Lowell E. Harter and Doretta Harter v. Iowa Grain Co.

The recent proliferation of so-called “hedge-to-arrive” contracts for the sale of grain has pitted many American farmers against their counterparts in the grain storage and marketing industry. The case before us involves these contracts, and these players, but it also wends its way into questions of arbitration and attorney’s fees. A familiarity with hedge-to-arrive contracts will be helpful to understanding the issues in the case.

I. INTRODUCTION

Farmers often contract to sell grain to grain elevators at some specific time in the future. Such contracts guarantee farmers a buyer for them grain and guarantee grain elevators a supply of a commodity. The contracts generally specify the quantity and quality of grain to be sold, as well as a delivery date and a price for the grain. Both parties, by agreeing in advance to the grain price, take a risk that the market will move against them. The farmer’s risk is that grain prices will be higher at the time of delivery, thus causing him to forego profit by selling at too low a price; the elevator’s risk is that prices will drop, causing it to purchase unduly expensive grain. “Hedge-to-arrive” contracts (HTA contracts) attempt to alleviate these risks by introducing price flexibility. See The Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 319 (6th Cir.1998). HTA contracts use two price indices — a “futures reference price,” set by the Chicago Board of Trade for some time in the future, and a “local cash basis level,” which is a local adjustment to the national price. See id. In an HTA contract, the parties generally agree at the time of contracting on the national portion of the price, and defer agreement on the local part of the price. See id. Many HTA contracts are “flexible,” meaning the parties may “roll” the established delivery date to some point in the future. See id. When an elevator enters an HTA contract, it usually “hedges,” or tries to offset the risk of paying *548 unduly high prices, by buying an equal and opposite position in the futures market. See id. If either party to an HTA contract rolls the delivery date forward, the elevator buys back its original hedge and re-hedges by purchasing a new futures contract. See id. The spread between the original hedge position and the “rolled” hedge position is attached to the price per bushel of the original HTA contract, and the farmer runs the risk of assuming a debit. See id.

The Commodity Exchange Act (CEA), codified at 7 U.S.C. § 1 et seq., and regulations promulgated under it, govern contracts for sale of a commodity for future delivery — futures contracts. The CEA specifically excludes from the definition of futures contracts — and thus from its reach — the sale of a cash commodity for deferred shipment or delivery' — cash forward contracts. See 7 U.S.C. § la(ll); see also The Andersons, 166 F.3d at 318. “HTAs began as simple variants of cash forward contracts, but soon began to acquire more and more characteristics of futures contracts. This process has progressed to the point that it is now possible to argue that newer versions of HTAs are more like speculative futures contracts than cash forward contracts.” Charles F. Reid, Note, Risky Business: HTAs, the Cash Forward Exclusion and Top of Iowa Cooperative v. Schewe, 44 Vill. L. Rev. 125, 134 (1999). Several courts have concluded that HTA contracts are cash forward contracts that may be sold off-exchange. 1 But the CFTC has leaned towards characterizing HTAs as futures contracts that must be sold on designated exchanges. 2

II. Baciíground

Lowell Harter was, until his retirement, a corn farmer in Grant County, Indiana. “The Andersons” is a corporation that operates grain elevators around the Midwest. The Andersons was not, at the time of the transactions in question, a futures commission merchant (FCM) registered with the Commodity Futures Trading Commission. 3 In 1993, The Andersons began marketing HTA contracts. The Andersons solicited Harter, who entered into five such contracts in November 1994. Harter contends that an employee of The Andersons told him the contracts were “no risk” plays on the futures market. The Andersons counters that the contracts clearly stated that “the commodities represented under this contract will be tangibly exchanged.” Appellee’s Br. at 4. The Andersons implies that Harter understood that the contracts called for him to turn over corn or its cash equivalent at some point in the future, suggesting that the risk of loss was apparent.

Harter claims that a few months later, presumably at the delivery obligation date, The Andersons notified him that he owed them $16,941.69 (we assume — neither party specifies — that The Andersons requested and Harter refused delivery of the corn, thus giving rise to an obligation to furnish its cash equivalent). Harter was sur *549 prised, he says, because he thought the HTAs were “no risk.” Harter says that the parties agreed he would tender a check for the amount, and they would simultaneously enter into new HTA contracts designed to capitalize on the market and generate enough profit to cover the initial loss. See Appellant’s Br.I at 3. 4 The Andersons does not directly respond to this, but states that the parties agreed to extend the delivery periods for the contracts, or roll the contracts forward.

In May of 1995, apparently when the new delivery obligation date arrived, The Andersons sought delivery of the corn, which Harter again refused. The Andersons then told Harter he owed it approximately $50,000. The Andersons explains that this figure represents “the difference between the market price of corn and the price for the corn established by the contracts.” Appellee’s Br. at 6-7. Harter says that the figure represents the entire loss throughout the HTA contract period, less a $16,000 payment Harter made to cover the initial loss. Appellant’s Br.I at 3.

Harter filed a class action lawsuit in the Northern District of Illinois against The Andersons, its subsidiary AISC and introducing broker Iowa Grain. Appellant’s Supp.App.1 at 24-35 (Harter v. Iowa Grain Co., No. 96 C 2936 (N.D. Ill. July 26, 1999) (first amended complaint)). Har-ter later dropped Iowa Grain, which Har-ter had erroneously believed to be The Andersons’ principal, from the suit. See Appellant’s Supp. App.II at 218-225 (Harter v. Iowa Grain, 202 F.3d 273 (7th Cir.1998) (unpublished order reversing award of sanctions against Harter’s attorney)). Harter alleged that The Andersons had violated the Commodity Exchange Act, the federal Racketeer Influenced and Corrupt Organizations Act (RICO), the Indiana RICO statute, and had committed common law fraud, breach of fiduciary duty and intentional infliction of emotional distress. The contracts Harter had signed expressly provided that in the event of a dispute, the National Grain & Feed Association (NGFA) would arbitrate. After Harter filed suit, The Andersons petitioned the district court, pursuant to the Federal Arbitration Act, 9 U.S.C. § 1 et seq., to stay proceedings and to compel arbitration. The district judge granted the motion. The NGFA arbitrators entered an award in favor of The Andersons, and ordered Harter to pay contract damages of $55,350 plus interest, as well as $85,000 in attorney’s fees plus interest. Harter moved to vacate or modify the award; The Andersons moved to confirm it. On July 24, 1998, the district court entered an order confirming the arbitration award in its entirety. It subsequently granted The Andersons’ request that Harter bear the attorney’s fees that The Andersons incurred in non-arbitration portions of the litigation. Harter now appeals the district court’s order compelling arbitration, its order affirming the award and its order regarding attorney’s fees.

III. The ORDER Compelling Arbitration

The contracts at issue provide for the arbitration of “any disputes or controversies arising out of’ those contracts. See, e.g., Appellant’s Supp.App.1 at 71-82 (duplicates of Harter HTA contracts). The Federal Arbitration Act provides that a court must stay its proceedings and compel arbitration if it is satisfied that an issue before it is arbitrable under the parties’ agreement. See 9 U.S.C. § 3. The district court in the present case did just that, and Harter protests. We review the district court’s order compelling arbitration *550 de novo. See Matthews v. Rollins Hudig Hall Co., 72 F.3d 50, 53 (7th Cir.1995). “The primary issue before the court,” Har-ter explains, “is whether [CFTC regulations governing predispute arbitration] invalidate[ ] the arbitration clause in the ... contracts.” Appellant’s. Reply Br. at 1. Harter does not identify any respect in which the clauses themselves violate CFTC regulations, for instance by excluding required consumer protection language. However, Harter insists that “the ... contracts violate the prohibition of the Commodity Exchange Act ... against the sale of off-exchange futures contracts ... by unregistered persons or entities through fraud.” Id. (citations omitted). We understand him to argue that the contracts themselves are illegal; if this argument is correct, he posits, the contracts are void and the arbitration clauses in them are ineffective. Consequently, the district court order compelling arbitration would have been in error.

Under section 4 of the Federal Arbitration Act, 9 U.S.C. § 4, a federal court must order arbitration “once it is satisfied that ‘the making of the agreement for arbitration or the failure to comply [with the arbitration agreement] is not in issue.’ ” Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) (quoting 9 U.S.C. § 4). Courts “will not allow a party to unravel a contractual arbitration clause by arguing that the clause was part of a contract that is voidable.... ” Colfax Envelope Corp. v. Local No. 458-3M, Chicago Graphic Communications Int’l Union, 20 F.3d 750, 754 (7th Cir.1994). “The party must show that the arbitration clause itself, which is to say the parties’ agreement to arbitrate any disputes over the contract that might arise, is vitiated by fraud, or lack. of consideration or assent....” Id. (emphasis added). Neither Harter’s complaint nor his motion opposing compelled arbitration alleges that the arbitration provisions themselves were the product of fraud, inadequate consideration or the like. Instead, he attacks the legality of each contract as a whole. Thus, under the Federal Arbitration Act and cases construing it, the dispute arising from the contracts — namely, the legality of the contracts under the CEA — is arbitra-ble.

In this respect, Harter’s case is a duplicate of Sweet Dreams Unlimited, Inc. v. Dial-A- Mattress Int’l, Ltd., 1 F.3d 639 (7th Cir.1993). In that case, two parties signed an agreement under which one would market the other’s trademarked product. The agreement called for all disputes “arising out of’ it to be arbitrated. The marketer was offered a franchise agreement, which was never executed. Eventually the producer severed the relationship entirely and allegedly attempted to put the marketer out of business. See id. at 640. The marketer sued in state court, and.the producer removed to federal court and asked the court to stay proceedings pending arbitration. The marketer argued that it was the purchaser of an unregistered franchise; the Illinois Franchise Act allowed such purchasers to sue for recision of the offending contract. See id. The marketer therefore argued that the contract which called for arbitration should be rescinded by the court, and the dispute should be resolved in court. We stated that the “interesting, if not somewhat metaphysical” question at issue was whether “a dispute, which has as its object the nullification of a contract, ‘arise[s] out of that same contract.” Id. at 641.

We held in Sweet Dreams that where a dispute has its origins in an agreement that calls for arbitration, the court cannot decide the merits because the dispute “arises out of’ the agreement and is subject to arbitration. Id. at 642-43. Therefore, in Sweet Dreams, whether the marketer was the purchaser of a registered or unregistered franchise under state statute was, pursuant to'the Federal Arbitration Act, a matter for the arbitrator and not for *551 the court. See id. Just so here. 5 The Harter contracts say that any dispute “arising out of’ the contract will be arbitrated. See, e.g., Supp.App.I at 71-83 (duplicates of HTA contracts; attorney’s fee provision found at ¶ 5 in each). Harter, like the marketer in Sweet Dreams, makes a legal argument that he is protected by a statute that would invalidate the agreement. Because his contentions “arise out of’ his contract, they are matters for the arbitrator.

Next, Harter embarks down an alternate rhetorical route to arrive at his preferred destination — federal court. He suggests that even if the court cannot decide the merits of his claim, the court must assume that the claim is valid for the purpose of evaluating the motion to compel arbitration. 6 If we were to accept this sophistry, we would essentially be directing the case to the district court. For if, based on our assumption, the arbitrators have no power, who but the court may hear this case? Fortunately, the argument is meritless, and we need not tax the district court further. Harter marshals Schacht v. Beacon Insurance Co., 742 F.2d 386 (7th Cir.1984), which states that “an order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.” Id. at 390 (quoting United Steelworkers v. Gulf Navigation Co., 363 U.S. 574, 582-83, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960)) (emphasis added). Based on this single word, Harter would have us take as true his assertions that these contracts violated the CEA and are therefore void. But reading Schacht as a whole, this is clearly wrong.

In Schacht, a reinsurance company contracted to cover the losses of an insurance company. 742 F.2d at 388-89. The contract included an arbitration clause. See id. The reinsurer asked the insurer for an “advance premium,” and when none was forthcoming, sent a notice of cancellation to the insurer. Id. The insurer responded that the contract called for 180 days notice before cancellation, and stated that it assumed the contract remained in force. See id. The insurer later sought coverage for its losses, and the reinsurer failed to pay the claim. See id. The insurer sought arbitration, and the reinsurer stated that the contract was void, thus relieving it of the duty to arbitrate. See id. We *552 said that it was clear the parties had a contractual relationship, but granted the possibility that if the reinsurer was correct, some of the contractual provisions were unenforceable. We then concluded that “[t]he claims raised by [the reinsurer] are susceptible to resolution through the arbitral process.” Id. at 390. So despite Harter’s creative interpretation of Schacht, the case ultimately weighs against his point of view. Clearly the parties in the present case had a contractual relationship—the record includes copies of the documents signed by both parties. See Appellant’s Supp.App.1 at 71-83 (duplicates of Harter’s HTA- contracts). Notwithstanding the merits of Harder’s claims that the contractual terms with The Andersons were not enforceable, Schacht (along with Sweet Dreams, Colfax Envelope and Prima Paint) instructs that the NGFA arbitration panel was the ultimate forum for those claims. 7

Not easily deterred, Harter makes an alternative effort to keep this dispute out of the arbitrators’ hands. He argues that even if the arbitration clauses are valid, a court is better suited to pass on the legal status of the contracts than is an arbitrator. This argument is not altogether fanciful. The Ninth Circuit has stated that questions of law regarding statutory rights are best left to judicial interpretation. Mar chese v. Shearson Hayden Stone, Inc., 734 F.2d 414, 419-20 (9th Cir.1984). The Márchese court concluded that “[i]t is up to case-by-case interpretation to determine which statutes are such that an arbitrator can consider the statutory claim.” Id. The plaintiff in Márchese had asked for a declaratory judgment stating that the Commodity Exchange Act allowed customers to retain “interest and increment” on margin deposits in excess of their brokerage fees. See id. at 419. The Ninth Circuit considered this a claim requiring pure legal interpretation of the Commodity Exchange Act, and held that it was uniquely suited for judicial resolution, and that the district court’s order to compel arbitration was in error. See id. at 421.

Though Marchese nicely reflects Har-ter’s point of view, it does not persuade us. Why? First, the CEA claim at issue here— that Harter’s HTA contracts are futures instruments rather than cash market transactions—is not a pure question of law, but requires a fact-intensive inquiry. We have stated that “[a]lthough cash forward contracts and futures contracts are easily distinguishable in theory, it is frequently difficult in practice to tell whether a particular arrangement between two parties is a bona fide cash forward contract for the delivery of grain or whether it is a mechanism for price speculation on the futures *553 market.” Lachmund, 191 F.3d at 787. Lachmund instructed that we examine the facts of the case, beginning with the words of the contract itself, and moving on to “the course of dealings between the parties and the totality of the business relationship.” Id. Thus, this case is unlike the pure question of law presented in Marchese. 8

Harter takes a final swipe at the arbitration order. He rightly recounts that arbitration is a matter of contract, and that “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” See United Steelworkers, 36 3 U.S. at 582, 80 S.Ct. 1347. Based on this truism, he floats two contractual arguments: first, he did not intend for a claim regarding the validity of the HTA contracts to be arbitrated; second, The Andersons did not intend that this claim be arbitrated. Harter claims to have received “something completely different” than what he “bargained for” when his claim was adjudicated by the NGFA panel. Appellant’s Br.I at 26. But the arbitration clauses in his contracts state that “any disputes or controversies arising out of th[ese] contract[s] shall be arbitrated by the National Grain & Feed Association, pursuant to its arbitration rules.” Appellee’s SuppApp. at 49-58 ¶ 136 of “Standard Purchase Contract Terms” (emphasis added). So Harter — like it or not— got exactly what he bargained for.

Equally implausible is Harter’s claim that The Andersons did not intend the NGFA to arbitrate the claim. He furnishes us records showing that the NGFA had not arbitrated claims of fraud or misrepresentation before the groundswell of HTA disputes. This evidence does not suggest that The Andersons did not intend NGFA to arbitrate such a dispute. In fact, if any inference can be drawn from the fact that the NGFA began hearing fraud and misrepresentation claims as soon as the HTA controversies arose, it is that the NGFA was the natural forum to which the parties to these disputes turned. We therefore affirm the district court’s grant of the motion to compel arbitration.

IV. StRütüRal Bias of the NGFA Arbitration Panel

The Andersons asked the district court to confirm the NGFA panel’s award, which it did. Harter now argues to us, as he did below, that this decision was erroneous because the NGFA panel was biased against him. When reviewing the district court’s confirmation of the arbitration award, we decide questions of law de novo and review findings of fact for clear error. See Employers Ins. of Wausau v. Banco Be Seguros Del Estado, 199 F.3d 937, 941 (7th Cir.1999).

Parties to an arbitration contract agree to trade procedural niceties for expeditious dispute resolution. See Dean v. Sullivan, 118 F.3d 1170, 1173 (7th Cir.1997). The Federal Arbitration Act permits us to upset the parties’ bargain by vacating an arbitration award only in very specific situations. See 9 U.S.C. § 10. Harter argues that this arbitration is such a situation because there was “evident partiality ... in the arbitrators ...” in violation of section 10(a)(2) of the Act. 9 U.S.C. § 10(a)(2). We have stated that “evident partiality” exists when an arbitrator’s bias is “direct, definite and capable of demonstration rather than remote, uncertain, or speculative.” United States Wrestling Federation v. Wrestling Division of the AAU, Inc., 605 F.2d 313, 318 (7th Cir. *554 1979). Harter now asks us to recognize a subset of arbitral partiality, “structural bias.” He contends that the NGFA is “structurally biased” against farmers because its members include grain elevators like The Andersons. Thus, he was “placed in the unenviable position of having to attempt to persuade NGFA members that a widespread practice of the association’s membership is illegal.” Appellant’s Br.I at 32. 9 Harter no doubt feels that the farmers’ traditional adversaries were sitting in judgment over him.

Some notable jurists have harbored similar suspicions about the fate of customers appearing before arbitration panels populated by industry “insiders.” For instance, when the Second Circuit required a securities buyer to arbitrate a fraud claim under the 1933 Securities Act against his broker, Judge Clark dissented. See Wilko v. Swan, 201 F.2d 439, 445-46 (2d Cir.), rev’d 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953). Judge Clark stated that “the persons to [adjudicate the dispute] would naturally come from the regulated business itself. Adjudication by such arbitrators ... is surely not a way of assuring the customer that objective and sympathetic consideration of his claim which is envisaged by the Securities Act.” Id. at 445 (Clark, J., dissenting). The Supreme Court adopted Judge Clark’s point of view, stating that Congress’s intent in passing section 14 of the Securities Act was to “assure that sellers could not maneuver buyers into a position that might weaken their ability to recover under the Securities Act.” Wilko v. Swan, 346 U.S. 427, 432, 74 S.Ct. 182, 98 L.Ed. 168 (1953). Section 14 created a non-waivable right to bring suit in federal court for such maneuvers, the Court determined. See id. at 434-35, 74 S.Ct. 182.

The Seventh Circuit adopted this reasoning in Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 558 F.2d 831 (7th Cir.1977). In Weissbuch, we relied on Wilko to find that a Rule 10b-5 consumer fraud claim was not arbitrable. See Weissbuch, 558 F.2d at 835-36. The same year we decided Weissbuch, we held that an analogous CEA claim was arbitra-ble. See Tamari v. Bache & Co. (Lebanon) S.A.L., 565 F.2d 1194, 1199-1200 (7th Cir.1977) (Tamari II). We reasoned that unlike the Securities Act of 1933 at issue in Wilko, the CEA had no non-waivable consumer protection provision. See Tamari II, 565 F.2d at 1199. Judge Swygert, in a persuasive dissent, relied on Wilko and Weissbuch to argue that commodities investors, like securities investors, were “vulnerable to fraudulent schemes perpetrated by industry insiders,” and thus deserved a judicial forum for their claims. See id. at 1206 (Swygert, J., dissenting).

However perceptive Judge Swygert and Judge Clark may have been, the opposing view favoring arbitration has firmly won out. In 1989, the Supreme Court explicitly overruled Wilko, stating that it had “fallen far out of step with our current strong endorsement of the federal statutes favoring [arbitration as a] method of resolving disputes.” Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 481, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989). Rodriguez de Quijas was the culmination of a series of pro-arbitration cases decided in the 1980s. In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985), the Court held that foreign arbitration panels could hear international antitrust claims under the Sherman Act. See id. at 639, 105 S.Ct. 3346. In Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), the Court held that industry panels could arbitrate most consumer claims under the Securities Exchange Act of 1934 and under RICO. See id. at 232-33, 238-39, 107 S.Ct. 2332. *555 Rodriguez de Quijas removed the final barrier to arbitration of section 14 Securities Act claims contained in Wilko. 10

To avoid the arbitration pitfalls identified by Judges Swygert and Clark, we have required arbitrators to provide a “fundamentally fair hearing.” See, e.g., Generica Ltd. v. Pharmaceutical Basics, Inc., 125 F.3d 1123, 1130 (7th Cir.1997). We guarantee fairness by steering clear of “evident partiality.” And, in settings where arbitrators and litigants were structural adversaries, as Harter suggests they are here, we have never found evident partiality: For instance, we refused to set aside an award rendered in favor of a financial services company by a panel whose members were “drawn from persons in the commodities business.” Tamari v. Bache Halsey Stuart, Inc., 619 F.2d 1196, 1201 (7th Cir.1980) (Tamari IV, see id. at 1197 n. 1). We reasoned that disqualifying arbiters with experience in the business would eviscerate the goals of arbitration. See id. at 1202 n. 11. We also noted in Tamari IV that the customer had agreed to arbitrate before the “industry” panel. See id. at 1201-02. We have elsewhere stated that by virtue of their expertise in a field, arbitrators may have interests that overlap with the matter they are considering as arbitrators. See, e.g., Health Servs. Management Corp. v. Hughes, 975 F.2d 1253, 1264 (7th Cir.1992). Such overlap has not amounted to prima facie partiality. See id. at 1264; Tamari IV, 619 F.2d at 1201. Thus, even a prior business association between an arbitrator and a party is not sufficient evidence of bias to vacate an award. See Health Servs., 975 F.2d at 1264. Reviewing these cases, we find it difficult to imagine how courts might apply the “structural bias” standard Harter advocates. In an economy increasingly populated by large conglomerates with diverse interests, many individual arbitrators could be affiliated with companies only arguably adverse to one of the parties. Harter’s standard would require disqualification, despite the practical reality that the arbitrators themselves would quite likely be impartial.

Although as a matter of first impression we might sympathize with Harter’s frustration, we are in the mainstream in rejecting his “structural bias” argument. 11 The First Circuit recently rejected an argument that an arbitration panel comprising financial employers was so inclined to *556 side with employers that it could not adjudicate the claim of a female worker alleging gender discrimination. See Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1, 14-15 (1st Cir.1999). The Eleventh Circuit has affirmed the impartiality of a panel whose members were in the business of collecting futures debit balances from customers in a situation where the panel held a customer liable for such obligations. See Scott v. Prudential Sec., Inc., 141 F.3d 1007, 1015-16 (11th Cir.1998). And, of particular relevance to us, the Sixth Circuit recently found in favor of The A