REVISED FEBRUARY 19, 2002

              IN THE UNITED STATES COURT OF APPEALS
                      FOR THE FIFTH CIRCUIT


                            No. 01-20334



FLEETWOOD ENTERPRISES, INC.,
FLEETWOOD HOMES OF MISSISSIPPI, INC.,
AND GEORGIA-PACIFIC CORPORATION
                                           Plaintiffs-Appellees,

versus

WILLIAM P. GASKAMP, JR., individually, and
as next friends for William P. Gaskamp, III,
Derek S. Gaskamp and Brooke A. Gaskamp, Minors;
SHANNON GASKAMP,individually, and as next
friends for William P. Gaskamp III, Derek S.
Gascamp and Brooke A. Gaskamp, Minors

                                           Defendants-Appellants.

                      --------------------

          Appeal from the United States District Court
               for the Southern District of Texas

                      --------------------
                        January 24, 2002

Before JOLLY, SMITH, and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

     This appeal arises from a district court order compelling

arbitration of all of the claims brought by plaintiffs in a

Mississippi state court lawsuit.     The plaintiffs-appellants, the




                                 1
Gaskamps,1 assert on appeal that the district court erred in

compelling arbitration of the claims of the Gaskamp children

because the children were not parties to the arbitration agreement

between the Gaskamp parents and the defendants-appellees Fleetwood

Enterprises,    Inc.    and      Fleetwood     Homes     of    Mississippi,   Inc.

(collectively, “Fleetwood”), and Georgia-Pacific Corp. (“Georgia-

Pacific”).     They also assert that the district court erred in

compelling     arbitration       of    the    parents’    claims    because   the

arbitration agreement was procedurally unconscionable.                 We reverse

in part and affirm in part.

                       FACTUAL   AND   PROCEDURAL BACKGROUND

     In November 1997, the Gaskamp parents negotiated with a sales

representative for Manufactured Bargains the purchase of a mobile

home manufactured by Fleetwood. They made a down payment of $2,500

on the home, gave Manufactured Bargains some household items, and

traded in their old mobile home; in exchange, Manufactured Bargains

delivered and installed the new Fleetwood home on the Gaskamp

parents’ property.      The Gaskamps moved into the new mobile home,

and remained there while Manufactured Homes arranged for financing

of the home.    The following month, Manufactured Homes informed the

Gaskamp parents that it had arranged financing for the mobile home

through Bombardier Capital, Inc. (“Bombardier”). To obtain the


     1
       Hereinafter, William P. Gaskamp, Jr. and Shannon Gaskamp are referred
to, collectively, as “the Gaskamp parents;” William P. Gaskamp, III, Derek S.
Gaskamp, and Brooke A. Gaskamp are referred to as “the Gaskamp children.” All
members of the Gaskamp family are collectively referred to as “the Gaskamps.”

                                          2
financing and keep the new home, the Gaskamp parents were asked to

make an additional down payment of $12,500.00, and to sign some

paperwork.      The   Gaskamp   parents   signed    documentation    on   two

separate occasions, and made the payment.            The documents signed

included an “Arbitration Provision.”2

     After moving into the Fleetwood home, the Gaskamps began

experiencing health problems including throat and eye irritation,

runny nose, and respiratory problems.          In September 1999, Brooke

Gaskamp was hospitalized as a result of breathing difficulties.

She received a diagnosis of reactive airway disease as a result of

exposure to formaldehyde.       Two months later, the Texas Department

of Health, Toxic Substances Division, tested the new mobile home,

and found elevated levels of formaldehyde. Shortly thereafter, the

Gaskamps moved out of the mobile home.


     2
       The Arbitration Provision provides, in relevant part:
      “The parties to the Retail Installment Contract or Cash Sale Contract
agree that any and all controversies or claims arising out of, or in any way
relating to, the Retail Installment Contract or Cash Sale Contract or the
negotiation, purchase, financing, installation, ownership, occupancy,
habitation, manufacture, warranties (express or implied), repair or
sale/disposition of the home which is the subject of the Retail Installment
Contract or Cash Sale Contract, whether those claims arise from or concern
contract, warranty, statutory, property or common law, will be settled solely
by means of final and binding arbitration before a three-judge panel of the
American Arbitration Association (AAA) in accordance with the rules and
procedures of the AAA....
      The parties agree that this Arbitration Provision inures to the benefit
of, and is intended to be for the benefit of, the manufacturer of the home
which is the subject of the Retail Installment Contract or Cash Sale Contract
as fully as if the manufacturer was a signatory to the Retail Installment
Contract or Cash Sale Contract.
      The parties agree that this Arbitration Provision inures to the benefit
of, and is intended to be for the benefit of, any lender or mortgagee (or
assigns) who provides financing for the purchase of the home...
      THE PARTIES KNOWINGLY AND VOLUNTARILY WAIVE ANY RIGHT THEY HAVE TO A
JURY TRIAL.”

                                      3
     In June 2000, the Gaskamp parents brought suit in Mississippi

state court against the manufacturer of the home, Fleetwood; the

manufacturer of particle board contained in the home, Georgia

Pacific; the seller, Manufactured Bargains; and the financing

institution, Bombardier.        The Gaskamp parents brought the suit

individually and as next friends of the Gaskamp children, alleging

a variety of claims for personal injuries resulting from the

exposure to formaldehyde.3

     In December 2000, two of the defendants in the Mississippi

lawsuit, Fleetwood and Georgia-Pacific, filed a Complaint to Compel


     3
       In summary, the claims listed in the complaint were as follows:
      First, strict liability claims against Fleetwood, Georgia-Pacific, and
Manufactured Bargains for defective design and manufacture of the home.
      Second, claims for negligence in the design, manufacture, financing, and
marketing of the home.
      Third, claims for fraud, on the grounds that defendants knowingly and
intentionally concealed the dangers of formaldehyde poisoning, in violation of
statutory requirements.
      Fourth, claims for intentional infliction of emotional distress, on the
grounds that the defendants intentionally engaged in extreme and outrageous
conduct that caused distress and damages to all the plaintiffs.
      Fifth, claims for negligent misrepresentation, on the grounds that
defendants supplied false information on which the plaintiffs relied in
deciding to purchase and occupy the home, and that the defendants’ withholding
of the information about the formaldehyde caused injuries to the plaintiffs.
      Sixth, claims for constructive fraud, in that the defendants made
material misrepresentations that the home was habitable.
      Seventh, claims for trespass to realty, on the grounds that defendants
designed and constructed the home in a manner that permitted the invasion of
unacceptably high levels of formaldehyde into the Gaskamps’ property.
      Eighth, claims for negligence under the theory of res ipsa loquitur, on
the basis that the presence of formaldehyde in the home is not the sort of
event that occurs in the absence of negligence.
      Ninth, a claim for misrepresentation, on the grounds that the defendants
materially misrepresented the character and quality of the home as fit for
human habitation via advertising and labeling, thereby causing injuries to the
plaintiffs.
      Tenth, plaintiffs allege that various defendants are responsible for
additional torts such as negligent testing, liability to third persons for
negligent performance of an undertaking, misrepresentation and false
advertising, and “violations of the Restatement of Torts, Sec. 324A.”


                                      4
Arbitration against the Gaskamps in the United States District

Court for the Southern District of Texas.     The Gaskamps responded

with a motion to dismiss. The Gaskamp parents subsequently settled

their claims against Bombardier in the Mississippi state court

lawsuit, and filed a motion to dismiss all of their individual

claims in the Mississippi state court lawsuit in February 2001.

     After the Gaskamps’ settlement with Bombardier, Fleetwood and

Georgia-Pacific filed a Motion to Compel Arbitration and for

Expedited Hearing.    On February 20, 2001, the district court

ordered all of the Gaskamps’ claims to arbitration, and stayed all

proceedings in both the district court and the Mississippi state

court (including the hearing on the Motion to Dismiss the claims of

the Gaskamp parents).     In its Order Compelling Arbitration and

Staying State and Federal Cases, the district court explained,

without citing authority, that the children must arbitrate with

their parents because “[u]nlike a guest who happened to be in a

mobile home when he was hurt, the children are permanent residents

whose presence and use is wholly derivative of the parents’ use of

the mobile home.”

     On appeal, the Gaskamps make two main arguments.    First, they

assert that the district court erred in compelling arbitration of

the Gaskamp children’s claims because they were not parties to the

arbitration   agreement   or   third-party   beneficiaries   thereof.




                                  5
Second, they argue that the arbitration provision is procedurally

unconscionable.




                                      DISCUSSION

I.   Standard of Review and Applicable Law

     This Court reviews de novo the grant or denial of a motion to

compel arbitration.      See Webb v. Investacorp, 

, 257(5th

Cir. 1996).     In adjudicating a motion to compel arbitration under

the Federal Arbitration Act, courts begin by determining whether

the parties agreed to arbitrate the dispute. See Mitsubishi Motors

Corp. v. Soler Chrysler-Plymouth, Inc., 

, 626, 

,    3353-54      (1985);     Folse     v.   Richard   Wolf     Medical

Instruments     Corp.,   

,   605    (5th   Cir.   1995).     This

determination is generally made on the basis of “ordinary state-law

principles that govern the formation of contracts.”                First Options

of Chicago, Inc. v. Kaplan, 

, 944, 

, 1924

(1995).   Next, the Court must determine "whether legal constraints

external to the parties' agreement foreclosed the arbitration of

those claims." Mitsubishi 

, 105 S.Ct. at

3355; see also 

.               In the present case, the




                                          6
parties agree that Texas state law governs matters that are not

addressed by the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.4

II.   The Claims of the Gaskamp Children

      As stated earlier, the first step in evaluating a motion to

compel arbitration is to determine whether the parties agreed to

arbitrate.      This determination depends on two considerations: (1)

whether there      is   a   valid    agreement    to   arbitrate     between   the

parties; and (2) whether the dispute in question falls within the

scope of that arbitration agreement.              

.         In

determining whether the dispute falls within the scope of the

arbitration agreement, “ambiguities... [are] resolved in favor of

arbitration.”     Volt Info. Serv., Inc. v. Bd. of Trustees of Leland

Stanford Junior Univ., 

, 475 (1989).                   However, this

federal   policy     favoring       arbitration    does   not   apply    to    the

determination of whether there is a valid agreement to arbitrate

between   the    parties;    instead     “[o]rdinary      contract    principles

determine who is bound.”        Daisy Mfg. Co., Inc., v. NCR Corp., 

, 392 (8th Cir. 1994); see also Volt 

(“[T]he FAA does not require parties to arbitrate when they have



      4
        In addition, under Texas choice of law rules “the law of the state
with the most significant relationship to the particular substantive issue
will be applied to resolve that issue.” Duncan v. Cessna Aircraft, 

, 421 (Tex. 1984). In the present case, the state with the most significant
relationship to the arbitration clause is Texas. The Gaskamp parents
purchased the home in Texas and signed the sale contract and arbitration
clause in Texas, and the arbitration clause itself provides that Harris
County, Texas, is the forum.

                                         7
not agreed to do so.”); EEOC v. Waffle House, 

,

at *24-*25 (U.S. Jan 15, 2002)(citations omitted)(“Because the FAA

is ‘at bottom a policy guaranteeing the enforcement of private

contractual arrangements,’... we look first to whether the parties

agreed to arbitrate a dispute, not to general policy goals....             It

goes without saying that a contract cannot bind a nonparty.”);

McCarthy v. Azure, 

, 355 (1st Cir. 1994)(“The federal

policy   [favoring    arbitration],       however,   does   not   extend   to

situations in which the identity of the parties who have agreed to

arbitrate is unclear.”).5

     In the present case, the parties agree that the dispute in

question, i.e. the set of claims for personal injury resulting from

use of the mobile home, falls within the scope of the arbitration

agreement, which is very broad. However, the parties disagree with

regard to the first consideration, namely, whether there is a valid

agreement to arbitrate between the parties.            The Gaskamps argue

that, although there is an arbitration agreement between the




      5
        The federal policy favoring arbitration does not extend to a
determination of who is bound because, as stated by the Supreme Court, the
purpose of the Federal Arbitration Act is “to make arbitration agreements as
enforceable as other contracts, but not more so.” Prima Paint Corp. v. Flood
& Conklin Mfg. Co., 

, 404 n.12, 

, 1806 (1967); see
also Mitsubishi Motors Corp v. Soler Chrysler Plymouth, 

, 625-26,

, 3353(1985)(citation omitted)(“The preeminent concern of
Congress in passing the Act was to enforce private agreements into which
parties had entered.”).

                                      8
Gaskamp parents and the appellees,6 there is no such agreement

between the Gaskamp children and the appellees.                The issue in

this case is, then, not what claims are arbitrable, but rather who

must arbitrate.       We apply Texas law to determine whether the

Gaskamp children are required to arbitrate.

     The Gaskamp children did not personally sign the arbitration

agreement, and there is no provision in the agreement expressly

stating that the Gaskamp parents, on behalf of their children,

agreed    to   submit     the   children’s     claims     to    arbitration.

Nonetheless, the appellees argue that because the Gaskamp children

are minors, their parents were empowered to make decisions of

substantial      legal     significance      concerning        the   minors.

Additionally, the appellees contend that under Texas law, non-

signatory family members who bring claims intertwined with a

signatory family member’s claims are bound to arbitrate.             Because

the Gaskamp children are minors and because they joined their

parents in the Mississippi state court suit, appellees argue, the

arbitration agreement should be considered binding on the Gaskamp

children.




     6
       It is not entirely clear whether the arbitration agreement covers
Georgia-Pacific. The agreement states that it “inures to the benefit of the
manufacturer” but is not clear on whether it covers manufacturers of component
parts of the mobile home. However, because the Gaskamps have not raised the
issue of whether Georgia-Pacific is protected by the agreement, they have
waived it. See Melton v. Teachers Ins. & Annuity Ass’n of Am., 

,
561 (5th Cir. 1997).

                                      9
     To determine whether the Gaskamp children are bound by the

arbitration agreement under Texas contract law, we apply the law as

interpreted by the state’s highest court, in this case, the Texas

Supreme Court.   See Ladue v. Chevron, U.S.A., Inc., 

,

274 (5th Cir. 1991).        Texas courts have found non-signatories

bound to arbitration agreements in only two situations: first,

where the non-signatory sued on the contract; and second, where the

non-signatory was a third-party beneficiary of the contract.        The

present case does not fit either model.

     In In re First Merit Bank, 

(Tex. 2001), the

Texas Supreme Court held that the owners of a mobile home, who had

received the home as a gift from their parents and were non-

signatories to the arbitration agreement between the seller and the

parents, were bound by the agreement.          The Court specifically

grounded its decision on the fact that the donees had sued on the

basis of the contract: “a litigant who sues based on a contract

subjects him or herself to the contract's terms.             Here, the

Alvarezes fully joined the de los Santoses' contract claims...

Thus, by suing FirstMerit based on the de los Santoses' installment

contract, the Alvarezes subjected themselves to the contract's

terms,   including   the   Arbitration   Addendum.”   

Indeed, the claims made by the Alvarezes and de los Santoses in

First Merit Bank included traditional contract claims: breach of

contract, revocation of acceptance, and breach of warranty.          In


                                   10
Southwest Tex. Pathology Assocs., L.L.P. v. Roosth, an intermediate

appellate court refused to bind a nonsignatory wife to arbitration

of claims against her husband’s employer, even though the husband’s

claims were subject to arbitration.            

, 208 (Tex. App.

San Antonio 2000)(“[A] nonsignatory can only be bound by the terms

of an arbitration provision in an agreement if the nonsignatory is

asserting claims that require reliance on the terms of the written

agreement containing the arbitration provision.”).7 In the present

case, while the Gaskamp children fully joined the Gaskamp parents’

claims in the Mississippi state court lawsuit, these claims were

not contractual, but rather tort claims.              At no point have the

Gaskamp children attempted to enforce the contract, or sue on the

basis of any warranties contained in the contract; the Gaskamps’

complaint in state court does not rely at all on the terms of any

agreement with the state court defendants. Thus, it cannot be said

that       the   children   sued   on   the   contract,   thereby   subjecting

themselves to the arbitration agreement.

   Intermediate appellate courts in Texas have also held that non-

signatories are bound by arbitration agreements where the non-


       7
       There are additional cases in which wives were found not to be bound by
arbitration agreements signed by their husbands.   In In re Conseco Fin.
Corp., 

(Tex. App. Waco 2000), the court held that in the absence
of a theory that would bind a non-signatory wife to her husband’s contract,
she could not be bound to arbitrate. And in another case, a court held that a
wife was not required to arbitrate her claim for loss of consortium even
though it was derivative of the wrongful termination claim of her husband, who
was subject to arbitration under his employment contract. See Merrill Lynch,
Pierce, Fenner, and Smith, Inc. v. Longoria, 

, 231 (Tex. App.
Corpus Christi 1990).

                                         11
signatories are third-party beneficiaries of the contracts. See In

re Rangel, 

, 787 (Tex. App. Waco, 2001); Nationwide of

Bryan, Inc. v. Dyer, 

, 520 (Tex. App. Austin 1998).

Under Texas    law,     parties      are    presumed      to    be   contracting     for

themselves only; as stated by the Texas Supreme Court, “[a] court

will    not    create        a    third-party          beneficiary       contract     by

implication....        The intention to contract or confer a direct

benefit to a third party must be clearly and fully spelled out or

enforcement     by     the       third     party   must        be    denied.”        MCI

Telecommunications Corp. v. Texas Utilities Elec. Co., 

, 651 (Tex. 1999); see also MJR Corp. v. B&B Vending Co., 

, 12     (Tex. App. Dallas 1988).                 Thus, “the fact that a

person is directly affected by the parties’ conduct, or that he

‘may have a substantial interest in a contract’s enforcement, does

not make him a third-party beneficiary.’”                     Loyd v. Eco Resources,

Inc.,   

,       134   (Tex.     App.       Houston    (14th    Dist.)

1997)(citing Merrimack Mut. Fire Ins. Co. v. Allred Fairbanks Bank,

, 577 (Tex. App. Houston (14th Dist.)).                           In other

words, the intent to make someone a third-party beneficiary must be

clearly written or evidenced in the contract.                        Otherwise, Texas

will not recognize that person as a third-party beneficiary.                          In

the present    case,     the      contract      does    not    mention    the    Gaskamp

children at all and there is no indication in the contract that it

is designed to benefit anyone other than the Gaskamp parents, who


                                           12
purchased the home.   Any intention to confer a direct benefit on

the children is far from being “clearly and fully spelled out.”

And the fact that the children lived in the home for some period of

time renders them only incidental beneficiaries, not third-party

beneficiaries.   Thus, the Gaskamp children are not third-party

beneficiaries of their parents’ contract under Texas law.

     The parties have not explicitly asserted any additional basis

on which a non-signatory could be bound to arbitrate.     The only

potential argument at which the appellees hinted is that the fact

that the Gaskamp children are minors somehow binds them to their

parents’ agreements to arbitrate.    However, there is no basis in

existing Texas law for such an argument, and we should not create

such a rule in this case.   When the state's highest court has not

yet spoken on an issue, as in this case, we must determine, to the

best of our ability, how that court would rule if the issue were

before it.   See 

.    There is no reason to

think that the Texas Supreme Court would adopt a rule requiring

non-signatory children to arbitrate on the basis of their parents’

arbitration agreement in the absence of third-party beneficiary

status or an attempt by the child to enforce the contract.   To the

contrary, several indicators suggest that the Texas Supreme Court

would refuse to adopt such a rule.    First, the language of Texas

decisions that have addressed the question of when non-signatories

are bound to arbitrate is restrictive: the decisions do not even



                                13
mention the possibility of additional bases for binding non-

signatories to arbitration.   Second, other jurisdictions that have

addressed the question of when non-signatories are bound have only

gone a little further than Texas, holding that there are five

theories under “common law principles of contract and agency law"

that provide a basis "for binding nonsignatories to arbitration

agreements:    1) incorporation by references;   2) assumption;   3)

agency;    4) veil piercing/alter ego;   and 5) estoppel."   Thomson-

CSF, S.A. v. American Arbitration Ass'n, 

, 776 (2d Cir.

1995).    See also Bel-Ray Co. v. Chemrite (Pty) Ltd., 

,

440-43 (3d Cir. 1999); International Paper Co. v. Schwabedissen

Maschinen & Anlagen, 

, 417 (4th Cir. 2000); Amoco

Transport Co. v. Bugsier Reederei & Bergungs, A.G. (In re Oil Spill

by the "Amoco Cadiz" ), 

, 795-96 (7th Cir. 1981);

McCarthy v. Azure, 

, 356 (1st Cir. 1994); In re Hydro-

Action, Inc., 

, 645 (U.S. Bankruptcy Court, E.D. Tex.

2001).    None of these theories would require children to arbitrate

simply because they are minors and their claims are related to

those of their parents.    If the Texas Supreme Court were to add to

the circumstances Texas has recognized so far for binding non-

signatories, it is unlikely that it would go beyond the theories

listed above.    Finally, even outside the context of arbitration

agreements, Texas law does not ordinarily bind children to the

contracts their parents sign.     See, e.g., Stern v. Wonzer,     846


                                  

, 944 (Tex. App. Houston (1st         Dist.)1993)(holding that

parents’ contract with a law firm for legal representation did not

bind their child with respect to her claims arising from the same

incident, and noting that “there is a distinction between having

authority to contract for legal representation of a child and

actually exercising that authority.”). In sum, because the Gaskamp

children are not signatories to the sales contract, are not third-

party beneficiaries of the agreement or contract, and are not suing

on the basis of the contract, they are not bound by the arbitration

agreement signed by their parents.

III. Procedural Unconscionability

      The Gaskamps raise a defense to arbitration, arguing that the

arbitration provision is procedurally unconscionable. The Gaskamps

argue that Paul and Shannon Gaskamp were improperly told that the

arbitration agreement was “standard documentation” that they were

required to sign to keep living in the home.            Consequently, they

claim that they were given no meaningful choice as to acceptance of

the   arbitration   agreement.      Moreover,    they    assert   that    no

explanation of the document was given to them, and that they did

not have an opportunity to read or negotiate the agreement’s terms.

They also point out that they were unsophisticated with respect to

business   and   legal   matters,   whereas     the   appellees   are    very

experienced in contract negotiations.         Thus, the Gaskamps argue,

there is evidence of Manufactured Bargains’ “overreaching or sharp


                                    15
practices combined with the buyer’s ignorance or inexperience,”

which make the arbitration agreement procedurally unconscionable.

American Stone Diamond, Inc. v. Lloyds of London, 

,

844 (S.D. Tex. 1996).

       The party contesting the contractual arbitration provision has

the burden to show procedural unconscionability.                         Smith v. H.E.

Butt Grocery Co., 

, 912 (Tex.App. Beaumont 2000, pet.

denied) (citing In re Oakwood Mobile Homes, 

, 573

(Tex. 1999)).       The Gaskamps have not met their burden here.                     The

only evidence the Gaskamps have presented is in the form of their

allegations    of    misrepresentations             and   pressure       to   sign   the

documents quickly.      Such allegations are insufficient to establish

unconscionability.           And   while      there   may     be   imbalance    in   the

relative     sophistication        of    the       parties,     this     imbalance    is

insufficient on its own to render the agreement unconscionable.

See Rangel, 

(Tex. App. Waco 2001) (holding that an

agreement was not unconscionable even though one of the parties had

never attended school, was 75, hard of hearing, and had difficulty

reading).    The only cases under Texas law in which an agreement was

found procedurally unconscionable involve situations in which one

of the parties appears to have been incapable of understanding the

agreement.    See In re Turner Bros. Trucking Co., 

(Tex.

App.    Texarkana     1999)(finding           an    agreement      was    procedurally

unconscionable       where     one      of    the     parties      was    functionally


                                             16
illiterate, nobody explained the agreement to him, and the person

who    gave   him    the    agreement       to   sign       did    not   understand     the

agreement); Prevot v. Phillips Petroleum Co., 

(S.D. Tex. 2001)(finding procedural unconscionability where the

plaintiffs     did    not       speak    English      and    the    agreement     was   not

translated or explained to them).




                                         CONCLUSION

       The Arbitration Provision was not procedurally unconscionable

and the Gaskamp parents have not raised any valid defenses to

arbitration of their own claims, so as signatories they are bound

to    arbitrate     all    of    their    claims      for    fraud       and   negligence.

However, because the Gaskamp children are not signatories to the

contract or third-party beneficiaries thereof, and because they

have not sought to enforce the contract, the children cannot be

required to arbitrate.              The district court’s order compelling

arbitration and staying state and federal cases is therefore

REVERSED with regard to the Gaskamp children’s claims, and AFFIRMED

with regard to the claims of the Gaskamp parents.




                                            17