444 n.1 (2006). “[W]here the ‘very existence of a contract’

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containing the relevant arbitration agreement is called into question, the

federal courts have authority and responsibility to decide the matter.” Banc

One Acceptance Corp. v. Hill, 367 F.3d 426, 429 (5th Cir. 2004) (quoting Will-

Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 218 (5th Cir. 2003)). Though

the difference between formation and validity may be unclear at the margins, 2

the Supreme Court has suggested that the category of arguments that question

the very existence of an agreement include “whether the alleged obligor ever

signed the contract, whether the signor lacked authority to commit the alleged

principal, and whether the signor lacked the mental capacity to assent.”

Buckeye Check Cashing, 546 U.S. at 444 n.1 (citations omitted).

Arnold contends that the arbitration provision in the April 2016 Terms

is illusory under Texas law. 3 On its surface, an illusoriness challenge would

appear to be in the nature of an existence challenge; illusory promises imply

lack of adequate consideration, which affects contract formation. See, e.g.,

RESTATEMENT (SECOND) OF CONTRACTS § 77 cmt. a (1981) (“Where the

apparent assurance of performance is illusory, it is not consideration for a

return promise.”); 3 WILLISTON ON CONTRACTS § 7:11 (4th ed.) (“Where no

consideration exists, and is required, the lack of consideration results in no

contract being formed.”). However, Arnold does not dispute the existence of a

contract with HomeAway governed by the April 2016 Terms. Instead, he

argues that the arbitration provision is an illusory promise on HomeAway’s

part and that, under Texas law, this renders the arbitration provision

unenforceable. See, e.g., J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 236

2 See generally George A. Bermann, The “Gateway” Problem in International

Commercial Arbitration, 37 YALE J. INT’L L. 1, 32–36 (2012) (discussing treatment of various

validity and/or formation issues).

3 For reasons made clear below, we find it unnecessary to address the conflicts-of-law

question briefed by the parties as, even assuming Arnold is correct in his assertion that Texas

law governs, he is bound to arbitrate.

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(Tex. 2003). Under our precedent, Arnold’s argument is in the nature of a

validity challenge.

In Lefoldt for Natchez Regional Medical Center Liquidation Trust v.

Horne, L.L.P., 853 F.3d 804, 813–17 (5th Cir. 2017), we explained that

Mississippi’s “minutes rule,” which requires that contracts with public entities

be memorialized in the minutes of the entity’s board meetings, sometimes

operates as a rule of contract formation and sometimes as a rule of

enforceability. With regard to one contract at issue in Lefoldt, the parties did

not dispute that there was a contract, but the party resisting arbitration

argued that the minutes rule “either foreclose[d] the possibility that there was

an agreement to arbitrate or preclude[d] enforcement of the arbitration

provision.” Id. at 814. We relied on a Mississippi Supreme Court opinion

stating, with respect to the minutes rule, that “the entire contract need not be

placed on the minutes. Instead, it may be enforced where ‘enough of the terms

and conditions of the contract are contained in the minutes for determination

of the liabilities and obligations of the contracting parties without the necessity

of resorting to other evidence.’” Id. at 812 (cleaned up). This statement, we

held, “unmistakably mean[t] that in some instances, the minutes rule is not a

matter of contract formation but instead is a rule preventing consideration of

evidence of the terms of the contract other than what is set forth in the

minutes.” Id. In other words, we concluded that the minutes rule was

operating as an enforceability argument. See id.

The Texas law at issue here is similar to the minutes rule at issue in

Lefoldt inasmuch as the existence of the parties’ agreement is separate from

the enforceability of the arbitration provision. See In re AdvancePCS Health

LP, 172 S.W.3d 603, 607 (Tex. 2005) (observing that defendant had

“established the existence of an arbitration clause governing [the] dispute,”

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and going on to consider “affirmative defense[s],” including illusoriness). The

Texas Supreme Court has stated that

an arbitration provision that is part of a larger underlying contract

may be supported by the consideration supporting the underlying

contract. . . . But such an arbitration provision remains illusory if

the contract permits one party to legitimately avoid its promise to

arbitrate, such as by unilaterally amending or terminating the

arbitration provision and completely escaping arbitration.

Royston, Rayzor, Vickery & Williams, LLP v. Lopez, 467 S.W.3d 494, 505 (Tex.

2015). Like the minutes rule in Lefoldt, Arnold’s allegation that a particular

provision of the contract is illusory is properly considered a validity challenge

rather than a formation challenge. See 853 F.3d at 814. And so, we move on

to consider the parties’ arguments concerning the purported delegation clause.

See Kubala, 830 F.3d at 202.

Under the FAA, parties are free to delegate questions to an arbitrator,

including questions regarding the validity and scope of the arbitration

provision itself. See Rent-A-Center, 561 U.S. at 68–70. However, courts may

not assume that parties have agreed to arbitrate threshold questions absent

clear and unmistakable evidence of their intent to do so. See First Options of

Chi., Inc. v. Kaplan, 514 U.S. 938, 944–45 (1995). We have held that, generally,

stipulating that the AAA Rules will govern the arbitration of disputes

constitutes such “clear and unmistakable” evidence. See, e.g., Petrofac, Inc. v.

Dyn-McDermott Petroleum Operations Co., 687 F.3d 671, 674–75 (5th Cir.

2012). Although the April 2016 Terms plainly stipulate that the AAA Rules

will govern arbitration, Arnold resists the application of the Petrofac rule,

suggesting that Texas law controls the question of what constitutes clear and

unmistakable evidence of parties’ intent to arbitrate threshold questions.

However, the Supreme Court has explained that the clear-and-unmistakable

standard is a requirement of its own creation, framing it as a “qualification” to

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the application of “ordinary state-law principles that govern the formation of

contracts.” Kaplan, 514 U.S. at 944. Thus, to the extent our precedent diverges

from Texas law, we follow our own interpretation of the “clear and

unmistakable” threshold. 4

Arnold’s attempts to otherwise distinguish Petrofac are unpersuasive.

First, he argues that Petrofac and Cooper v. WestEnd Capital Management,

L.L.C., 832 F.3d 534, 536 (5th Cir. 2016), which followed Petrofac, are

distinguishable because both cases involved negotiated contracts between

sophisticated parties, whereas this case presents a consumer contract of

adhesion. As an initial matter, this circuit has already applied the Petrofac

rule in a case in which there was unequal bargaining power between the

parties—a national chain and locally owned drugstores—despite apparently

recognizing the adhesive nature of the contracts at issue. See Crawford

Professional Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 262 (5th Cir.

2014). We have also applied the rule to an individual investor without mention

of his level of sophistication. See Cooper, 832 F.3d at 546.

Moreover, as explained by the Supreme Court, the clear-and-

unmistakable standard concerns “the parties’ manifestation of intent, not the

agreement’s validity.” Rent-A-Center, 561 U.S. at 69 n.1. Accordingly, in Rent-

A-Center, the Court rejected the plaintiff’s claim that, although the text of the

parties’ agreement was clear and unmistakable with respect to the parties’

intent to delegate, the plaintiff’s agreement to that text was not because the

arbitration provision was unconscionable. Id. While Arnold does not use the

term “unconscionable,” the premise of his argument is essentially the same as

4 We do not mean to imply that state law is wholly irrelevant to the clear-and-

unmistakable analysis. Arnold’s contention is that the substance of the threshold itself is

governed by Texas law, a proposition squarely refuted by the Supreme Court’s explanation

in Kaplan. See 514 U.S. at 944. He does not rely on any Texas principle of contract formation

or construction.

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that of the plaintiff in Rent-A-Center, namely that his intent to delegate is

unclear because he did not, in fact, assent to the purported delegation

provision. See id. We therefore cannot adopt Arnold’s proposed policy-based

exceptions to the Petrofac rule. 5

Arnold next argues that Petrofac and its progeny are distinguishable

because he was never provided the AAA rules. But, again, for present

purposes, we are concerned with whether the parties manifested intent to

arbitrate threshold questions, not whether Arnold’s agreement to incorporate

the AAA rules was valid. See id. Petrofac has already answered the basic

question of textual interpretation presented here: an agreement to arbitrate

under the AAA rules constitutes express incorporation of those rules, which

constitutes clear and unmistakable evidence of the parties’ intent. See

Petrofac, 687 F.3d at 674–75.

Arnold’s final argument is that the text of the April 2016 Terms is

distinguishable from the contracts at issue in Petrofac and its progeny because

those cases did not involve “an arbitration clause that expressly reserved some

categories of claims for judicial resolution rather than arbitration.” The April

2016 Terms state that “[a]ny and all Claims will be resolved by binding

arbitration, rather than in court, except [the user] may assert Claims on an

individual basis in small claims court if they qualify.” (emphasis omitted).

Arnold does not contend that his claims qualify for disposition in small claims

5We note that, to date, no circuit court has adopted Arnold’s proposed approach. As

the Ninth Circuit observed, “the vast majority of the circuits that hold that incorporation of

the AAA rules constitutes clear and unmistakable evidence of the parties’ intent [to delegate]

do so without explicitly limiting that holding to sophisticated parties or to commercial

contracts.” Brennan v. Opus Bank, 796 F.3d 1125, 1130–31 (9th Cir. 2015) (citing Petrofac,

687 F.3d at 675; Republic of Arg. v. BG Grp. PLC, 665 F.3d 1363, 1371 (D.C. Cir. 2012); Fallo

v. High–Tech Inst., 559 F.3d 874, 878 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d

1366, 1373 (Fed. Cir. 2006); Terminix Int’l Co. v. Palmer Ranch LP, 432 F.3d 1327, 1332 (11th

Cir. 2005); Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005); Awuah v.

Coverall N. Am., Inc., 554 F.3d 7, 10–12 (1st Cir. 2009)).

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court. The mere fact that an arbitration provision does not apply to every

possible claim does not render the parties’ intent to delegate threshold

questions about that provision less clear. See Crawford Prof’l Drugs, 748 F.3d

at 262–63 (applying Petrofac where parties argued that their claims fell outside

the scope of the arbitration provision). We do not foreclose that a contract

might incorporate the AAA rules but nonetheless otherwise muddy the clarity

of the parties’ intent to delegate. See Archer & White Sales, Inc. v. Henry

Schein, Inc., 878 F.3d 488, 494 (5th Cir. 2017) (“It is not the case that any

mention in the parties’ contract of the AAA Rules trumps all other contract

language.”). However, Arnold’s arguments do not persuade us that we have

such a contract before us.

Because the April 2016 Terms expressly incorporate the AAA rules, the

parties have clearly and unmistakably demonstrated their intent to delegate.

See Petrofac, 687 F.3d at 674. We will therefore proceed to the final piece of

our analysis: determining the breadth of Arnold’s challenge to the arbitration

provision.

The Supreme Court has held that “a challenge to the validity of the

contract as a whole, and not specifically to the arbitration clause, must go to

the arbitrator.” Buckeye Check Cashing, 546 U.S. at 449. This is true even

when the “contract as a whole” is an arbitration agreement, and the

“arbitration clause” at issue is an agreement to delegate threshold questions

to an arbitrator. See Rent-A-Center, 561 U.S. at 71–72.

In Rent-A-Center, the plaintiff filed an employment-discrimination claim

against his former employer, who then moved to compel arbitration based on

an arbitration agreement containing a purported delegation provision. 561

U.S. at 65. The plaintiff opposed arbitration, arguing that the arbitration

agreement was unconscionable and therefore unenforceable under state law.

Id. at 66. The defendant contended, based on the delegation provision, that

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the arbitrator had exclusive authority to resolve any dispute about the

enforceability of the agreement. Id. The Court agreed, explaining that, under

its precedents, if a party challenges the validity “of the precise agreement to

arbitrate at issue, the federal court must consider the challenge,” but unless

the party resisting arbitration has “challenged the delegation provision

specifically, [a court] must treat it as valid[,] . . . leaving any challenge to the

validity of the [a]greement as a whole for the arbitrator.” Id. at 71–72. The

Court concluded that the plaintiff focused his unconscionability argument on

the arbitration agreement as a whole, rather than the delegation clause in

particular, and therefore the question of the arbitration agreement’s validity

was for the arbitrator to decide. Id. at 74–76. Thus, Rent-A-Center holds that,

in the absence of a challenge specifically to a delegation clause, validity

challenges must be sent to an arbitrator. See id. at 71–72.

Arnold’s contention is that the arbitration provision as a whole is

unenforceable under Texas law. Because his challenge is not specific to the

delegation clause, Arnold must present it to an arbitrator. See Rent-A-Center,

561 U.S. at 71–72. Having concluded that there is a contract between the

parties that contains a putative arbitration provision, that the parties have

agreed to delegate threshold questions about the arbitration provision to an

arbitrator, and that Arnold does not specifically challenge the validity of the

delegation clause, we need not reach the remainder of the issues briefed by the

parties.

B

Under the preceding principles, the resolution of Seim’s appeal is

straightforward. Seim states in her opening brief that when one of her

subscriptions “came up for renewal in March 2016, . . . it came under the

February [2016] Terms.” She also asserts that she “does not dispute that the

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arbitration provision applied to [one of her properties], even retroactively.” 6

Thus, Seim concedes that the February 2016 Terms “contains an arbitration

clause” that “covers some set of claims.” IQ Prods., 871 F.3d at 349.

Accordingly, she is challenging only the scope of the arbitration provision. See

id.

Because the February 2016 Terms contain the same delegation clause as

the April 2016 Terms, they too contain clear and unmistakable evidence of the

parties’ intent to delegate gateway questions like scope to an arbitrator. See

Petrofac, 687 F.3d at 674. Seim’s only argument to the contrary is that “the

difficulty that the parties, lawyers and courts have in deciding which ‘contract’

even applies shows the lack of clear and unmistakable intent to arbitrate.” But

this argument, at most, suggests lack of clarity as to the scope of the arbitration

provision. Because there is an agreement to arbitrate some set of claims, a

delegation provision, and no specific challenge to that provision, Seim’s

additional arguments are for an arbitrator to resolve. Thus, in Seim’s case, the

district court was correct to order arbitration but should not have assessed

threshold questions itself. Consistent with our opinion, the parties may revisit

these issues in arbitration.

***

For these reasons, we REVERSE the judgment of the district court in

No. 17-50088 and REMAND with instructions to grant the motion to compel

arbitration, and we AFFIRM the judgment of the district court in No. 17-50102

and REMAND with instructions to grant the motion to compel arbitration.

6 In light of this clear concession, and because her opening brief challenges only the

application of the February 2016 Terms to four of her five properties, while repeatedly

acknowledging that she agreed to the February 2016 Terms, we will not address the

inconsistent arguments raised in her reply brief. Cf. Hosp. House, Inc. v. Gilbert, 298 F.3d

424, 434 n.12 (5th Cir. 2002) (finding plaintiffs abandoned their claims “by their clear

representations to the district court that they were not alleging any violations of federal

rights”).

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