Summary of a Recent
Judicial Development in
Production Contracts

Broiler Chicken Growers Must Abide by Arbitration Agreement

John Pesek
National AgLaw Center Research Associate

Summary of Decision

In Steed v. Sanderson Farms, Inc., Civ. No. 2:05cv02146-KS-MTP, 2006 WL 2844546 (S.D. Miss. Sept. 29, 2006), the United States District Court for the Southern District of Mississippi ruled that Elizabeth and Don Steed were required to abide by the terms of their contract with Sanderson Farms, Inc., which contained an arbitration agreement.

Background

On October 9, 2001, the Steeds applied to become contract broiler growers with Sanderson Farms, Inc. (SFI). On or around January 2002, the Steeds met with Charles Bell, SFI's Production Division Manager, to ensure that they had a full understanding of the business arrangement because the Steeds were new to the chicken-growing business. Id. at *1. In accordance with SFI's policy, Bell and the Steeds discussed the Broiler Growing Program (BGP). Id. At the meeting, Bell and the Steeds also discussed the Broiler Production Agreement (BPA), the standard agreement used by SFI with its contract broiler growers. Id. During the meeting, Bell explained to the Steeds that the BPA had a complaint resolution process set forth in the agreement that called for a binding arbitration of disputes. Id. After discussing the agreement with the Steeds, Bell let them go to a private room to review and discuss the agreement; the Steeds spent thirty minutes reviewing the document and did not ask any questions. Id. at *2.

The Steeds decided to purchase a farm and enter into the BPA after borrowing money from State Bank and Trust Co. Id. Mrs. Steed then signed the BPA, and according to her, this was the first time that she heard of the binding arbitration agreement. Id. Above the signature line, the BPA included the following text: "THE UNDERSIGNED DOES HEREBY DECLARE THAT THE TERMS OF THIS AGREEMENT HAVE BEEN COMPLETELY READ AND FULLY UNDERSTOOD. THIS AGREEMENT CONTAINS ARBITRATION LANGUAGE WHICH IS BINDING." Id. The agreement provided that in the event of a dispute, each party was responsible for the cost of their attorneys and that they would divide the cost of arbitration equally. Id. The arbitration agreement provided that Sanderson was only liable for contract damages, and any other damages would have to be proven by clear and convincing evidence. Id. The Steeds received their first batch of chickens on March 11, 2002. Id.

On November 7, 2005, the Steeds filed a complaint alleging, inter alia, that they were induced into signing the BPA, that SFI made various misrepresentations relating to the age and condition of the chicken houses, that they had been required to make expensive improvements, and that they began to receive inferior chickens and feed after complaining to Sanderson. Id. at *3. On November 30, 2005, STI filed a Demand for Arbitration of the Steeds' claim with the American Arbitration Association (AAA). Id.

Arguments

The Steeds argued that their claims existed prior to the execution of the BPA; therefore, they were not covered by the arbitration agreement. Id. at *4. The Steeds also argued that the arbitration agreement was unconscionable, that Mr. Steed was not bound to the arbitration agreement because he did not sign the agreement, and that the agreement violated the Packers and Stockyards Act. Id.

STI's defense relied primarily on the Federal Arbitration Act (FAA). Id. at *3.

Analysis and Holdings

First, the court held that Mr. Steed could be subject to the arbitration agreement even though he did not sign the contract. Id. at *4 (citing Wash. Mut. Fin. Group, LLC v. Bailey, 364 F.3d 260, 267 (5th Cir. 2004)). The court found the husband to be bound to the arbitration agreement based on equitable estoppel because the husband could not try to enforce certain provisions of the agreement while also trying to avoid other provisions. Id.

The court reviewed the motion to compel arbitration filed by STI though a two-step analysis: (1) the court had to consider whether there was a valid agreement to arbitrate between the groups and whether the dispute was within to scope of the arbitration agreement; and (2) the court had to decide whether there were any valid contractual remedies that would invalidate the agreement. Id. at *3. The court stated that there is a strong presumption in favor of arbitration agreements and that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration . . . ." Id. at *5 (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)). The court relied on a Mississippi Supreme Court's ruling that stated that if the arbitration agreement contained the phrase "any controversy," that language was sufficient to include most claims related to the contract in question. Id. (citing Smith Barney, Inc. v. Henry, 772 So.2d 722, 725-26 (Miss. 2001)). The Steeds alleged that because their claims were grounded in allegations of fraudulent inducement that occurred prior to the execution of the BPA, they should not be subject to the BPA. Id. In response, the court held that the broad language of the arbitration agreement and the policies favoring the arbitration agreement were sufficient to cover the plaintiffs' claims. Id.

Regarding the Steeds' claim of unconscionability, the court analyzed both the procedural and substantive issues. Id. at *6. Procedural unconscionability exists when a party does not possess the knowledge to understand the terms of the contract and lacks the opportunity to study the contract and inquire about its terms. See id. (citing New S. Fed'l Savings Bank v. Anding, 414 F. Supp. 2d 636, 644 (S.D. Miss. 2005)). The court noted that adhesion contracts are not automatically void, and the party seeking to make one void must prove that it is unconscionable. Id. The Steeds' argument of unequal bargaining power and a lack of choice when signing the contract were without merit because they could produce no evidence that they could not get a loan from another company or without first signing the BPA. Id. at *7. Also, the agreement was written in plain and simple English, and the Steeds did not argue that they lacked the necessary education or were unable to read; therefore, the agreement was not procedurally unconscionable. Id. at *8.

For substantive unconscionability, facts must exist to show that the terms of the agreement were oppressive. See id. To prove substantive unconscionability, the Steeds argued that the agreement was oppressive due to the high cost of arbitration, the limitation and waiver of certain damages and remedies, severe diminution of the arbitrators' power, and mandated payment of the parties' own attorney fees; however, the court held that the agreement was not substantively unconscionable. Id. The court explained that merely showing that the contract is one-sided is insufficient to prove that an agreement is substantively unconscionable. See id. The Steeds argued that they could not afford to pay the high cost of arbitration, but the agreement incorporated the AAA's Commercial Arbitration Rules, which provide that the cost of arbitration may be deferred or reduced in the event of extreme hardship. Id. at *9. The Steeds failed to provide evidence as to how much the arbitration would have cost, and SFI had offered to pay all of the cost of the arbitration. Id. With regard to the waiver of certain remedies, the court noted that various courts have upheld the waiver of punitive damages in arbitration agreements. Id. at *10 (citing Investment Partners, L.P. v. Glamour Shots Licensing, Inc., 298 F.3d 314, 317-18 (5th Cir. 2002)).

The court further held that, with regard to the Steeds' argument that the agreement did not allow them to seek permanent injunctive relief, the agreement did not speak of permanent injunctive relief and SFI admitted that such relief would be allowed upon a showing that it was warranted. Id. at *11. As to the issue of attorney fees, the court explained that under Mississippi law, attorney fees are not proper unless there is a specific grant provided by statute, and the Steeds had not cited any statute that would allow such an award. Id.

Finally, the court addressed the alleged violation of the Packers and Stockyards Act (PSA), and noted that it could find no provision or authority from another jurisdiction holding that an arbitration agreement violated the PSA. Id. The court held that all of the Steeds' claims were subject to the arbitration agreement and that arbitration must be compelled. Id. at *12.

The case was decided on September 29, 2006.