Image: Unsplash

In a press released circulated this month, Young Living Essential Oils announced that it is donating $70,000 to help combat recent fires in the Amazon and to support reforestation efforts. While Jared Turner, the president and COO of Young Living, was touting the  company’s “close partnership with nature,” and its resulting “responsibility to step in and help,” a magistrate judge in Texas was preparing to hand down an unfavorable recommendation for the company: the case that it is facing in federal court in western Texas should continue instead of being ushered into private – and potentially confidential – arbitration.

The report and recommendation that U.S. Magistrate Judge Susan Hightower issued on Friday – in which she recommends that Judge Lee Yeakel deny Young Living’s June motion to compel arbitration, and orders that the case be removed from the Magistrate Court’s docket and returned to the docket of Judge Yeakel – is the latest development in the 6-month old case accusing Young Living of “operating an illegal pyramid scheme created under the guise of selling essential oils for quasi-medicinal purposes.”

According to the complaint that plaintiff and former Young Living member Julie O’Shaughnessy filed against Young Living and a number of its executives in April, the Utah-based company – which brings in more than $1 billion in revenue each year by way of a multi-level marketing operation – “purports to sell ‘essential oils’ via a complicated [multi-level marketing] operation.”

While Young Living holds itself out as a company that “creates abundance” for its nearly 3 million members, in reality, Ms. O’Shaughnessy claims that the 26-year old entity “is nothing more than a cult-like organization falsely peddling the ever-elusive promise of financial success” by way of a “structure [that] ensures that every new member will almost certainly lose large sums of money … trying to recruit additional new members from an ever-shrinking pool of available candidates.”

Because Young Living’s business model is “overwhelmingly dependent on the recruitment of new people into the Young Living sales force” and “emphasizes recruitment over [actual] product sales, it crosses the threshold from legitimate multi-level marketing [entity] into an illegal pyramid scheme,” O’Shaughnessy asserts. “The complex and intentionally hard-to-understand multi-layer compensation/participation structure of Young Living is a hallmark of illegal multi-level marketing pyramid schemes.”

With that in mind, O’Shaughnessy filed suit against Young Living this spring, citing the company’s alleged “pattern of racketeering activity, wire and mail fraud,” and conspiracy. She has also ask the federal court to approve her class action suit, and enable other similarly situated individuals to join and share in the unspecified monetary damages being sought.

In addition to “vigorously denying the allegations” by way of a statement to TFL this spring, Young Living has fought to have the case tossed out of court and transferred to arbitration, a non-public form of alternative dispute resolution. Its basis for arguing for arbitration? All Young Living member agreements contain an arbitration clause, which requires “any controversy or claim arising out of or relating to the agreement, or the breach thereof, will be settled by arbitration” and notes that by signing the agreement, “parties waive all rights to trial by jury or to any court.”

Counsel for Ms. O’Shaughnessy disagreed, asserting that the very same agreement that Young Living points to as proof of the need for arbitration also contains a “Jurisdiction and Choice of Law” provision, which states that the agreement “will be interpreted and construed in accordance with the laws of the State of Utah applicable to contracts to be performed therein. Any legal action concerning the Agreement will be brought in the state and federal courts located in Salt Lake City, Utah.”

That provision, according to O’Shaughnessy’s counsel, conflicts with and supersedes the arbitration clause.

Judge Yeakel referred Young Living’s motion to compel arbitration to Magistrate Judge Hightower for a recommendation, and late last week, the District Court judge got his answer. In her recommendation, Magistrate Judge Hightower cited a two-step framework for determining whether a dispute must be arbitrated. “This first step is a question of contract formation – did the parties form a valid agreement to arbitrate some set of claims,” she stated. If the court determines that there is a valid agreement to arbitrate, it then “moves on to the second question: whether the claim at issue is covered by the arbitration agreement.”

In the case at hand, Magistrate Judge Hightower found that because there are the two “irreconcilably conflicting provisions” in the Young Living member agreement, there “was no ‘meeting of the minds’ with respect to arbitration in this case.” In other words, due to the conflicting provisions, there is no way that O’Shaughnessy (or any other Young Living member) could have a “definite understanding that she agreed to arbitrate all claims arising out of the member agreement.”

The Magistrate Judge was not persuaded by Young Living’s argument that “the Arbitration Clause and the Forum Selection Clause can be harmonized because the Forum Selection Clause ‘concerns only disputes that are not subject to arbitration, such as a challenge to the validity of the Arbitration Provision, or enforcement of an arbitration award.’” And so, Judge Hightower shot down the argument, stating that the Forum Selection Clause “contains no such limitation,” and instead, “plainly and unequivocally applies to ‘[a]ny legal action concerning the Agreement,’ not just to disputes that are not subject to arbitration.”

With that in mind, Judge Hightower held that Young Living has failed to demonstrate that O’Shaughnessy entered into a binding arbitration agreement in this case, and sent the matter back to the District Court, which will hear any objections from the parties.

While the choice of venue might not seem like seem like a deal-breaker but it could be. The snag for a company like Young Living – which is being accused of operating like a “cult” and of scamming some 3 million or so people out of hundreds of dollars (or more) – is that the venue will dictate the level of information that will be made available to the public and the media.

What tends to make arbitration a popular non-court alternative (for at least one of the parties to the case) is that the proceedings can be and in many cases, tend to be completely confidential. More often than not, the participants in arbitration are forced to sign confidentiality agreements as a prerequisite to the settlement of the claims and as a condition to a financial settlement. That could certainly bode well if a company like Young Living has anything to hide.

*The case is O’Shaughnessy et al v. Young Living Essential Oils et al, 1:19-cv-00412 (W.D.Tx.).