Sleeper Farms v. Agway Inc. ( 2007 )

United States Court of Appeals
For the First Circuit
No. 06-2694
SLEEPER FARMS; VAUGHN SLEEPER; and MARY SLEEPER,
Plaintiffs, Appellants,
v.
AGWAY, INC., RICHARD SIROIS,
TODD BRADLEY, and CARL SMITH,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. George Z. Singal, U.S. District Judge]
Before
Boudin, Chief Judge,
Selya, Senior Circuit Judge,
and Schwarzer,* Senior District Judge.
Nicholas J.K. Mahoney for appellants.
Frederick J. Badger, Jr. with whom Richardson, Whitman, Large
and Badger was on brief for appellees.
November 2, 2007
*
Of the Northern District of California, sitting by
designation.
BOUDIN, Chief Judge. This case concerns dealings by
Agway Inc., an agricultural cooperative, with Vaughn and Mary
Sleeper. The Sleepers grew seed potatoes on their farm (Sleeper
Farms) in Sherman Mills, Maine, and claim that Agway owes them
money for potatoes harvested between 1998 and 2001. The parties
have now litigated before a bankruptcy court, an arbitrator, and
the federal district court twice; Agway has gone bankrupt; the
Sleepers are no longer growing potatoes.
Between 1998 and 2001 (three growing seasons), Agway
purchased seed potatoes from Sleeper Farms; Agway would then re-
sell the crop to other farmers for new plantings. In June 2000,
Agway withheld some $51,000 of payment, saying that the Sleepers
had mixed genetically altered potatoes with unaltered potatoes in
a shipment. The parties corresponded about the withheld sum but
reached no agreement; the Sleepers threatened to sue; Agway then
filed a demand for arbitration with the American Arbitration
Association ("AAA"), which the AAA accepted.
On February 21, 2002, the Sleepers filed a complaint in
the federal district court in Maine against Agway and several
individuals associated with that company. The complaint included
multiple common law causes of action and also alleged violations of
various state and federal statutes; it challenged, in addition to
the earlier withholding, other alleged unfair practices by Agway--
unilateral cutting of prices, refusal to accept quantities
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previously ordered, and so on. The Sleepers moved to enjoin the
arbitration, and Agway moved to dismiss or stay court proceedings
pending arbitration. See 9 U.S.C. § 3 (2000).
The district court held an evidentiary hearing on May 15,
2002, after which it denied the motion to enjoin arbitration and
instead ordered a stay of judicial proceedings pending arbitration.
The court determined that Sleeper Farms assented to a series of
purchase orders, which incorporated by reference Agway's standard
sales contract, which in turn included an arbitration clause. None
of the Sleepers' objections to arbitrability was accepted.
The district judge did not reach the question of scope,
i.e. which of the Sleepers' claims fell within the arbitration
clause; that is generally a question for the judge to decide, AT&T
Techs., Inc. v. Commc'n Workers of Am., 475 U.S. 643, 650-51
(1986), but here he found a "clear and unmistakable" delegation of
that power to the arbitrator1 and told the arbitrator to decide the
scope of the clause and the merits of the claims that were within
the scope. We do not have jurisdiction over interlocutory orders
that stay proceedings pending arbitration, 9 U.S.C. § 16(b)(1), and
1
The arbitration clause referenced the AAA's procedural rules,
one of which permits the arbitrator to rule on such questions of
scope. The Sleepers do not challenge this finding by the district
judge, and so we need not consider whether such a reference meets
the "clear and unmistakable" standard. See Green Tree Fin. Corp.
v. Bazzle, 539 U.S. 444, 452 (2003) (plurality opinion).
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the Sleepers voluntarily dismissed without prejudice the appeal
that they filed after the order was issued.
Shortly after the district court's order, Agway filed for
bankruptcy and proceedings slowed; but eventually the bankruptcy
court permitted the arbitration to go ahead. In May 2005, the
parties signed an additional stipulation, filed with the AAA, that
"all issues of liability and damages contained within Sleeper
Farm's Complaint . . . shall be determined through arbitration in
this forum." The implications of this stipulation are disputed.
On the merits, in an award issued on December 16, 2005,
the arbitrator awarded some $82,000 (plus costs) to Sleeper Farms.
He found that Agway's withholding of payment in June 2000 had been
improper, but rejected most of the Sleepers' other claims. Not
satisfied with this limited victory, the Sleepers returned to the
district court and moved to vacate the award.2 Agway moved to
confirm it. Finding neither fraud nor manifest disregard of law,
the court upheld the arbitrator's award.
On appeal, the Sleepers challenge both of the district
judge's orders: the 2002 order referring the dispute to the
arbitrator, and the 2006 order confirming the arbitrator's award.
The former was not appealable on an interlocutory basis, but as
2
There was some debate over whether the bankruptcy court or
the district court was the proper forum for the post-arbitration
motions, but the bankruptcy court noted that the district court
proceedings had only been stayed, not dismissed, and therefore
directed the parties to return there.
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with non-final orders generally, it can be challenged along with
the final judgment. Tejidos de Coamo, Inc. v. Int'l Ladies'
Garment Workers' Union, 22 F.3d 8, 11 (1st Cir. 1994). We first
consider the challenges to the initial order.
As a threshold matter, Agway points out that the
stipulation stated that the Sleepers agreed to have "all issues of
liability and damages" resolved through arbitration. It argues
that none of the objections to the July 2002 order matter anymore,
claiming the stipulation signed by the parties provided an
independent basis for the arbitrator's authority. Indeed, as Agway
reads the stipulation, the Sleepers abandoned their original
objection to the reference.
Agway's position is arguable, but we think that the more
reasonable reading of the stipulation favors the Sleepers. At the
arbitration, the parties could have continued to argue about which
of the numerous claims made by the Sleepers fell within the
arbitration clause--the scope question having been explicitly
referred to the arbitrator by the district court. But the claims
were intertwined and overlapping and it was efficient for the
parties to agree to treat the whole group as within the scope.
The Sleepers' objections to sending the case to the
arbitrator and the manner of its sending were of a different order.
Those objections involved not the scope of the clause but whether
Agway could invoke the arbitration clause at all and whether the
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reference by the district court properly allowed the arbitrator to
consider other, non-scope objections. The Sleepers had reason to
preserve such claims for eventual appeal and no obvious motive for
abandoning them.
Although the stipulation would have been clearer with an
express reservation as to these non-scope objections, the Sleepers
did not waive them. We therefore consider the claims, the district
court's legal conclusions being open to de novo review. Marie v.
Allied Home Mortgage Corp., 402 F.3d 1, 9 (1st Cir. 2005). As it
turns out, our interpretation of the stipulation does not affect
the result: the district court rightly sent the case to the
arbitrator and the terms of the reference did not foreclose any of
the Sleepers' legitimate objections.
In the district court the Sleepers objected to any
reference--saying that they had never agreed to arbitrate and, in
the alternative, that the arbitration clause was unenforceable on
various grounds. Claims of the former class--for example, that
they had never agreed to any arbitration clause--were for the
district court. AT&T Techs., 475 U.S. at 648-49. But the district
court resolved claims of this type against the Sleepers and they
are not pursued on this appeal.
By contrast, various claims of unenforceability were made
but on appeal the Sleepers press only two: that the contracts were
illegal (or "void ab initio" as they put it) and that Agway waived
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its right to arbitrate. Correctly, the Sleepers assume that such
claims were properly for the arbitrator; their objection here is
that the wording of the district court's reference to the
arbitrator did not allow the arbitrator to address those claims.
Indeed, the reference did not refer such claims to the
arbitrator as objections to arbitration. The district judge told
the arbitrator to determine (i) the scope of the arbitration clause
and (ii) the merits of whichever of the Sleepers' federal claims
fell within the clause's scope. But the district court was correct
in thus framing the issues. The illegality and waiver arguments
present different problems and we address them in that order.
The Sleepers' "void ab initio" argument goes to the
validity of the substantive provisions of the contract, not to
arbitrability. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S.
440, 445-446 (2006). As a matter of federal law, the arbitration
clause is unaffected even if the substance of the contract is
otherwise void or voidable. Prima Paint Corp. v. Flood & Conklin
Mfg. Co., 388 U.S. 395, 403-04 (1967). Without this rule, the
merits of a contractual dispute would often have to be adjudicated
in court in order to determine whether the dispute is arbitrable.
If the contract was illegal or if Agway's alleged breach
excused promised performance by the Sleepers, the Sleepers might
then win the arbitration on the merits. But illegality or breach
are simply merits issues that affect what performance is due from
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each side and what remedies should be ordered. Here, the void ab
initio claim was referred to the arbitrator when the court directed
that the arbitrator rule on "the merits of the issues"; and the
arbitrator did consider the validity of the contracts under Maine
law.
By contrast, a claim of waiver may be a genuine
challenge to arbitrability. See Menorah Ins. Co. v. INX Reins.
Corp., 72 F.3d 218, 221-22 (1st Cir. 1995). But where a party
challenges only "procedural" arbitrability, the court under
recently consolidated Supreme Court doctrine is to defer to the
arbitrator--for example, as to whether contractual time limits have
been adhered to, Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79,
84-85 (2002), or prerequisites (such as internal grievance
procedures) have been met, John Wiley & Sons, Inc. v. Livingston,
376 U.S. 543, 557 (1964), or laches or estoppel have barred the
invocation of arbitral rights, Moses H. Cone Memorial Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).
Waiver claims fall into this category of threshold issues
for the arbitrator, Howsam, 537 U.S. at 84; cf. Marie, 402 F.3d at
14 (exception for waiver claims based on litigation activity), and
the Sleepers are correct that the district court did not instruct
the arbitrator to make that threshold determination. But a closer
examination of their original "waiver" argument before the district
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court reveals that, even if sufficiently presented to avoid
forfeiture,3 it did not state a genuine challenge to arbitrability.
Essentially, the waiver claim reflects the Sleepers'
position that Agway unilaterally withheld payment due by contract;
that such withholding constituted a breach of contract; further,
that Agway breached the arbitration clause by taking that self-help
measure rather than immediately invoking arbitration to resolve the
dispute; and that the breach or the self-help or both constituted
implicit waivers of Agway's right to arbitrate now.
But, as already noted, breach of the substantive contract
is not a permitted objection to arbitrability; it is a merits
question, one that the arbitrator considered and based on which
even awarded damages to the Sleepers. Cf. Prima Paint, 388 U.S. at
404. To the extent that the Sleepers claim that Agway breached the
arbitration clause by resorting to self-help, that is (at least in
form) a procedural arbitrability argument--but one that is utterly
empty: nothing in the agreement or incorporated AAA arbitration
3
The Sleepers' response to Agway's motion to stay the
proceedings did make a waiver argument, but it was hidden within a
subsection that purports to argue that "Agway's Own Conduct Reveals
That The Parties Never Intended To Make the 'Agway Sales Contract'
A Basis of their Bargain." The two arguments were conflated
throughout, likely contributing to the confusion surrounding the
argument and who was to decide it. In their reply brief, the
Sleepers now characterize their argument as an "issue of Laches or
Estoppel," but the Sleepers did not argue laches or estoppel to the
district judge or even in their opening brief in this court, which
alone forfeits that claim. Keeler v. Putnam Fiduciary Trust Co.,
238 F.3d 5, 10 (1st Cir. 2001).
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rules suggests that engaging in self-help waives arbitration
rights.4
The Sleepers might still insist that because this version
of their waiver claim was in form a procedural arbitrability
objection (albeit one that lacked merit), they were entitled to
have the arbitrator rule on it in the first instance. Arguably, a
claim so lacking in merit might not need to be referred to
arbitration, cf. Bell v. Hood, 327 U.S. 678, 682-83 (1946); but in
any event this waiver claim was not clearly preserved (note 3,
above); and, if it had been referred, the arbitrator would have had
to reject it on the merits.
We turn now to the Sleepers' second group of arguments,
directed to whether the arbitration award should be vacated. Our
review is "exceedingly narrow," In re Vital Basics Inc., 472 F.3d
12, 16 (1st Cir. 2006), and "tightly circumscribed." Cytyc Corp.
v. DEKA Prods. Ltd. P'ship, 439 F.3d 27, 32 (1st Cir. 2006). A
district court may set aside an award only on limited grounds.5 We
4
Indeed, before the Supreme Court clarified that procedural
arbitrability objections should go to the arbitrator, Howsam, 537
U.S. at 84-85, courts routinely rejected "waiver" arguments of this
sort. See Local Union No. 721, United Packinghouse v. Needham
Packing Co., 376 U.S. 247, 251-53 (1964); Welborn Clinic v.
Medquist, Inc., 301 F.3d 634, 637 (7th Cir. 2002); Morrie Mages &
Shirlee Mages Found. v. Thrifty Corp., 916 F.2d 402, 404 (7th Cir.
1990); Southwest Indus. Imp. & Exp., Inc. v. Wilmod Co., 524 F.2d
468, 469-70 (5th Cir. 1975).
5
The Federal Arbitration Act enumerates specific grounds for
which an award can be vacated by the district court, 9 U.S.C. §
10(a), and there are limited extra-statutory grounds that could
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review the district court for clear error on factual findings and
de novo as to legal conclusions. First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938, 947-49 (1995).
Of the two grounds put forward by the Sleepers for
vacating the award, we need only consider one. In their brief,
they assert that the arbitrator acted "in manifest disregard of the
law," cf. Prudential-Bache Secs., Inc. v. Tanner, 72 F.3d 234, 240
(1st Cir. 1995), but do not actually make any arguments to support
that claim. Instead, they purport to "incorporate[] by reference"
their motion before the district court. That is not acceptable:
this court will only consider arguments made before this court;
everything else is deemed forfeited. United States v. Beltran, ---
F.3d ---, 2007 U.S. App. LEXIS 22054, at *4 (1st Cir. Sep. 14
2007).
Next, the Sleepers attempt to tar the arbitral award as
contrary to public policy--particularly, the policy reflected in
the Maine Potato Licensing Act, 7 M.R.S.A. § 1022 (2007). Since
the statute is designed (they say) to "protect the potato farmer
from the placing of oral planting orders," the Sleepers argue that
the arbitrator should not have invoked the statute of frauds to bar
any of their claims.
also merit vacatur. Advest, Inc. v. McCarthy, 914 F.2d 6, 8 (1st
Cir. 1990).
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Their theory seems to be that if (as they allege) oral
contracts were made despite the statutory requirement of a detailed
written record, those contracts should be enforced against the
purchasers as a form of penalty notwithstanding the general
doctrine that voids such agreements. But a contract can only be
enforced if it exists--and the arbitrator found that there were no
such oral contracts between Agway and the Sleepers; he invoked the
statute of frauds only as an alternative ground of decision.
Even if the Sleepers' argument rested on a sound premise,
legal mistakes by the arbitrator are not automatically subject to
correction on judicial review, United Paperworkers Int'l Union v.
Misco, Inc., 484 U.S. 29, 38 (1987), even when they are alleged to
touch on public policy. W.R. Grace & Co. v. Local Union 759, Int'l
Union of United Rubber, 461 U.S. 757, 766 (1983) (describing
exceptions). Since the premise fails, we need not fine tune the
limits on reviewability.
Affirmed.
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