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Farmers Opposing Arbitration Fail to Cultivate Favor of Court of Appeals

Cotton Photo.jpgThe Case:

Venture Cotton Coop. v. Freeman, No. 11-11-00093-CV, 2015 WL 1967251 (Tex. App. Apr. 30, 2015).

Brief Facts:

A group of cotton farmers (Appellees) contracted to sell cotton to Venture, managed by Noble (Appellants), a cotton cooperative-marketing association. The farmers brought action against Venture, which then moved to compel arbitration under the mandatory arbitration agreement in the parties' contract.

The trial court denied the Motion to Compel Arbitration, finding that the arbitration agreement was unconscionable. The Court of Appeals of Texas initially affirmed the trial court's finding.

The Supreme Court of Texas reversed and remanded the Court of Appeals' initial holding, concluding that the facts supporting the Court of Appeals' finding of unconscionability were insufficient to defeat arbitration under the Federal Arbitration Act. On remand, the Court of Appeals held that the farmers failed to show:

(1) prohibitive costs of arbitration caused the arbitral forum to be unconscionable,

(2) the agreement was substantively unconscionable because its terms limited the farmers' right to discovery, and

(3) the arbitration agreement was procedurally unconscionable.

Unconscionability of an Arbitration Agreement:

The Court noted that the "basic test for unconscionability is whether, given the parties' general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract." In re FirstMerit Bank, N.A., 52 S.W.3d 749, 757 (Tex. 2001). In general, a contract will be found unconscionable if it is grossly one-sided. In re Poly-Am., L.P., 262 S.W.3d 337, 348 (Tex. 2008).

In determining whether the agreement was unconscionable on the grounds that arbitration would be cost-prohibitive, the Court analyzed three factors: (1) the claimant's ability to pay the arbitration fees and costs, (2) the expected cost differential between arbitration and litigation, and (3) the actual cost of arbitration compared to the damages sought. In re Olshan Found. Repair Co., LLC, 328 S.W.3d 883, 893-95 (Tex. 2010). The Appellees failed to provide evidence of these factors supporting a finding of unconscionability.

The Appellees also asserted that the agreement was substantively unconscionable because it limited their right to discovery. Appellees argued that, under the agreement, they were not allowed reasonable time to perform discovery, nor did they have the opportunity to obtain witness testimony. For an agreement to be found substantively unconscionable on the grounds that it limits the claimant's right to discovery in arbitration, such limitations must "prevent a party from effectively presenting its claims." Poly-America, 262 S.W.3d at 358. The Court rejected Appellees' assertion, noting that the arbitrator would have discretion to extend discovery deadlines as necessary, and finding nothing in the agreement prohibiting witness testimony.

Lastly, the Appellees asserted that the arbitration agreement was procedurally unconscionable because a conflict of interest existed between the Appellants and the ACSA, which authored the rules and provisions of the arbitration agreement at issue. The Appellees contended that the Appellants would be able to influence the selection, and therefore the ruling, of the arbitrator. The Court found nothing more than "a mere possibility" of a bias in the arbitral forum. It noted that, until Appellees were denied access to unbiased arbitrators, it would be a matter of pure speculation to find that a conflict of interest existed. See Lawson v. Archer, 267 S.W.3d 376, 384 (Tex. App. 2008). The Court refused to indulge in such speculation, and rejected Appellees' argument.

What to Take Away:

Because the law favors arbitration, the party opposing arbitration has the burden of proving a defense to arbitration. If an arbitration agreement is found to be unconscionable, it is unenforceable. To determine whether an arbitration agreement is unconscionable, a court must consider whether, given the parties' general commercial background and the commercial needs of the particular trade or case, the arbitration clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract.

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