Opinion
Civil Nos. 03-848 (JRT/FLN), 03-849 (JRT/FLN), 03-853 (JRT/FLN), 03-854 (JRT/FLN).
July 2, 2003.
Noel L. Phifer, Jr., Gislason Hunter, New Ulm, MN, Attorney for Plaintiffs.
Michael H. Wetmore, Husch Eppenberger, St. Louis, MO, Attorney for Defendant.
MEMORANDUM OPINION AND ORDER GRANTING DEFENDANT'S MOTION TO STAY AND TO COMPEL ARBITRATION
This dispute stems from an alleged breach of a Hog Procurement Agreement ("Agreement"). Plaintiffs, who are hog producers, filed this action in state court alleging that defendant John Morrell Co., Inc. ("Morrell"), a hog purchaser, breached the parties' Agreement. Defendant timely removed to this Court, and now asks the Court to dismiss or stay this case pursuant to an arbitration provision in the Agreement. Plaintiffs contend that the arbitration clause is not enforceable, and that even if the arbitration clause is valid, that the present dispute does not fall within the scope of the arbitration clause. For the reasons discussed below, defendant's motion is granted, and the Court will stay further proceedings in this Court pending arbitration. The Court will retain jurisdiction for any appeal from the arbitration proceedings.
BACKGROUND
Defendant, a Delaware corporation headquartered in Ohio, is a subsidiary of Smithfield Foods, the largest pork processor and hog purchaser in the world. Plaintiffs entered into separate, but nearly identical, Hog Procurement Agreements ("Agreements") with Morrell to supply hogs to Morrell. Although the parties signed separate Agreements, the plaintiffs negotiated as a team. Plaintiffs negotiated with Morrell employee David Poppen. During the course of these negotiations, Poppen provided a standardized Morrell form agreement to plaintiffs. Plaintiffs knew that certain terms, such as those regarding pricing, ledger balances, and number of hogs to be delivered, could be negotiated, but claim that they were unaware that other terms, namely, the arbitration and choice of law terms, could be negotiated.
After a period of negotiations, the parties signed the Agreements on October 7, 1997. The Agreements essentially provided that the plaintiffs would supply varying numbers of hogs and would receive a contract floor price for the delivered hogs. Each plaintiff had an account with the defendant, and depending on the actual open market price for hogs at the time of delivery, these accounts would be either credited or debited, resulting in a "ledger balance." The Agreements contained a clause that indicated that the Agreements could be extended, at each plaintiff's option, so long as the ledger was less than minus $50,000. Plaintiffs complain that they each attempted to extend their Agreements pursuant to the extension clause, but that defendant wrongfully refused to extend the Agreements. Defendant responds that each of the plaintiffs had ledger balances in excess of negative $50,000, therefore defendant was not obligated to extend the Agreements. Plaintiffs also complain that defendant wrongfully demanded payment of the plaintiffs' negative ledger balances.
Each of the plaintiffs sued defendant in Minnesota state court, alleging the same six counts and requesting identical relief. Plaintiffs allege breach of the Agreement, breach of the implied promise of good faith, and fraud and misrepresentation, as well as statutory violations. Plaintiffs request enforcement of certain terms in the Agreement and seek a declaratory judgment that defendant has forfeited its right to receive certain sums under the contract. Defendant timely removed each of the underlying cases to this Court and filed the instant motion to stay or dismiss pending arbitration.
CHOICE OF LAW and ARBITRATION CLAUSES
The Agreement contains a choice of law provision stating Ohio law governs all the parties' rights and obligations under the Agreement. Specifically, the clause states: "[t]his agreement, the relationship of the parties, and all of their respective rights and obligations shall be construed and interpreted in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws thereof."
The Agreement also contains the following arbitration clause:
Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration according to the rules, then obtaining, of the American Arbitration Association or such other rules as it may designate. The American Arbitration Association is hereby authorized to make arrangements for any such arbitration to be held under such rules in Cincinnati, Ohio, unless the parties hereto agree upon some other location for the arbitration. This Agreement to arbitrate shall be enforceable, and the judgment upon any award rendered by all or a majority of the arbitrators may be entered, in any court of any county having jurisdiction.
ANALYSIS
I. Federal Arbitration Act ("FAA")To stay or dismiss pending arbitration, the moving party, the defendant in this dispute, must show that there is a valid arbitration agreement in effect between the parties, and that the present dispute is within that agreement. Fleet Boston Robertson Stephens v. Innovex, Inc., 264 F.3d 770, 773 (8th Cir. 2001); Lebanon Chem. Corp. v. United Farmers Plant Food, Inc., 179 F.3d 1095, 1100 (8th Cir. 1999). The FAA, 9 U.S.C. § 1-16, was enacted "to reverse the longstanding judicial hostility to arbitration agreements . . . and to place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). The FAA requires a court to enforce a written arbitration agreement as it would any other contract. 9 U.S.C. § 2 ("A written provision . . . to settle by arbitration a controversy . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.").
The parties do not dispute that the FAA applies in this case. They do, however, disagree about the validity and scope of the arbitration clause. Plaintiffs claim that the arbitration clause is not enforceable because the underlying contract itself was fraudulently induced and is therefore invalid. The Court must first assess the validity of the arbitration clause itself. Barker v. Golf U.S.A., Inc., 154 F.3d 788, 791 (8th Cir. 1998). If the Court finds the clause is valid and encompasses the instant dispute, then the claim of fraudulent inducement of the contract itself is for the arbitrator. Id. See Houlihan v. Offerman Co. Inc., 31 F.3d 692, 695 (8th Cir. 1994) (noting that "as counterintuitive as it may seem" a court can consider a claim that a party was fraudulently induced to include an arbitration clause in a contract, but not a claim that an entire contract was the product of fraud). See also ABM Farms, Inc. v. Woods, 692 N.E.2d 574, 577 (Ohio 1998) (noting that arbitration is favored under Ohio law and holding that to defeat a motion for stay to compel arbitration, "a party must demonstrate that the arbitration provision itself in the contract at issue, and not merely the contract in general, was fraudulently induced.").
Plaintiffs seem to assert that both the underlying contract, and the arbitration clause itself were fraudulently induced. Compare Count III of the Amended Complaints (arguing fraudulent inducement of the contract as a whole) with Plaintiff's Memorandum in Opposition to Defendant's Motion to Dismiss/Stay Litigation and to Compel Arbitration (arguing that the arbitration clause and choice of law clauses themselves are unenforceable because they are the result of unequal bargaining power). Regardless of the theory plaintiffs pursue, the Court's analysis must proceed as laid out above. Specifically, the Court first must assess the validity and scope of the arbitration clause.
In this case, plaintiffs' factual allegations cannot fairly be limited to the making of the arbitration clause. Because plaintiffs claim fraud in the inducement of the contract as a whole, the claims are subject to mandatory arbitration as long as the requisites for application of the FAA — a valid arbitration agreement that encompasses the present dispute — are met. See Houlihan, 31 F.3d at 695 ("Because the [plaintiff's] claims of fraud in the inducement relate to the contract as a whole, they are subject to mandatory arbitration."). The Court therefore turns to an examination of those requisites.
"To decide whether the parties' agreement to arbitrate is valid, [the Court] look[s] to state contract law." Id. (citing Perry v. Thomas, 482 U.S. 483, 493-94 n. 9 (1987)). When making this determination, the Court applies only general contract law principles. Id. "Put another way, [the Court] may not invalidate an arbitration agreement under any state law applicable only to arbitration provisions; instead, [the Court] may apply only a state's general contract defenses." Id. (citing Doctor's Assoc. v. Casarotto, 517 U.S. 681, 687 (1996)). The Agreement contains a choice of law provision directing that Ohio law applies. The next step, therefore, is to determine whether, under Minnesota law, the choice of law provision should be given effect.
II. Choice of law
As noted, federal courts sitting in diversity look to state law to determine whether arbitration clauses and/or choice of law clauses are valid. See North Central Const. v. Siouxland Energy Livestock Coop., 232 F. Supp.2d 959, 963 (N.D. Iowa 2002) ("State contract law guides the court's analysis when considering the validity of an arbitration agreement."); Florida State Bd. of Admin. v. Eng'g and Envtl. Serv., Inc., 2003 WL 21205261 (Minn. May 21, 2003) ("In determining whether a choice of law provision in the parties' agreement will be given effect, a federal court sitting in diversity looks to the choice of law principles of the forum state. . . .") (citing Minn. Mining and Mfg. Co. v. Kirkevold, 87 F.R.D. 324, 331 (Minn. 1980)). Therefore the Court applies Minnesota choice of law principles to its analysis.
Under Minnesota law, the parties may agree that either state's law should apply. Hagstrom v. American Circuit Breaker Corp., 518 N.W.2d 46, 48 (Minn.Ct.App. 1994) ("Minnesota traditionally enforces parties' contractual choice of law provisions.") (citing Combined Ins. Co. of Am. v. Bode, 77 N.W.2d 533, 536 (Minn. 1976) (additional citations omitted)). Minnesota courts are "`committed to the rule' that parties may agree that the law of another state shall govern their agreement and will interpret and apply the law of another state where such an agreement is made." Milliken Co. v. Eagle Packaging Co., 295 N.W.2d 377, 380 n. 1 (Minn. 1980) (quoting Combined Ins. Co. of America v. Bode, 77 N.W.2d 533, 536 (1956)). See also Carlock v. Pillsbury Co., 719 F. Supp. 791, 807 (Minn. 1989) ("Generally, Minnesota enforces contractual choice of law provisions, so long as application of the chosen law is consistent with constitutional requirements.").
In the absence of a choice of law agreement, Minnesota courts apply the "better law" methodology adopted by the Minnesota Supreme Court in Milkovich v. Saari, 203 N.W.2d 408 (Minn. 1973). However, where, as here, "the parties express contractual provisions have designated that the laws of a particular state shall govern disputes arising under the agreement, Minnesota courts have applied the substantive law of the designated state without reference to the Milkovich factors." Surgidev Corp. v. Eye Technology, Inc., 648 F. Supp. 661, 679 (Minn. 1986) (citing Medtronic, Inc. v. Gibbons, 684 F.2d 565, 567-68 (8th Cir. 1982) (additional citations omitted)).
The choice of law provision might nonetheless be disregarded if plaintiffs were completely unable to negotiate the choice of law term. See Cell v. Moore Schley Securities Corp., 449 N.W.2d 144, 147 (Minn. 1989). In this case, plaintiffs claim that they were unable to negotiate the choice of law clause, because the agreement was a "take it or leave it" offer, and because they are unsophisticated parties and should not be expected to negotiate the choice of law clause. However the record is devoid of evidence that plaintiffs attempted to negotiate the choice of law or arbitration provisions. In addition, defendant submits the uncontroverted affidavit of David Poppen, who avers that the Agreement was not presented on a "take it or leave it" basis. Finally, although plaintiffs claim to be unsophisticated parties, each plaintiff operates a substantial business, selling thousands of hogs per year and being paid millions of dollars over the life of the Agreement. On the record before the Court, therefore, the choice of law clause should not be disregarded on the basis of unequal bargaining power or the complete inability to negotiate the term.
Plaintiffs also contend that the choice of law provision should be disregarded, because application of Ohio law violates Minnesota public policy as set forth in Minnesota agriculture producer protection laws, including the Minnesota Packers and Stockyards Act. See Minn. Stat. §§ 17.92, 17.94 (sections include implied promise of good faith by all parties in agriculture contracts, and a protection for producers who make substantial investments in capital improvements). However, neither of these provisions indicates that producers and purchasers cannot contract around those provisions. Unlike other statutes, the statutes purportedly violated do not contain "non-waiver" provisions. See, e.g., Minn. Stat. § 80C.21 ("[a]ny condition, stipulation, or provision, including any choice of law provision purporting to bind . . . a person acquiring any franchise to be operated in this state to waive compliance or which has the effect of waiving compliance with any provision of sections 80C.01 to 80C.22 or any rule or order thereunder is void."); Healy v. Carlson Travel Network Assocs., 227 F. Supp.2d 1080, 1086-87 (Minn. 2002) (discussing nonwaivability of Minnesota Franchise Act and correspondent Illinois Franchise Disclosure Act, 815 Ill. Comp. Stat. § 705/41). In the absence of a "non-waiver" provision in the statute, the Court will not assume that Minnesota's interest in protecting hog producers is more significant than its long-standing policy of enforcing contractual choice of law provisions. See Rowlette Assoc. v. Calphalon Corp., No. C8-99-1667 2000 WL 385502 (Minn.Ct.App. April 18, 2000) (discussing Minnesota' public-policy interest in enforcing contractual choice of law terms) (citing Hagstrom, 518 N.W.2d at 48-49).
Finally, plaintiffs argue that Ohio lacks minimum contacts with the dispute, therefore application of Ohio law violates constitutional requirements and cannot be applied. "A party's incorporation in a state is a contact sufficient to allow the parties to choose that state's law to govern their contract." Carlock v. Pillsbury Co., 719 F. Supp. 791, 807-808 (Minn. 1989). Morrell's headquarters are located in Ohio, providing a sufficient contact to apply Ohio law as provided in the Agreement. See Ferrofluidics Corp. v. Advanced Vacuum Components, Inc., 968 F.2d 1463 (1st Cir. 1992) (holding that "Ferro was incorporated in Massachusetts and did a substantial amount of business there. The cases indicate that this is a sufficient bond to sustain the contractual choice of law."); Woodling v. Garrett Corp., 813 F.2d 543, 552 (2nd Cir. 1987) (holding that lower court properly honored parties' contractual choice of Connecticut law with respect to matters of substance where Connecticut was principal place of business of one of the parties).
Applying Minnesota choice of law principles, the Court finds the choice of law provision valid. Therefore Ohio law applies to the instant dispute and the Court examines Ohio contract law to determine the validity of the arbitration clause.
III. Ohio Law
A. Validity of arbitration clause
Under Ohio law, a contract clause is unconscionable "where there is the absence of meaningful choice for the contracting parties, coupled with draconian contract terms unreasonably favorable to one party." Kelm v. Kelm, 623 N.E.2d 39, 41-42 (Ohio 1993); Harper v. J.D. Byrider of Canton, 772 N.E.2d 190, 192 (Ohio Ct.App. 2002). Preprinted forms, in themselves, do not constitute "absence of meaningful choice." Id. ("Preprinted forms are a fact of commercial life and do not serve to demonstrate prima facie unconscionability with regard to arbitration clauses.") (citations omitted).
In this case, there is no evidence that plaintiffs lacked a meaningful choice. Nothing in the record indicates that defendant is, or was, the only hog purchaser operating in Minnesota. Neither is there evidence that either the choice of law or arbitration clause was nonnegotiable. In contrast, the parties negotiated for some time and negotiated key provisions of the contract, including those terms included in the addendum to the Agreement. The presence of the addendum indicates that the parties knew that some negotiations were expected, and obviously negotiated to some extent. Also in the record is an Affidavit from Morrell employee Poppen in which Poppen avers that while there were extensive negotiations, the plaintiffs did not attempt to discuss or negotiate either the arbitration or choice of law clause. The Court assumes that defendant is in a better bargaining position, if only because of its size in the industry. However, Ohio cases, like federal decisions, consistently hold that mere inequality in bargaining power is not enough to render an agreement or term in an agreement unconscionable. Neubrander v. Dean Witter Reynolds, Inc., 610 N.E.2d 1089, 1091 (Ohio Ct.App. 1992) (citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991)).
Neither provision can fairly be considered "draconian." Arbitration agreements such as this one are commonplace, and there is nothing especially "defendant-friendly" about this one. Although application of Ohio law is arguably more favorable to defendant because of defendant's familiarity with that law, there is no indication that Ohio law is particularly friendly to purchasers and hostile to producers. The choice of Ohio as the location for the arbitration is more favorable to defendant, but is not outrageous given the corporate headquarters in Ohio.
Applying Ohio general contract law principles, the arbitration clause is valid and enforceable. The next step in the Court's analysis is to determine whether the present dispute — namely, plaintiffs' claims of fraudulent inducement, are within the scope of the arbitration clause. See Fleet Boston Robertson Stephens v. Innovex, Inc., 264 F.3d 770, 773 (8th Cir. 2001).
It is likely that the same result would be reached applying Minnesota law. Minnesota cases instruct that contracts of adhesion are not enforced. Contracts of adhesion are those contracts that are the result of unequal bargaining power between the parties. Hauenstein Bermeister, Inc. v. Met-Fab. Indus., Inc., 320 N.W.2d 886, 891 (Minn. 1982). However, "[t]he use of boilerplate language contained in a printed form . . . does not create a contract of adhesion. Id. In determining whether an agreement is a contract of adhesion, "a court must consider (1) the relative bargaining power of the parties, (2) the opportunity for negotiation, (3) the availability of the service for which the parties contracted, (4) whether the service was a public necessity, and (5) the relative sophistication of the parties." Interfund Corp. v. O'Byrne, 462 N.W.2d 86, 89 (Minn.Ct.App. 1990). Fields v. Maslon Edelman Borman Brand, LLP, 2003 WL 115449 (Minn.Ct.App. Jan. 14, 2003) (citing Ottman v. Fadden, 575 N.W.2d 593, 597 (Minn.Ct.App. 1998)). Consideration of these factors would not guide the Court to find a contract of adhesion in this case.
B. Scope of the arbitration clause
Plaintiffs claim that the arbitration clause does not encompass arbitration of claims of fraudulent inducement. Ohio courts note that "[i]t is well recognized that a clause in a contract providing for dispute resolution by arbitration should not be denied effect unless it may be said with positive assurance that the subject arbitration clause is not susceptible to an interpretation that covers the asserted dispute." Neubrander v. Dean Witter Reynolds, Inc., 610 N.E.2d 1089, 1090 (Ohio Ct.App. 1992). Federal courts follow a similar rule: "The federal rule on the scope of arbitration is a liberal one favoring arbitration, and the arbitrator may be called upon to determine the scope of the arbitration clause. All doubts as to whether an arbitration clause covers a particular dispute are to be resolved in favor of coverage." RPJ Energy Fund Mgmt, Inc. v. Collins, 552 F. Supp. 946, 950 (Minn. 1982) (citations omitted).
Minnesota courts evidence a similar principle. See Heyer v. Moldenhauer, 538 N.W.2d 714, 716 (Minn.Ct.App. 1995) ("If it is `reasonably debatable' whether a dispute is subject to arbitration, the district court should forward the dispute to arbitration.") (citing Woog v. Home Mut. Indem. Co., 340 N.W.2d 863, 865 (Minn. 1983)).
Plaintiffs contend that the arbitration clause does not encompass their tort-based fraudulent inducement claim, because the clause applies only to contract-based disputes. However, similar phrases have been considered broad enough to cover torts as well as contracts. See Dunn v. L M Bldg., No. 77399, 2000 WL 1594102 (Oct. 26, 2000) (holding that clause stating "[a]ny claim or controversy arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration" was a "broad" clause and encompassed claims of fraudulent inducement). See also Watkins Sons Pet Supplies v. lams Co., 254 F.3d 607, 611 (6th Cir. 2001) (applying Ohio law and finding that choice of law provision stating that "This agreement shall be governed by the laws of the State of Ohio" encompassed tort as well as contract-based claims); Northwest Airlines, Inc. v. Astraea Aviation Serv., Inc., 111 F.3d 1386, 1392 (8th Cir. 1997) (construing similar arbitration clause to encompass tort and contract-based claims); Ottman v. Fadden, 575 N.W.2d 593, 596 (Minn.Ct.App. 1998) (defamation claim "arose out of" employment relationship, and thus, fell within similar compulsory arbitration provision of registration agreement).
In sum, the Court finds that the choice of law provision and arbitration clauses are valid and enforceable. The Court further finds that the arbitration clause the parties agreed to is broad enough to encompass plaintiffs' claims of fraudulent inducement. Having found that there is a valid arbitration agreement between the parties, and that the present dispute is within that agreement, the Court is compelled to stay these proceedings pending arbitration of plaintiffs' claims.
ORDER
Based upon the foregoing, the submissions of the parties, the arguments of counsel and the entire file and proceedings herein, IT IS HEREBY ORDERED that the motions of defendant John Morrell Co., Inc. to stay and to compel arbitration [Civ. No. 03-848, Docket No. 6; Civ. No. 03-849; Docket No. 7; Civ. No. 03-853; Docket No. 5; Civ. No. 03-854; and Docket No. 7] are GRANTED. The Court will retain jurisdiction for any appeal from the arbitration proceedings.