Venture Cotton Cooperative and Noble Americas Corp. v. Shelby Alan Freeman

Opinion filed April 30, 2015
In The
Eleventh Court of Appeals
__________
No. 11-11-00093-CV
__________
VENTURE COTTON COOPERATIVE AND
NOBLE AMERICAS CORP., Appellants
V.
SHELBY ALAN FREEMAN ET AL., Appellees
On Appeal from the 106th District Court
Gaines County, Texas
Trial Court Cause Nos. 11-02-16176 & 11-02-16184
OPINION ON REMAND
This is a consolidated interlocutory appeal of the trial court’s orders in
which it denied Venture Cotton Cooperative’s and Noble Americas Corp.’s
motions to compel arbitration under the Federal Arbitration Act (FAA). See 9
U.S.C. §§ 1–16; TEX. CIV. PRAC. & REM. CODE ANN. § 51.016 (West Supp. 2015).
We reverse and remand.
Venture is a cotton cooperative-marketing association managed by Noble.
Appellees are a group of twenty-eight cotton farmers who each contracted to sell
cotton to Venture. In the trial court, there were two separate suits. Two farmers
were plaintiffs in one suit, and the twenty-six other farmers were plaintiffs in
another suit. Appellees sued Appellants, as well as the cotton gin that acted as
Appellees’ agent when Appellees entered into the contracts, and asserted several
causes of action, including claims such as fraud, negligent misrepresentation, and
breach of fiduciary duty. Appellants filed a motion to compel arbitration in each
case based on the mandatory arbitration agreement contained in the contracts. The
trial court found that the arbitration agreement was unconscionable, and it denied
Appellants’ motions to compel arbitration.
In a single issue, Appellants argued that the trial court erred when it found
that the arbitration agreement was unconscionable and, thus, unenforceable.
Specifically, Appellants challenged Appellees’ arguments that the agreement was
procedurally unconscionable on one ground and substantively unconscionable on
three grounds. In a footnote, Appellants also challenged Appellees’ argument, to
the extent that Appellees raised it, that the agreement was substantively
unconscionable because of a conflict of interest or favorable bias present between
Appellants and the arbitration committee. Appellants also addressed the issue of
whether the underlying controversies were within the scope of an arbitration
agreement governed by the FAA; however, Appellees did not dispute that issue.
We initially affirmed the orders in which the trial court denied Appellants’
motions to compel. See Venture Cotton Coop. v. Freeman, 395 S.W.3d 272 (Tex.
App.—Eastland 2013), rev’d, 435 S.W.3d 222 (Tex. 2014) (Venture Cotton I). In
that opinion, based on the arguments in the parties’ briefs, we set out five
arguments1 that Appellees raised in the trial court and that Appellants challenged
on appeal as to whether the agreement was substantively unconscionable. Id. at
274–75. We held that the arbitration agreement was substantively unconscionable
1
We note that Appellants raised four challenges to Appellees’ arguments that the agreement was
substantively unconscionable. We divided one of those challenges into two, creating a total of five
arguments regarding whether the agreement was substantively unconscionable. It was on the one ground
that we divided into two that we initially affirmed the trial court’s orders.
2
on two of the five grounds raised by Appellees. Id. at 274–76. We did not reach
the other three grounds raised by Appellees in the trial court and challenged by
Appellants on appeal, nor did we reach the argument regarding procedural
unconscionability. Id. at 277. Because Appellees did not dispute that the
underlying controversies fell within the arbitration agreement, we also declined to
address that issue, and we assumed without deciding that the claims fell within the
agreement’s scope. Id. at 274. The two grounds that we found to be
unconscionable were that certain provisions in the arbitration agreement and in the
American Cotton Shippers Association’s (ACSA) rules prevented Appellees from
recovering statutory remedies under the Deceptive Trade Practices–Consumer
Protection Act, TEX. BUS. & COM. CODE ANN. §§ 17.41–17.63 (West 2011 &
Supp. 2014), and from recovering attorney’s fees under TEX. CIV. PRAC. & REM.
CODE ANN. § 38.001 (West 2015). Id. at 274–76. We also held that the trial court
did not err when it did not sever the unconscionable terms from the agreement
because Appellants never asked the trial court to sever the terms. Id. at 277.
Therefore, we held that Appellants waived that argument. Id.
After it granted Appellants’ petition for review, the Supreme Court of Texas
concluded that the limitation on the recovery of statutory remedies and attorney’s
fees that we held to be unconscionable was insufficient to defeat arbitration under
the FAA. Venture Cotton Coop. v. Freeman, 435 S.W.3d 222, 225, 233 (Tex.
2014) (Venture Cotton II). The court opined that Appellees did not contractually
waive the DTPA remedies at issue and that, as such, any implied waiver under the
ACSA rules was “contrary to public policy and therefore invalid.” Id. at 230. In
addition, the court held that we erred when we declined to consider the severability
issue even though Appellants did not present the issue to the trial court. Id. at 230.
The court reasoned that, because “this is an interlocutory appeal, and the case
remains pending in the trial court,” Appellants could raise the severability
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argument when the case was again before the trial court. Id. “Conservation of
time and resources recommend that we consider the issue now because nothing
prevents Venture from urging severance in the trial court and, if denied, from
renewing its complaint in yet another interlocutory appeal.” Id. The court
concluded that the limitation upon recovery of statutory rights and remedies under
the DTPA was not an essential purpose of the agreement and that we erred when
we “declin[ed] to sever the objectionable limitation on the farmers’ statutory
rights.” Id. at 230–31 (relying on In re Poly-America, L.P., 262 S.W.3d 337, 360
(Tex. 2008) (orig. proceeding)). Therefore, we now sever the following provision
from the ACSA rules: “The awards shall be limited to the monetary damages
arising out of the failure of either party to perform its obligations pursuant to the
contract as determined by the Arbitration Committee and shall not include
attorney’s fees unless provided for in the contract.”
With regard to attorney’s fees, the court concluded “that neither the
contract’s attorney’s fee provision nor its effect on attorney’s fees under
Section 38.001 is sufficient to invalidate the arbitration agreement as
unconscionable.” Id. at 231. The court explained that “a contract that expressly
provides for one party’s attorney’s fees, but not another’s, is not unconscionable
per se”; “the attorney’s fee provision here is not, standing alone, decisive proof of
an unconscionable bargain.” Id.
In this court originally, Appellants argued that Appellees had contractually
waived their right to recover attorney’s fees and that, because they had, they could
not recover attorney’s fees under Section 38.001. However, we disagreed and held
that waivers must be specific in order to be effective. Venture Cotton I, 395
S.W.3d at 276 (citing Tex. Nat’l Bank v. Sandia Mortg. Corp., 872 F.2d 692, 701
(5th Cir. 1989)). Because there was no specific waiver of attorney’s fees under
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Section 38.001, we concluded that Appellees had not waived their rights to
attorney’s fees under Section 38.001. Id.
On appeal from our earlier decision, the supreme court wrote: “[T]he court
of appeals itself concludes that the arbitration agreement did not waive the
farmers’ statutory right to attorney’s fees under section 38.001 and so its relevancy
to the court’s unconscionability analysis is unclear.” Venture Cotton II, 435
S.W.3d at 231. The supreme court then concluded that because we had found that,
no harm had been visited upon Appellees, the agreement to arbitrate was not
unconscionable. Id. at 232.
We concede that we inartfully chose our words in Venture Cotton I; we did
not intend to convey the idea that Appellees were not harmed. We felt that the
harm was found in the fact that Appellees could not recover attorney’s fees under
Section 38.001 even though they had not waived them. That is because of the
following provisions in the ACSA rules and the arbitration agreement: “[A]wards
shall be limited to the monetary damages arising out of the failure of either party to
perform its obligations pursuant to the contract . . . and shall not include attorney’s
fees unless provided for in the contract,” and “[i]n the event of breach of this
Agreement by [Appellees], [Appellees] agree[] to pay all arbitration and court
costs, if any, and the reasonable attorney’s fees and litigation and arbitration
expenses of Venture.” By those provisions, Appellees could not recover
attorney’s fees even if they were otherwise entitled to them. The ACSA provision
has now been severed from the remaining provisions of the ACSA rules.
The supreme court indicated in its opinion that it was premature for us to
consider whether these provisions that limited the recovery of Appellees’
attorney’s fees were unenforceable, and it instructed that such determinations
should be entrusted to the arbitrator. Id. at 232–33; see also, G.T. Leach Builders,
LLC v. Sapphire V.P., LP, No. 13-0497, 2015 WL 1288373, at *11–12 (Tex.
5
A.K. Marsh. 20, 2015) (not yet released for publication) (holding that whether arbitration
agreement limits rights under the agreement itself is an issue of procedural
arbitrability and is for the arbitrators to decide). As instructed, we will leave that
determination to the arbitration committee.
The supreme court reversed the judgment of this court, and it remanded the
case for us to consider the remaining arguments on the issue of unconscionability.
Id. at 225. Therefore, we must first address whether the other three grounds of
unconscionability raised by Appellees in the trial court and challenged by
Appellants on appeal were in fact substantively unconscionable.
The other three grounds of unconscionability that we did not reach in our
first opinion are as follows: (1) whether the ACSA rules provided an arbitration
forum that was cost prohibitive due to fee shifting and excessive costs; (2) whether
the rules limited Appellees’ right to discovery; and (3) whether there was a conflict
of interest between Appellants and the ACSA. “[T]he 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) (orig. proceeding). “Unconscionability is to be determined in light of a
variety of factors, which aim to prevent oppression and unfair surprise; in general,
a contract will be found unconscionable if it is grossly one-sided.” Poly-America,
262 S.W.3d at 348.
As to Appellees’ argument that the ACSA rules provided an arbitration
forum that was cost prohibitive, Appellants argue that Appellees failed to establish
that they would incur excessive arbitration costs and that such costs would deter
Appellees from pursuing their claims against Appellants. We agree that Appellees
failed to meet their requisite burden of proof. “[E]xcessive costs imposed by an
6
arbitration agreement render a contract unconscionable if the costs prevent a
litigant from effectively vindicating his or her rights in the arbitral forum.” In re
Olshan Found. Repair Co., LLC, 328 S.W.3d 883, 893 (Tex. 2010) (orig.
proceeding) (citing Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 90
(2000)). The party that opposes arbitration has the burden of proof. Id. It is not
sufficient for the party to show that it is at risk of incurring excessive fees and
costs. Poly-America, 262 S.W.3d at 356 (“the ‘risk’ that [a claimant] will be
saddled with prohibitive costs is too speculative to justify the invalidation of an
arbitration agreement”) (alteration in original) (quoting Green Tree, 531 U.S. at
91) (internal quotation marks omitted). The complaining party must present “some
evidence that [it] will likely incur arbitration costs in such an amount as to deter
enforcement of statutory rights in the arbitral forum.” Id. (citing In re U.S. Home
Corp., 236 S.W.3d 761, 764 (Tex. 2007); FirstMerit Bank, 52 S.W.3d at 756–57)).
Such evidence may be shown “through invoices, expert testimony, reliable cost
estimates, or other comparable evidence.” Olshan, 328 S.W.3d at 895.
To determine whether an arbitral forum is an adequate substitute to litigation
on the basis of costs, we analyze three factors: (1) the claimant’s ability to pay the
arbitration fees and costs, (2) the expected cost differential between arbitration and
litigation and whether that differential is so substantial that it deters the claimant
from bringing its claims, and (3) the actual cost of arbitration compared to the total
amount of damages that the claimant is seeking. Id. at 893–95. “[A] comparison
of the total costs of the two forums is the most important factor in determining
whether the arbitral forum is an adequate and accessible substitute to litigation.”
Id. at 894–95. At the hearing on the motions to compel arbitration, Appellees
presented general testimony about how the arbitral forum was cost prohibitive in
comparison to litigation. Robert Perry Brewer, one of the Appellees, testified that,
based on his reading of Appellants’ arbitration demand letter and the arbitration
7
rules, he would have to pay all arbitration costs, court costs, and attorney’s fees.
Shelby Alan Freeman, another Appellee, testified that he agreed with Brewer’s
testimony and understanding of the arbitration rules. Although Freeman testified
that he did not know the exact amount of what the arbitration costs would be, he
agreed that it would easily be in the tens of thousands of dollars and that he could
not afford to pay those expenses. Freeman further testified about the potential for
Appellees to have to be away from their farms during the critical planting season;
he explained that one could not put a dollar amount on that cost. David Bergen,
another Appellee, also testified that he could not afford to go to arbitration. Out of
the twenty-eight Appellees, Brewer, Freeman, and Bergen were the only three that
testified that they could not afford the costs of arbitration; however, none of the
three testified at the hearing as to what specific cost amounts they would incur if
they were subject to arbitration under the ACSA rules.
Appellees attached an affidavit by Brewer to their post-hearing brief in
which Brewer provided detailed cost estimates for fees and travel for Appellees
and the arbitrators. Brewer calculated that the cost of arbitration would be
$167,314, without an appeal, and that the cost of trial—a filing fee and a jury fee—
would be $265. However, Appellants objected to, and the trial court struck,
Brewer’s affidavit. Thus, we cannot consider this evidence in our review of
whether Appellees presented sufficient evidence to show that they would incur
arbitration costs in such an amount as to deter them from pursuing their claims in
the arbitral forum.
Although none of Appellees testified as to the specific fees imposed under
the ACSA rules, the rules were admitted into evidence, and the rules provide for
what expenses the parties must bear. The rules require that the party that requests
arbitration must submit an arbitration service fee in the amount of one-half of one
percent of the amount claimed for damages along with the party’s complaint.
8
ACSA members must pay a minimum of $1,000 and a maximum of $3,000.
Nonmembers must pay a minimum of $5,000; no maximum amount is specified. It
is undisputed that Appellants are members of the ACSA and that Appellees are
nonmembers. Appellees argue that, for just two of the farmers, the filing fee of
one-half of one percent of their $6,771,270 claim is $33,856.35. However,
Appellants have already filed a complaint against Appellees and paid the required
service fee. Under the rules, Appellees are permitted “to file a cross-complaint,
counterclaim, or offset, arising out of the same transaction upon which the
complaint is based.” The rules do not address whether the party that files a cross-
complaint, counterclaim, or offset must also submit a fee with its filing as is the
case when a party files a complaint. Therefore, based on our review of the rules
and the testimony Appellees presented at the hearing, Appellees have not shown
that they will likely incur such an exorbitant filing fee.
In addition to the filing fees, the rules also provide that “an amount may be
required to compensate the arbitrators for their time and reimburse them for
expenses (including travel and legal counsel), if any” (emphasis added). This
additional amount is paid equally by the parties. “Unless it demonstrates by
affidavit and proof satisfactory to the arbitrators that it is unable to pay its share of
fees and expenses, a party refusing to pay its share of fees or expenses shall forfeit
its right to appear and be heard.” This section of the rules provides nothing but
speculation as to whether Appellees will incur any costs related to the arbitrators’
time and expenses. Furthermore, even if Appellees were required to pay these
extra costs, the rules provide an opportunity for Appellees to show that they could
not afford to pay such costs and, thus, could avoid the additional costs altogether.
Appellees also raised a concern regarding the costs associated with
requesting a hearing before the arbitration panel. The ACSA rules provide that the
party requesting the hearing must pay the additional expenses of the hearing,
9
including the expense to make the record and the travel expenses of the arbitrators,
the executive vice president, and legal counsel for the ACSA. Nonmembers must
advance the amount that the arbitrators determine is necessary to cover such
expense. If both parties request a hearing, “the amount to be paid by each in
advance shall not exceed one-half of the estimated amount.” “Failure to advance
expenses may be grounds for denying a request for an oral hearing or rendering the
noncomplying party in default.” Parties are refunded any money paid in excess of
the actual expense of the hearing. While it appears that Appellees would have to
advance the full estimated cost of the hearing if they were the only party to request
a hearing, the rules provide that Appellees could be awarded those fees in the
arbitrators’ decision.
The rules further provide that an oral hearing, if requested, shall be held in
Memphis, Tennessee. Thus, Appellees also argue that they would have to pay for
themselves—twenty-eight farmers—to travel to and stay in Memphis, which
would “easily run into the tens of thousands of dollars.” Appellants assert that
Appellees can request the hearing to be held in Houston, Texas, instead of in
Memphis. The arbitration agreement provides that “[t]he site of the arbitration
shall be either Houston, Texas or Memphis, Tennessee, as chosen by Venture,
unless otherwise directed by the arbitrator(s).” Brewer testified that the rules,
based on his understanding, required that the hearing would be conducted in
Memphis. Although the arbitration agreement provides that Venture may choose
the “site of the arbitration,” the rules expressly provide that oral hearings shall be
held in Memphis. Thus, based on the rules, it does not appear that Appellees can
request the hearing to be held in Houston. As we discussed earlier, although
Brewer testified by affidavit regarding detailed estimates of the costs for all
twenty-eight farmers to travel to Memphis, the trial court struck Brewer’s affidavit,
and we cannot consider it as evidence in our review. Appellees have not presented
10
any other specific evidence as to the costs associated with traveling to Memphis.
Furthermore, it is not known whether a hearing will even be necessary in the
arbitral forum, nor is it known whether all twenty-eight farmers would actually
attend the hearing, considering the fact that only three of the farmers testified at the
hearing on the motions to compel arbitration. We do not believe that Appellees
have sufficiently shown that the potential cost of a possible arbitration hearing is so
great as to deter them from filing their cross-claims in the arbitral forum.
The ACSA rules also contain provisions relating to appellate costs. A party
who wishes to appeal the arbitrators’ decision must pay an appellate fee equal to
the filing fee, with a minimum fee of $1,000 and a maximum fee of $3,000. The
appealing party must also send a certified check for the amount of the arbitrators’
award, payable to the adverse party. The rules require the executive vice president
to hold the check while the appeal is pending. Nonmembers who request oral
argument on appeal must also pay for the estimated appellate hearing expenses in
advance. As with the other cost provisions that we have evaluated, this one is also
speculative. If the arbitrators grant Appellees the relief that they seek, there will be
no reason for Appellees to incur any appellate costs.
Likewise, Appellees’ argument that the arbitration agreement provides that
they must pay all arbitration expenses and attorney’s fees is without merit. While
it is true that the agreement provides that Appellees agreed “to pay all arbitration
and court costs, if any, and the reasonable attorney’s fees and litigation and
arbitration expenses of Venture,” the agreement only requires Appellees to pay
such costs and attorney’s fees if they breached their contracts with Venture. If the
arbitrators do not find that Appellees breached their contracts with Venture,
Appellees will not be required to pay all of Venture’s costs under this provision.
Moreover, the rules provide that “[t]he arbitrators may, in their decision and award,
provide for payment by one party to the other of all or any part of fees and
11
expenses incurred.” Therefore, if Appellees are successful in their claims against
Appellants, Appellees may ultimately bear no cost at all in the arbitral forum.
As to evidence of litigation costs, the only mention of litigation costs during
the hearing on the motions to compel came when Freeman’s attorney questioned
him as to whether he had been asked to pay for an attorney for the district judge or
for the judge’s travel, meals, expenses, or time. Freeman testified that he had not
been asked to pay for those things and that, if he had, it would be tough for him to
pay those costs. Thus, Appellees also failed to present, during the hearing on the
motions to compel arbitration, any specific evidence regarding the cost of
litigation. As we have previously discussed, we cannot consider Brewer’s affidavit
in which Brewer testified that the cost of litigation would be $265.
Because Appellees failed to present any evidence of the cost of litigation and
because the evidence regarding the cost of arbitration was speculative, we cannot
compare the total costs of the two forums. Therefore, we conclude that Appellees
did not present sufficient evidence to show that arbitration of their claims would be
unconscionable on the ground that the arbitral forum was cost prohibitive. See
Olshan, 328 S.W.3d at 897, 899.
The next argument that we must consider is whether the arbitration
agreement is substantively unconscionable because the ACSA rules limit
Appellees’ right to discovery. We look to whether the agreement imposes
discovery limitations that would prevent a party from effectively presenting its
claims. Poly-America, 262 S.W.3d at 358. Here, however, the rules do not
expressly limit Appellees’ right to discovery. The rules provide that “[t]he scope
of discovery in any matter submitted pursuant to these rules shall be subject to the
discretion of the arbitrators.” Appellees argue that, although discovery is at the
discretion of the arbitration panel, there is no time allowed for discovery under the
rules because the rules also require the panel to act promptly and to make a report
12
within thirty days of receiving the final papers from the executive vice president.
Although the rules do not specify when and how discovery is permitted, we
assume that the arbitrators can allow for discovery and extend the deadline of when
the final papers are due if necessary. One of the specific concerns raised at the
hearing on the motions to compel was that, if the parties had to submit to
arbitration, the pleading deadline in the arbitral forum would expire before the
federal government completed its yearly documentation of the amount that each
farm produced. Because several years have elapsed since the initial hearing on the
motions to compel, we assume that this specific concern is now moot.
Appellees also argue that no procedures exist under the rules that permit
witnesses to testify or that allow a party to cross-examine the opposing party’s
witnesses. While this is true, the rules are silent as to whether testimony is
permitted at a requested hearing; thus, it is equally true to state that the rules do not
prohibit witnesses from testifying or from being cross-examined.
Appellees further assert that Appellants’ course of conduct was un-
conscionable when Appellants demanded that some farmers, who fully delivered
the bales of cotton that they produced, be sent to arbitration. For example, Bergen
testified that he fully delivered all the bales of cotton that he produced, yet he still
received an arbitration demand letter. Bergen further testified that, without a right
to discovery in the arbitral forum, he was worried that he would have to fight a
claim that Appellants had not even tried to substantiate. Appellees contend that, if
those farmers, such as Bergen, were allowed to proceed in the trial court instead of
being sent to arbitration, they could file a motion for summary judgment and defeat
Appellants’ claim that they breached the contract. While we agree that Appellants
should not succeed on their breach of contract claims until they prove that
Appellees did not deliver the bales of cotton as required under the contract, we do
not believe that the arbitrators will rule in favor of Appellants without such proof.
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The rules provide that “[p]arties to the arbitration are responsible for clearly
presenting all aspects of their case (the Executive Vice President and the
Arbitration panel are not responsible for undertaking fact-finding searches or
discovery).” There is no provision in the rules that allows Appellants to succeed
on any claim before the arbitrators without presenting sufficient evidence to prove
such claim. We also note that, while the rules state that the arbitration panel is
“not responsible for undertaking fact-finding searches or discovery,” the same is
true for a trial court or jury. While the trial court or jury is responsible for finding
facts based on the evidence presented, the factfinder is not responsible for
discovering facts.
At this juncture, Appellees have not shown that their right to discovery will
be limited in any way in the arbitral forum. Thus, until an arbitrator actually
denies Appellees’ requests for discovery, it is only speculative that Appellees’
right to discovery will be limited. Therefore, Appellees’ argument does not
support their claim that the arbitration agreement is substantively unconscionable.
The third argument that Appellees raised in the trial court and that
Appellants challenge on appeal, as to whether the agreement was substantively
unconscionable, deals with Appellants’ relationship with the ACSA. Appellees
contended that a conflict of interest existed between Appellants and the ACSA
because the manager of Noble, one of the Appellants, was also on the ACSA’s
board of directors and because Appellants’ legal counsel was also legal counsel for
the ACSA. However, according to the ACSA’s rules, it does not appear that any
one director on the board plays a vital role in the arbitration process. The
executive vice president and the president have active roles in the selection process
in that the executive vice president selects the three arbitrators to hear a case and
the president approves the selection. Arbitrators are “selected from the
membership, retired members, or from a roster of qualified arbitrators approved by
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the Board of Directors.” Thus, it is possible that the arbitrators that are selected by
the executive vice president to hear this case will come from a list of arbitrators
that Noble’s manager, as one of the directors on the board, approved. However,
the rules also provide that, “[t]o qualify as an arbitrator, a member should be
commercially disinterested with respect to the particular dispute intended to be
presented to him for judgment.” A selected arbitrator must also disclose “any
circumstances likely to affect his or her impartiality, including any bias or any
financial or personal interest in the result of the arbitration.” Such arbitrator shall
be replaced if either party requests replacement. Furthermore, “either party to the
case may challenge the appointment of [an arbitrator] for prejudicial or other
causes.” And, if the challenge is determined to be valid, the executive vice
president is to replace the arbitrator. Parties may also challenge the appointment of
an arbitrator in an appeal of the initial award.
Appellees argue that their ability to object to appointed arbitrators is a
“hollow and worthless right because disqualification simply leads to an endless
procession of ACSA cotton merchant members” who will “benefit from arbitration
rulings that favor member cotton merchants in disputes with non-member cotton
producers.” Appellees do not argue whether unbiased arbitrators can, in general,
be found. Instead, they argue whether, under the rules in this case, unbiased
arbitrators will be found. However, according to the rules, arbitrators are not
necessarily members or retired members of the ACSA. They may also be selected
“from a roster of qualified arbitrators approved by the Board of Directors.”
While it is possible that the arbitral forum will be biased because one of the
Appellants serves on the board of directors for the ACSA and because he or she
might play a role in approving a biased arbitrator that is not replaced upon request,
it is simply that—a mere possibility. Until Appellees are denied access to unbiased
arbitrators, it would be a matter of pure speculation to find that there is a conflict of
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interest that will not be resolved. See Lawson v. Archer, 267 S.W.3d 376, 384
(Tex. App.—Houston [14th Dist.] 2008, no pet.) (“We do not know who the
specific arbitrators will be; and, like the United States Supreme Court . . . , we
‘decline to indulge the presumption that the parties and arbitral body conducting a
proceeding will be unable or unwilling to retain competent, conscientious and
impartial arbitrators.’”) (quoting Gilmer v. Interstate/Johnson Lane Corp., 500
U.S. 20, 30 (1991)).
Regarding Appellees’ argument that there is a conflict of interest because
Appellants’ legal counsel is also legal counsel for the ACSA, Appellants contend
that there is no indication from the record that Appellants’ legal counsel will
violate the rules of professional conduct regarding conflicts of interest by
representing Appellants and counseling the arbitrators. Appellants also contend
that there is no evidence that the ACSA will violate the provisions of the FAA by
engaging in conduct that would authorize a court to vacate the arbitrators’ decision.
If indeed Appellants’ counsel were to continue to represent Appellants and advise
the arbitrators in ruling on this case, there would be no doubt that the arbitral
forum would be partial. But we cannot speculate as to what will happen in the
future.
Appellees also argue that Venture has exclusive access to prior ACSA
arbitration decisions allowing Venture to tailor its arbitration strategy based on
prior successful or failed arguments and the tendencies of particular arbitrators.
The rules require the ACSA to publish, to all of its members, a bulletin that
includes the details of all cases arbitrated, the awards made, the full text of all
decisions, the names of all the parties, and any other information that may be of
interest to its members. Appellees assert that there is no mechanism for a
nonmember to receive or request the ACSA’s arbitration bulletins. As to this
issue, the rules are again silent. We do not know whether Appellees would be
16
denied access to these bulletins or to the information contained in the bulletins if
Appellees presented their request to the ACSA or if Appellees requested such
information in discovery.
Because Appellees failed to present evidence that the ACSA will in fact
provide biased arbitrators to hear Appellees’ case, that Appellants’ legal counsel
will in fact continue to represent both Appellants and the ACSA during the
arbitration proceedings, or that Appellants have access to pertinent information that
Appellees cannot in fact obtain, Appellees have failed to show that the rules
prevent them from effectively vindicating their rights in the arbitral forum.
Therefore, Appellees’ argument that the arbitral forum will be biased does not
support the trial court’s determination that the arbitration agreement was
unconscionable.
Another issue that Appellants raised in their briefs, but that we did not
address in our first opinion, is whether the arbitration agreement was procedurally
unconscionable. Although Appellees candidly admitted in their response brief that
this argument was probably not the basis of the trial court’s finding that the
agreement was unconscionable and although Appellees stated that they were not
advancing this argument on appeal, we will nevertheless address this issue because
it was presented to the trial court for consideration in its determination of whether
the arbitration agreement was unconscionable. The trial court did not express its
reasons for finding the agreement unconscionable, nor did the trial court
specifically exclude Appellees’ procedural argument as a basis for its finding of
unconscionability; to avoid addressing it at a later date, we will address it now.
Procedural unconscionability “refers to the circumstances surrounding the
adoption of the arbitration provision.” In re Halliburton Co., 80 S.W.3d 566, 571
(Tex. 2002). Appellees argued that the arbitration agreement was procedurally
unconscionable because Venture misrepresented the terms of the contract and
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fraudulently induced Appellees to enter into the contract as a result. However, this
argument goes toward Appellees’ misrepresentation and fraudulent inducement
claims as to the contract as a whole, not as to the arbitration agreement itself.
“[D]efenses must specifically relate to the Arbitration Addendum itself, not the
contract as a whole, if they are to defeat arbitration. Defenses that pertain to the
entire . . . contract can be arbitrated.” FirstMerit Bank, 52 S.W.3d at 756 (footnote
omitted). Therefore, this argument does not support the trial court’s finding that
the arbitration agreement was unconscionable.
Appellees also argued that the arbitration agreement was procedurally
unconscionable because Venture was the sole drafter of the agreement and yet
Venture did not disclose the ACSA rules, describe the rules, or warn that the rules
were biased against Appellees. Appellants counter that the rules were readily
available on the ACSA website and that Appellees had notice of and an
opportunity to review the rules before agreeing to arbitration under them.
Appellants were not present when Appellees entered into the contracts.
Ocho Gin Company, Ltd., a cotton gin that allowed Appellants to present their
proposal to any interested farmers, acted as a facilitator between Appellants and
Appellees. One of Ocho Gin’s employees, who marketed and sold cotton for the
gin, was the person who mainly facilitated Appellees’ enrollment into the Venture
Cotton pool. She testified at the hearing on the motions to compel that she vaguely
read the arbitration provision in the contract but that she did not tell Appellees that
there was an arbitration provision. Brewer testified that he did not know there was
an arbitration provision in the contract when he signed the contract. Ocho Gin’s
employee also testified that she did not go to the ACSA website to obtain a copy of
the ACSA rules for arbitration and that she did not know what the rules required or
prohibited. However, she believed that most cotton contracts contained an
arbitration clause. It does not appear from the record that Appellees read the
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contract before signing it. And although each Appellee signed at least one of the
documents in the contract, some of them did not sign the specific document that
contained the arbitration provision.
Regardless of whether Appellants or Ocho Gin told Appellees that there was
an arbitration clause in the contract and regardless of whether Appellees read the
contract or read the rules, the contract clearly provided that “[a]ll disputes will be
resolved pursuant to binding arbitration pursuant to the arbitration rules of the
American Cotton Shippers Association.” A party is bound to the contract he signs
regardless of whether he read it or believed it had different terms. In re McKinney,
167 S.W.3d 833, 835 (Tex. 2005) (orig. proceeding). While the ACSA rules were
not attached to the contract, they were referenced and readily available on the
ACSA website. “A contractual term is not rendered invalid merely because it
exists in a document incorporated by reference.” In re D. Wilson Constr. Co., 196
S.W.3d 774, 781 (Tex. 2006) (citing Owen v. Hendricks, 433 S.W.2d 164, 166
(Tex. 1968)); see also In re December Nine Co., 225 S.W.3d 693, 702 (Tex.
App.—El Paso 2006, orig. proceeding.) (“We fail to see how having to request a
copy of the incorporated Rules is so onerous a requirement as to amount to
procedural or substantive unconscionability.”).
Appellees’ complaint that not all Appellees signed the specific document
that contained the arbitration provision is also without merit. It is well settled that
an unsigned document may be incorporated by reference in the signed document.
Owen, 433 S.W.2d at 166. Here, each Appellee signed a document titled “Annual
Enrollment Agreement.”2 The Annual Enrollment Agreement provided that the
undersigned agreed to sell and deliver cotton to Venture in accordance with the
Membership and Marketing Agreement. The Membership and Marketing
2
We have not been able to locate the signature page of the Annual Enrollment Agreement for
Appellee Gerardo Froese. However, we have located his signature on the document titled “Terms and
Conditions of Enrollment,” and this document also references the Membership and Marketing Agreement.
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Agreement contained the arbitration clause. Thus, the failure by some Appellees
to sign the Membership and Marketing Agreement does not invalidate the
arbitration agreement. See, e.g., Teal Constr. Co./Hillside Villas Ltd. v. Darren
Casey Interests, Inc., 46 S.W.3d 417, 420 (Tex. App.—Austin 2001, pet. denied)
(holding that an unsigned arbitration agreement contained in a document
incorporated by reference into the signed contract constitutes an enforceable
arbitration agreement). Appellees have not shown that the arbitration agreement
was procedurally unconscionable. Therefore, Appellees’ procedural
unconscionability arguments do not support the trial court’s finding that the
arbitration agreement was unconscionable.
Although not addressed on appeal by the parties, Appellees raised two other
arguments in the trial court in support of their claim that the arbitration agreement
was substantively unconscionable. Because the trial court was presented with
these two additional arguments, we feel that, in this interlocutory appeal, we must
determine whether either argument could support the trial court’s conclusion that
the agreement was unconscionable.
The first argument we will address is whether Appellees would be limited in
their ability to adequately present their counterclaims in the arbitration forum as a
result of the provision in the rules that provides that “in no case shall the matters
submitted by the defendant be any other than those directly related to the
transaction on which the original complaint is made.” Appellees argued that this
rule prohibits any meaningful assertion of counterclaims by Appellees against
Appellants, and they further claimed that there is a real risk that Appellees will not
have a meaningful forum in which to adjudicate their counterclaims. Specifically,
Appellees argued that they would be barred from bringing claims under the DTPA,
bringing claims for consequential damages, and bringing claims for punitive
damages. At the hearing on the motions to compel arbitration, Brewer testified
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that the rules required him to waive any counterclaims against Appellants, except
as to the manner in which Appellants framed the dispute.
We have previously addressed Appellees’ argument that they cannot recover
certain damages under the ACSA rules, and we have now severed from the
agreement the ACSA rule that limited arbitration awards so that the rules no longer
limit the type of damages that the arbitrators can award. It appears from the
arguments of the parties that Appellants have initiated an arbitration proceeding
against Appellees for breach of contract. The rules require that any counterclaim
filed by Appellees be “directly related to the transaction on which the original
complaint is made.” We do not see how any of Appellees’ counterclaims, such as
fraudulent inducement, would be barred under the ACSA rules. To the contrary, it
appears to us that the claims that Appellees have raised against Appellants in the
trial court are “directly related” to the contract—“the transaction”—that Appellants
have claimed Appellees breached. We do not believe that Appellees will be
limited in their ability to adequately present their counterclaims in the arbitral
forum. Therefore, this argument also does not support the trial court’s conclusion
that the agreement was unconscionable.
The second argument that was presented to the trial court but that was not
presented on appeal is whether Ocho Gin is subject to the arbitration agreement.
Appellees argued at the hearing on the motions to compel arbitration that the
arbitration rules deprived them of their right to pursue claims against Ocho Gin for
joint and several liability because Ocho Gin was not subject to arbitration and that
the arbitral forum did not have any jurisdiction over Ocho Gin. Appellants
responded in a post-hearing brief that, although Ocho Gin was a non-signatory to
the arbitration agreement, Ocho Gin should be compelled to arbitration based on
contract principals such as agency and estoppel.
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Even if we assume that Ocho Gin is not bound by the arbitration agreement
and that Appellees cannot pursue their claims against Ocho Gin in arbitration
without Ocho Gin’s consent, we have not found any authority that stands for the
proposition that an arbitration agreement is unconscionable under such
circumstances. We have found, however, authority that suggests such
circumstances would not render the agreement unconscionable. See In re Palm
Harbor Homes, Inc., 195 S.W.3d 672, 678 (Tex. 2006) (holding third-party
beneficiary’s limited right, as provided for in the contract, to opt out of arbitration
did not render the arbitration agreement so one-sided as to be substantively
unconscionable). Therefore, Appellees’ argument that the arbitration rules deprive
Appellees of their right to pursue claims against Ocho Gin for joint and several
liability does not support the trial court’s finding that the agreement was
unconscionable.
Because we conclude that none of Appellees’ remaining arguments support
a finding that the agreement was unconscionable and because we have now
severed the ACSA provision that limits the award an arbitrator can give, we find
that the trial court abused its discretion when it did not grant Appellants’ motions
to compel arbitration.
We reverse the orders of the trial court and remand this cause to the trial
court for the court to enter an order in which it compels the parties to arbitration
and in which it stays all proceedings in the trial court until the conclusion of such
arbitration.
April 30, 2015 JIM R. WRIGHT
Panel consists of: Wright, C.J., CHIEF JUSTICE
Willson, J., and McCall.3
Bailey, J., not participating.
3
Terry McCall, Retired Justice, Court of Appeals, 11th District of Texas at Eastland, sitting by
assignment.
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