Summary of a Recent
Judicial Development in
Alternative Dispute Resolution

Arbitration Clause in Poultry Grower Contracts Held
to be Valid and Enforceable

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Bell v. Koch Foods of Mississippi, LLC, No. 3:08-cv-697-WHB-LRA, 2009 WL 1259054 (S.D. Miss. May 5, 2009), the United States District Court for the Southern District of Mississippi held that the arbitration clauses in the defendant poultry company's grower agreements were valid and enforceable under the Federal Arbitration Act (FAA), because the plaintiffs had failed to show that the clauses were substantively or procedurally unconscionable or "unfair and deceptive" in violation of the Packers and Stockyards Act.

Background

Poultry growers under contract with Koch Foods of Mississippi brought this action alleging that Koch had breached their grower agreements by unilaterally amending the length of the agreements from a three-year term to a one-year term, delivering dead chickens, refusing to deliver scheduled flocks, requiring upgrades for their chicken houses that were not provided for in the agreements, and unilaterally canceling the agreements. Id. at *1. The plaintiffs asserted several causes of action against Koch Foods, including violations of the Packers and Stockyard Act, 7 U.S.C. §§ 181-229, and state law claims of fraud, fraudulent inducement, and fraudulent concealment. Id. Koch Foods moved to compel arbitration pursuant to an arbitration clause in the grower agreements, which stipulated that the FAA was applicable to any controversy arising from the agreements and that the clause would act as a complete defense to any suit or proceeding before a court or administrative tribunal. Id.

Arguments

The plaintiffs moved for arbitration-related discovery, arguing that it was necessary in order to show that Koch knew the plaintiffs, as unsophisticated persons, did not understand the arbitration clause. Id. at *3. The plaintiffs also argued that they were entitled to a jury trial on the issue of whether the arbitration clauses were valid because of fraud in the procurement of the clauses. Id. at *4. They further argued that the arbitration clauses were procedurally unconscionable because of the unequal bargaining power between the parties, and thus unenforceable. Id. at *6. They also claimed that the clauses were substantively unconscionable because they contained an "absence of meaningful choice and oppressive terms" and resulted in a "severely diminished limitation of actions," and because of the excessive cost associated with arbitration. Id. at *7-8. Lastly, the plaintiffs argued that the clauses violated the Packers and Stockyard Act, 7 U.S.C. § 192(a), which provides that "[i]t shall be unlawful . . . for any live poultry dealer with respect to live poultry, to . . . [e]ngage in or use any unfair, unjustly discriminatory, or deceptive practice or device." Id. at *8. In support of this argument, the plaintiffs cited several provisions under 7 U.S.C. § 197c, which required that poultry contracts contain a provision allowing a contract producer or grower to decline to be bound by arbitration provisions. Id. at *8-9. Although they conceded that § 197c did not apply retroactively and thus was not applicable to their contracts, the plaintiffs argued that the court should nonetheless rely on the provisions and hold that the clauses were unfair and deceptive. Id. at *9.

Analysis and Holdings

First, the court denied the plaintiffs' motion for arbitration-related discovery because, under Mississippi law, a plaintiff "may not escape [an] agreement by simply stating [he] did not read the agreement or have it read to him or understand its terms." Id. at *3 (quoting Cleveland v. Mann, 942 So.2d 108, 115-16 (Miss. 2006)). The court also denied the plaintiffs' motion for a jury trial on the validity of the arbitration clause because they had not presented any evidence showing that Koch Foods made false representations at the time the clauses were entered, and to be entitled to a jury trial under the FAA, "a party contesting the 'making' of the arbitration agreement must 'make at least some showing that under prevailing law, he would be relieved of his contractual obligations to arbitrate if his allegations proved to be true . . . [and] produce some evidence to substantiate his factual allegations.'" Id. at *5 (quoting Am. Heritage Life Ins. Co. v. Orr, 294 F.3d 702, 710 (5th Cir. 2002).

The court then explained that courts apply a two-step analysis to determine whether parties should be compelled to arbitrate under the FAA: first, the court must "determine whether the parties agreed to arbitrate the dispute in question," and second, it must determine "whether legal constraints external to the parties' agreement foreclosed the arbitration of those claims." Id. at *4. As to the first inquiry, the court found that the parties had entered valid arbitration agreements and that all of the plaintiffs' claims were within the scope of the agreements. Id. at *6. Regarding the enforceability of the agreements, the court noted that although the plaintiffs alleged that the arbitration clauses were presented on a "take it or leave it" basis, they had presented no evidence that they had to accept it (i.e., that they were unable to contract with a different poultry company, or were unable to refrain from contracting at all). Id. The court further found that the terms of the clauses were not substantively unconscionable because they did not restrict the plaintiffs from bringing claims or limit the amount or types of damages to be awarded by the arbitrators. Id. at *7. Likewise, the court held that the fees associated with arbitration did not render the clauses unenforceable because although the plaintiffs had provided evidence that the up-front costs of arbitration would be approximately $30,000, they had not provided any individualized evidence that they were "financially incapable of meeting those costs." Id. at *8. The court found that the clauses could not be invalidated under 7 U.S.C. § 197c because that section expressly provided that it did not apply retroactively. Id. at *9. Lastly, the court held that the clauses were not "unfair and deceptive" under the former version of the Packers and Stockyards Act (in place at the time the contracts were executed) because the same agreement had been offered to all growers, and there had been no showing of procedural or substantive unconscionability. Id. The court therefore granted Koch Foods' motion to compel arbitration. Id.

The case was decided on May 5, 2009.