Howard v. Ferrellgas Partners, L.P. , 748 F.3d 975 ( 2014 )

FILED
United States Court of Appeals
Tenth Circuit
PUBLISH April 8, 2014
Elisabeth A. Shumaker
UNITED STATES COURT OF APPEALS Clerk of Court
TENTH CIRCUIT
RANDY HOWARD, individually and
on behalf of all others similarly
situated,
Plaintiff-Appellee,
v.
FERRELLGAS PARTNERS, L.P.;
FERRELLGAS, L.P.; FERRELLGAS, No. 13-3061
INC.,
Defendants-Appellants,
and
DOES 1 THROUGH 25,
Defendants.
Appeal from the United States District Court
for the District of Kansas
(D.C. No. 2:10-CV-02555-JTM-JPO)
Peter W. Herzog III of Bryan Cave LLP, St. Louis, Missouri (Kathryn R. DeBord
of Bryan Cave LLP, Denver, Colorado, with him on the briefs), for Defendants-
Appellants.
Charles Slidders of Milberg LLP, New York, New York (R. Frederick Walters of
Walters Bender Strohbehn & Vaughan, P.C., Kansas City, Missouri, and Peggy
Wedgworth of Milberg LLP, New York, New York, with him on the brief), for
Plaintiff-Appellee.
Before KELLY, GORSUCH, and HOLMES, Circuit Judges.
GORSUCH, Circuit Judge.
Everyone knows the Federal Arbitration Act favors arbitration. But before
the Act’s heavy hand in favor of arbitration swings into play, the parties
themselves must agree to have their disputes arbitrated. While Congress has
chosen to preempt state laws that aim to channel disputes into litigation rather
than arbitration, even under the FAA it remains a “fundamental principle” that
“arbitration is a matter of contract,” not something to be foisted on the parties at
all costs. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745 (2011).
What happens when it’s just not clear whether the parties opted for or
against arbitration? The FAA tells district courts to “proceed summarily to the
trial” of the relevant facts. 9 U.S.C. § 4. Once the facts are clear, courts must
then apply state contract formation principles and decide whether or not the
parties agreed to arbitrate. Hardin v. First Cash Fin. Servs., Inc., 465 F.3d 470,
475 (10th Cir. 2006). The object is always to decide quickly — summarily — the
proper venue for the case, whether it be the courtroom or the conference room, so
the parties can get on with the merits of their dispute.
That much didn’t happen here. After Randy Howard sought to bring a class
action against Ferrellgas in federal court for allegedly overcharging him and other
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customers on a massive scale, Ferrellgas moved to force Mr. Howard to pursue
his individual claim alone in arbitration, arguing that’s the procedure the parties
had agreed to. Unsure whether Ferrellgas had shown an agreement to arbitrate in
its initial motion, the district court entertained discovery and further motions
practice. After that process exhausted itself, the court found too many unresolved
factual questions remained and proceeded to invite yet more discovery followed
by yet more motions practice. Finally, almost a year and half after Ferrellgas
filed its motion to compel arbitration, the court issued an order in which it found
that material disputes of fact still prevented it from saying for certain whether or
not the parties had agreed to arbitrate. But rather than proceeding to resolve the
conflicting factual accounts through trial as the Act requires, the court entered an
order denying arbitration outright.
That was error. When it’s apparent from a quick look at the case that no
material disputes of fact exist it may be permissible and efficient for a district
court to decide the arbitration question as a matter of law through motions
practice and viewing the facts in the light most favorable to the party opposing
arbitration. See, e.g., Hancock v. Am. Tel. & Tel. Co., 701 F.3d 1248, 1261 (10th
Cir. 2012). In these circumstances, the Act’s summary trial can look a lot like
summary judgment. But when, as in this case, a quick look at the case suggests
material disputes of fact do exist on the question whether the parties agreed to
arbitrate, round after round of discovery and motions practice isn’t the answer.
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Parties should not have to endure years of waiting and exhaust legions of
photocopiers in discovery and motions practice merely to learn where their
dispute will be heard. The Act requires courts process the venue question quickly
so the parties can get on with the merits of their dispute in the right forum. It
calls for a summary trial — not death by discovery. See Moses H. Cone Mem’l
Hosp. v. Mercury Const. Corp., 460 U.S. 1, 22 (1983) (FAA requires “an
expeditious and summary hearing, with only restricted inquiry into factual
issues”).
Of course, the parties here didn’t exactly help themselves. They were
anything but quick to seek the trial promised by the Act. In fact, they seemed
content enough to haggle along together in the usual way of contemporary civil
litigation, all about discovery disputes and motions practice and with only the
most glancing consideration given to the possibility of trial. But even if today
some may prefer the familiarity of lingering discovery to the conclusiveness of
trial, that’s simply not the process specified by the Act. See ISC Holding AG v.
Nobel Biocare Fin. AG, 688 F.3d 98, 113 (2d Cir. 2012) (distinguishing between
the Act’s “simple, flexible framework” and “the intricate requirements of” pre-
trial civil litigation practice).
Not only did the proceedings here veer badly off course, they ended in an
impermissible place. One thing the district court may never do is find a material
dispute of fact does exist and then proceed to deny any trial to resolve that dispute
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of fact. That’s like mixing apples and oranges, like saying someone who fails to
win a summary judgment motion must necessarily lose after trial. It confuses the
very different roles summary judgment and trial serve in our legal order. Having
found unresolved questions of material fact precluded it from deciding
definitively whether the parties agreed to arbitrate, the district court was in no
position to deny a motion to arbitrate. It had to move promptly to trial of the
unresolved factual questions surrounding the parties’ claimed agreement to
arbitrate.
Neither is there any question that, even after all the parties’ discovery
machinations, critical questions of fact still remain on the threshold question
whether they agreed to arbitrate. We know Mr. Howard called Ferrellgas to order
propane to heat his home. We know Ferrellgas agreed to sell him some. But
much more than that remains unclear even now. Did the parties form a final and
complete oral contract in that initial phone call governing all their propane
dealings over the next few years? Or did their agreement cover only Mr.
Howard’s propane tank rental and its initial fill, in this way perhaps leaving room
for Ferrellgas’s later-delivered, arbitration-clause-containing form contract to
govern the parties’ subsequent dealings, including the later propane purchases at
issue in this case?
Whether this case belongs in arbitration or litigation hinges on the answers
to factual questions like these. It is possible that the parties reached an agreement
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requiring Ferrellgas to refill Mr. Howard’s propane tank at market prices
whenever it verged on empty, without a single mention of Ferrellgas’s
forthcoming written terms. If that’s the case, then under Kansas law (which the
district court applied here) Ferrellgas’s arbitration clause could modify the
parties’ preexisting oral agreement only with Mr. Howard’s express consent,
something he contends he never gave. Klocek v. Gateway, Inc., 104 F. Supp. 2d
1332, 1341 & n.13 (D. Kan. 2000); see also Wachter Mgmt. Co. v. Dexter &
Chaney, Inc., 144 P.3d 747, 752, 755 (Kan. 2006) (expressing agreement with
Klocek). But it also remains possible that the parties agreed only to an initial fill
during that phone call. And if that’s the case, then under Kansas law Ferrellgas’s
arbitration clause and other written terms may well govern the parties’ later
dealings because they amounted to an offer to provide future service that Mr.
Howard accepted when he chose to keep the propane Ferrellgas went on to
deliver. See Crouch v. Marrs, 430 P.2d 204, 209 (Kan. 1967) (an offeree
normally manifests acceptance when he “exercise[s] dominion over the thing
offered him”); Restatement (Second) of Contracts § 69(2) (1981). Simply put,
without knowing definitively what happened in the parties’ initial encounter —
without factual findings about what was said and whose story to credit — we
don’t know whether Ferrellgas’s introduction of the written contract amounted to
an (unsuccessful) attempted modification of an existing agreement or an
(accepted) new offer that governed not the first fill but later ones. And without
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knowing that, we don’t know whether the parties agreed to arbitrate a dispute like
this one.
*
Mr. Howard resists the idea that a trial is needed. In fact, he argues that
the FAA’s trial guarantee doesn’t apply unless and until the party moving for
arbitration has first proven the existence of an agreement to arbitrate. In support
of his view, he quotes this bit from Avedon Engineering, Inc. v. Seatex: “The
existence of an agreement to arbitrate is a threshold matter which must be
established before the FAA can be invoked.” 126 F.3d 1279, 1287 (10th Cir.
1997). But the point of this passage is entirely different and much more prosaic
than Mr. Howard seems to think: it merely points out that the FAA doesn’t
compel arbitration until it’s proven the parties agreed to arbitrate — and that the
existence (or nonexistence) of an agreement to arbitrate is judged by normal state
law contract formation principles. Id. at 1286-87. Indeed, Mr. Howard’s contrary
interpretation fails to take account of the express acknowledgment in Avedon
Engineering that “[w]hen parties dispute the making of an agreement to
arbitrate,” the district court should hold a trial on the subject “unless there are no
genuine issues of material fact regarding the parties’ agreement.” Id. at 1283.
Neither is Mr. Howard’s interpretation of Avedon Engineering just inconsistent
with its plain language; it would also invite a nonsense. What end might be
served by a trial on the question whether the parties agreed to arbitrate once the
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party seeking arbitration has proven they did? What would be the point of the
statutory language directing a trial “[i]f the making of the arbitration agreement
[is] . . . in issue”? 9 U.S.C. § 4. None springs to mind and Mr. Howard suggests
none.
Retreating, Mr. Howard suggests that a remand for the trial the FAA
prescribes would serve no purpose in this particular case. Because any trial here
would be a bench trial — only the party resisting arbitration has the power to
demand a jury and Mr. Howard says he has no intention of doing that — the
district judge would act as fact-finder. And, Mr. Howard submits, the district
judge in this case would surely conclude after trial that the parties never agreed to
arbitrate. In this way Mr. Howard invites us to call the district court’s failure to
hold a trial a harmless error. He assures us he will inevitably prevail at trial
because he prevailed against Ferrellgas’s summary-judgment-like motion.
But that much does not necessarily follow and here again we have parties
confusing the point of summary judgment with the point of trial. So far the
district court has only held that a reasonable person could believe Mr. Howard’s
account of the facts — his claim that the parties formed an oral agreement
covering all their future dealings and that he never assented to any modification
of that deal. In deciding this much, moreover, the district court has only and
always viewed all the facts in the light most favorable to Mr. Howard. At trial,
the court must lift that thumb from the scales, evaluate the conflicting evidence
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even-handedly, and decide which side’s account is more likely true. Deciding
whether a reasonable person could find in your favor when looking at all the facts
your way just isn’t the same thing as saying your story is the more credible one
when viewed with the cool dispassion of a neutral judge. Maybe the district court
will still find in Mr. Howard’s favor after trial, just as he contends. But nothing
in the court’s disposition to date renders that a foregone conclusion.
*
Mr. Howard isn’t the only one who suggests we might avoid the necessity
of a trial. To be sure, Ferrellgas argues the district court erred by failing to hold a
trial after declaring that material disputes of fact still needed to be resolved. But,
the company says, the district court also erred before that by declaring material
disputes of fact needed to be resolved. Under any reasonable view of the facts,
Ferrellgas submits, the parties agreed to arbitrate as a matter of law. So allow
trial if we must, the company says, but better yet we can and should fast-forward
these long-delayed proceedings, enter an order compelling arbitration, and put an
end to the parties’ venue miseries.
How can we do this? Ferrellgas insists that when we look at the evidence
carefully for ourselves we will not find any competent support for Mr. Howard’s
contention that in the initial phone call the parties reached an oral agreement
covering all future deliveries. Contrary to the district court’s conclusion,
Ferrellgas says, any rational person viewing the facts has to conclude that the first
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phone call was only about the delivery of a tank and its first filling; the call never
purported to address the parties’ future dealings. Maybe Mr. Howard secretly
intended to sign up for ongoing propane service, but the company says the
objective facts about the call all suggest he accomplished no such thing. For this
reason, it says, the arbitration question can and should be decided as a matter of
law in its favor.
Ferrellgas is quite right that contract formation in the sale of goods can
often turn on objective manifestations of assent, not the secret subjective
intentions of one party or the other. See, e.g., Nat’l Envtl. Serv. Co. v. Ronan
Eng’g Co., 256 F.3d 995, 1002 (10th Cir. 2001) (the UCC relies “on objective,
observable manifestations of intent to contract,” not the purely subjective intent
of the parties). But the company is quite wrong to suggest that Mr. Howard’s
testimony about the parties’ conversation holds no clues about how an objective
observer would have interpreted the Ferrellgas representative’s statements. Mr.
Howard didn’t merely testify about the future service he subjectively intended to
order: he testified that a Ferrellgas representative expressly promised to keep his
tank full and deliver all future fills at the then-prevailing market price. More than
that, Mr. Howard introduced a script that Ferrellgas gives to train employees who
take customer phone orders. This describes three alternative plans that Ferrellgas
employees can offer prospective customers. For at least two of these plans, the
script assures the subscriber that Ferrellgas will automatically refill his propane
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tank — and in this way could lead a reasonable person to believe ongoing service
was promised and agreed. At the end of the day, then, the facts hardly point in
only the direction Ferrellgas suggests. 1
With that, it becomes Ferrellgas’s turn to retreat. Even supposing the
parties did reach an understanding over the phone that covered all future refills as
Mr. Howard contends, Ferrellgas submits that its later-introduced arbitration
clause still governs the parties’ subsequent dealings as a matter of law.
How might that be? As we’ve seen, if the parties reached an agreement
covering all their dealings in the initial phone call, Ferrellgas’s later-introduced
arbitration clause amounts under Kansas law to a proposed amendment requiring
Mr. Howard’s express consent to become effective, consent that Mr. Howard
insists he never gave.
1
Separately, Ferrellgas suggests in its reply brief that the parol evidence
rule bars consideration of Mr. Howard’s account of the parties’ oral dealings.
The company likewise contends that the statute of frauds requires any contract
along the lines Mr. Howard posits to be written down. Because these points
weren’t raised until the reply brief, we deem them as waived for purposes of this
appeal. See Hill v. Kemp, 478 F.3d 1236, 1250-51 (10th Cir. 2007). Ferrellgas
further contends that Mr. Howard’s claimed oral contract would have been
unenforceable for want of consideration because Mr. Howard’s claimed promise
to buy propane from Ferrellgas after the first fill was illusory — at his sole
discretion he could choose to buy as much propane as he wanted. See 3 Samuel
Williston & Richard A. Lord, A Treatise on the Law of Contracts § 7:7 (4th ed.
2008). But because Mr. Howard promised to buy at least a full tank’s worth of
propane to start with, his promise to buy placed him under a genuine obligation
and so counts as valid consideration. See Restatement (Second) of Contracts § 77
cmt. b, illus. 3 (1981).
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But what if the law treated those same facts differently? Ferrellgas points
to and asks us to invoke the so-called rolling theory of contract formation, an idea
with roots in Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997), and
ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). In Hill, much as here, a
commercial relationship between company and consumer began with a telephone
order. Some while later the company in Hill, again much as here, sought to
introduce its written arbitration provision into that relationship. The Hill court
held that the company’s efforts succeeded, that the contract wasn’t fully formed
during the initial call but continued to form over the course of the parties’
interactions. Ferrellgas submits we should apply the same rolling view of
contract formation to the parties’ dealings in this case, treating its introduction of
written terms as a step in the formation of the original contract itself, not as an
amendment to an agreement fully formed by the end of that first phone call.
The problem is Ferrellgas’s rolling contract formation theory may be about
as controversial an idea as exists today in the staid world of contract law. Some
states endorse the theory, but others reject it — holding that a seller’s later-
arriving written contract constitutes at most only a proposal to modify a
preexisting oral contract, and that a buyer’s assent to the proposed modification
won’t be inferred simply from the buyer’s continuing the preexisting oral
contract. See generally John Edward Murray, Jr., Murray on Contracts § 51[J]
(5th ed. 2011). It’s pretty clear, moreover, that Kansas is among those states that
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reject the rolling theory of contract formation. See Wachter Mgmt. Co., 144 P.3d
at 755; Klocek, 104 F. Supp. 2d at 1341; John E. Murray, Jr., The Dubious Status
of the Rolling Contract Formation Theory, 50 Duq. L. Rev. 35, 63-65 (2012).
Where does that leave us? Ferrellgas doesn’t seek to show its theory
succeeds under Kansas law. Instead, it submits it should prevail yet because the
district court erred by applying Kansas law to this case. In the company’s view,
California law should control the question whether the parties agreed to arbitrate.
And, Ferrellgas continues, California counts itself among those states that have
adopted the rolling theory of contract formation.
About this, however, we harbor our doubts. Everyone acknowledges that
Kansas’s choice of law principles apply to this case. Everyone acknowledges that
Kansas choice of law principles suggest that the location of “the last act
necessary” to form the contract determines which state law governs their contract
formation dispute. See In re K.M.H., 169 P.3d 1025, 1031-32 (Kan. 2007);
Restatement (First) of Conflict of Laws § 332 (1934). But at this point in the
proceedings, it’s anything but clear where “the last act necessary” to form the
contract in this case took place. If the contract was formed when Mr. Howard
accepted Ferrellgas’s offer to sell him propane while at his home in California,
California law might apply, just as Ferrellgas argues. But if the contract was
formed when (say) Ferrellgas accepted Mr. Howard’s terms from Ferrellgas’s
office in Washington, then Washington law might apply. Once again material
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factual disputes about the content of the parties’ dealings cloud the path and
preclude a definitive ruling. And where (as here) a party fails to make “a clear
showing that another state’s law should apply,” Kansas choice of law principles
require a court to default to Kansas substantive law. See In re K.M.H., 169 P.3d
at 1032 (collecting cases). Precisely the course the district court found itself
compelled to take in this case.
Even so, Ferrellgas isn’t without a reply. If the problem is uncertainty over
whether the final act consummating this contract took place in Washington or
California, Ferrellgas says that’s no real problem at all. It isn’t, the company
insists, because both Washington and California endorse the rolling contract
theory. And when all the plausible choice of law candidates share a common
view of the law, that view should control, not the view embodied in Kansas
substantive law. Cf. Brenner v. Oppenheimer & Co., 44 P.3d 364, 372 (Kan.
2002) (endorsing application of forum state law when there is no true conflict
between it and the law of other choice of law candidates).
Although this line of argument may have much to commend it in theory, it
bears a problem as applied to this case. Ferrellgas’s submission rests on the
premise that California and Washington are equally solicitous of the rolling
contract theory, even if Kansas isn’t. But the strength of that premise is far from
clear, at least from a review of the authorities the parties have cited in this appeal.
While Washington does seem to approve the rolling contract theory, see M.A.
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Mortenson Co. v. Timberline Software Corp., 998 P.2d 305, 310-14 (Wash. 2000),
Ferrellgas hasn’t proven that California law is anything like so welcoming to it.
The company identifies no controlling authority from the California state supreme
court. Instead, it cites a federal district court case out of California that seems to
endorse the rolling contract theory, Bischoff v. DirecTV, Inc., 180 F. Supp. 2d
1097 (C.D. Cal. 2002), but that case in turn points to an intermediate state
appellate court decision that seems a good deal less helpful to Ferrellgas’s cause:
Badie v. Bank of America, 79 Cal. Rptr. 2d 273 (Ct. App. 1998). There the
California Court of Appeal confronted a challenge by several of the bank’s
customers to the bank’s attempt to add an arbitration clause to the terms of their
preexisting account agreements. Id. at 275-77. Even though the original
agreements expressly authorized the bank to change their terms unilaterally, the
court didn’t think the parties intended to allow the addition of arbitration
provisions. See id. at 287-89. Then, having determined that the arbitration
addition wasn’t supported by the contracts’ modification provision, the court
proceeded to reject the suggestion that the customers’ “failure to close or stop
using” their accounts after receipt of the arbitration clause constituted a “clear
and unmistakable indication” that they assented to its addition. Id. at 290-91.
Ferrellgas offers us no clear reason to believe California contract law would be
any more inclined to treat Mr. Howard’s continued acceptance of Ferrellgas
deliveries as assent to adding an arbitration clause to the parties’ oral agreement.
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In these circumstances, we can’t fault the district court for resorting to
Kansas substantive law. Before the court was free to abandon the default
presumption that Kansas law controls, Ferrellgas had to make “a clear showing
that another state’s law should apply.” In re K.M.H., 169 P.3d at 1032.
That it did not do. Material disputes of fact prevented the district court from
being able to conclude clearly where the last act occurred in the contract
formation process and thus whether Washington or California law should apply.
Neither has Ferrellgas shown — clearly — that relevant Washington and
California contract formation principles align. Given all this, the district court
understandably resorted to the default presumption in favor of Kansas law.
Certainly Ferrellgas has cited no authority suggesting that in doing so the district
court misapplied Kansas choice of law rules, let alone any authority suggesting
the application of those rules in this case offends constitutional due process or
full faith and credit commands. Cf. Phillips Petroleum Co. v. Shutts, 472 U.S.
797, 818-19 (1985). Maybe after trial when the facts are finally found the district
court will be able to say where the last act forming the contract took place and
thus able to say whether California or Washington law should apply. But at least
for now, that’s more than the record will allow.
*
We appreciate both sides’ evident frustration at how long this case has
lingered at the transom without having entered either the door into arbitration or
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litigation. It’s understandable that everyone might want us to give the case a firm
nudge (one way or the other) so the parties’ dispute can finally progress past
preliminary venue questions to the merits. But unresolved material disputes of
fact block our way — disputes that could and should have been resolved years
ago according to the procedures the FAA provides. Summary-judgment-like
motions practice may be a permissible and expedient way to resolve arbitrability
questions when it’s clear no material disputes of fact exist and only legal
questions remain. But when factual disputes may determine whether the parties
agreed to arbitrate, the way to resolve them isn’t by round after round of
discovery and motions practice. It is by proceeding summarily to trial. That is
the procedure the Act requires and the parties should have undertaken a long time
ago — and it is the procedure they must follow now. The district court’s denial
of Ferrellgas’s motion to compel arbitration is vacated and this case is remanded
for further proceedings consistent with this opinion.
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