Amarillo COA Overturns Order Holding Arbitration Provision is Unconscionable in Cotton Marketing Pool Dispute

Texas’ Seventh District Court of Appeals in Amarillo has overturned a Cochran County court’s order refusing to compel a cotton-marketing dispute to arbitration. In Ecom USA, Inc. v. Clark, No. 07-14-00240-CV (February 25, 2015), a group of cotton farmers agreed to deliver any crops grown in 2010 and 2011 to a marketing pool that was owned and administered by Ecom USA, Inc. Each individual farmer’s contract included a provision which stated all disputes between themselves and the marketing pool would be resolved through “binding arbitration pursuant to the arbitration rules of the American Cotton Shippers Association.”

After a disagreement arose between the farmers and the marketing pool, the farmers filed a lawsuit against both USCGA and Ecom in Cochran County, Texas. In their complaint, the farmers accused the two companies of fraud, breach of contract, breach of fiduciary duty, violating the Texas Deceptive Trade Practices Act, and more. In addition, the farmers asked the court to issue a declaratory judgment and order an accounting. In response to the lawsuit, Ecom and USCGA filed a motion to compel arbitration. After considering the motion, the trial court held that the arbitral provision relied upon by the companies was unconscionable and unenforceable. As a result, the trial court denied the defendants’ motion. Next, Ecom and USCGA filed an appeal with the Seventh District Court of Appeals in Amarillo.

On appeal, the Amarillo court stated the trial court issued its ruling before the Texas Supreme Court decided Venture Cotton Coop. v. Freeman. In that case, a group of farmers also sued a cotton marketing pool. When the marketing pool sought to enforce the arbitration provision included in each farmer’s contract, the farmers claimed the alternative dispute resolution agreement at issue was unenforceable:

The farmers in Venture argued that the arbitration provisions were unconscionable because 1) they “were one-sided and designed to foster arbitrator bias,” 2) the summary nature of the arbitration rules “denied them adequate discovery and preparation time,” 3) “arbitration was too expensive and . . . its prospective cost would prevent them from vindicating their rights in the arbitral forum,” and 4) the “agreement and ACSA rules violated the state’s public policy by illegally eliminating their statutory right to attorney’s fees and other remedies under the Texas Consumer Protection—Deceptive Trade Practices Act (DTPA).” Id. at 228-29. Of those issues, only the latter was considered. And, the Supreme Court agreed that since the arbitration provision could be read as waiving remedies afforded under the DTPA and the waiver did not comport to the requirements of that Act, it was invalid because it transgressed public policy. Id. at 230.

Yet, the invalidity of that aspect of the American Cotton Shipper Association rules (which the parties were obligated to follow under the arbitration clause) did not necessarily warrant a holding that arbitration was unconscionable. Rather, the court observed that an illegal or unconscionable provision of a contract may generally be severed if it does not constitute the essential purpose of the agreement.

According to the appellate court, the relative bargaining power of the parties must be balanced against the parties’ freedom to negotiate when considering whether an agreement to arbitrate is unconscionable. The court stated:

The balance is not an easy one to strike. As can be seen from what we said above, conflicting policies are at play. And, another that cannot be ignored is that favoring arbitration as a means to timely and efficiently resolve disputes. See In re Olshan Foundation Repair, L.L.C., 328 S.W.3d at 892 (stating that “arbitration is favored in both federal and Texas law”). Arbitration is not per se unconscionable. Id. So, caution must be taken to avoid placing the bar too low in deciding whether clauses like that before us are unconscionable. Id.

Much like the farmers in Venture, the Farmers at bar “emphasized potential abuses and unequal treatment under the arbitral process” in complaining about the unconscionability of the arbitration clause. That is, they alleged below that arbitration clauses are unenforceable when “1) the causes of action pled cannot be effectively arbitrated; 2) the damages pled cannot be awarded or recovered [via arbitration]; 3)effective development and presentation of the case is not allowed [in arbitration]; and 4) the arbitrators are impartial.” So too did they posit that those circumstances existed here. Indeed, their evidence focused on those four criteria. Due to that focus, though, little was said about the parties’ general commercial background and commercial needs of the particular case. So too were other pivotal indicia ignored, such as 1) the commercial atmosphere in which the agreement was made, 2) the alternatives available to the parties at the time they executed the contracts, and 3) the ability of the Farmers to bargain. Whether the Farmers actually knew of the ramifications of agreeing to arbitrate and the limitations placed upon their ability to seek redress through the court system garnered little attention as well. That is also a matter of concern since knowing of the limitations about which they complain while raising no objection before executing the agreements merits consideration in the overall equation.

Next, the Seventh District analyzed the trial court’s unconscionability ruling de novo. Ultimately, the Court of Appeals found:

Here, the narrow approach undertaken by the Farmers and adopted by the trial court evinced an incomplete and improper analysis of the issue. Thus, the trial court abused its discretion in refusing to compel arbitration due to the purported unconscionability of the arbitration clause. We reverse the trial court’s decision and remand the cause for further proceedings in light of the Supreme Court’s opinion in Venture.

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