Opinion
Civil No. 01-581-AS
October 3, 2001
FINDINGS AND RECOMMENDATION
Defendants Rain Hail, LLC, and Ace Property and Casualty Company (collectively "Defendants") assert that plaintiffs Cliff Hoeft and South County Helicopter, LLC (collectively "Plaintiffs"), claims are subject to the arbitration agreement set forth in the Multiple Peril Crop Insurance Policy issued by Defendants to plaintiff Hoeft (the "Policy"). Defendants ask the court to compel the arbitration of this dispute and stay this action pending the completion of the arbitration.
BACKGROUND
The Policy provides crop failure coverage for Hoeft's 2000 canola crop. The Policy was issued by Ace Property and Casualty Company through its general agent Rain Hail, LLC, and is serviced by Rain Hail, LLC. Additionally, the Policy is reinsured by the Federal Crop Insurance Corporation (FCIC) under the provisions of the Federal Crop Insurance Act, as amended ( 7 U.S.C. § 1501, et. seq.) (the "Act").
In late May, Hoeft submitted a claim and proof of loss to Defendants. Defendants denied the claim contending that Hoeft did not plant the canola crop at a rate of seven to ten pounds per acre, as required by the Policy, and had applied Roundup, or its derivative, to the canola crop, in violation of the terms of the Policy. Hoeft filed this action alleging breach of the Policy. Additionally, Defendants filed a claim for defamation based on a letter from Defendants to a number of policy holders representing that Plaintiffs had sprayed Roundup on Hoeft's canola crop and may have done the same on others.
LEGAL STANDARD
The Federal Arbitration Act ("FAA"), 9 U.S.C. § 3-4, reflects Congress's intent to enforce arbitration agreements within the full reach of the Commerce Clause. Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 475 (9th Cir. 1991), cert denied, 503 U.S. 919 (1992), citing Perry v. Thomas, 482 U.S. 483, 490 (1987). "Under § 4 of the FAA, the district court must order arbitration if it is satisfied that the making of the agreement for arbitration is not in issue. Therefore, the district court can determine only whether a written arbitration agreement exists, and if it does, enforce it in accordance with its terms." Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719 (9th Cir. 1999) (citation and footnote omitted). The Supreme Court has repeatedly noted that a party cannot be required to submit to arbitration any dispute unless that party has entered into an agreement to do so. ATT Technologies, Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986); see also United Steelworkers of Am. v. Warrior Gulf Navig. Co., 363 U.S. 574, 582 (1960). This is consistent with the purpose of the FAA to "make arbitration agreements as enforceable as other contracts but not more so." Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 404 n12 (1967) (emphasis added).
The standard for demonstrating arbitrability "is not high." Simula, 173 F.3d at 719. What issue is "referable to arbitration" must be determined with a "healthy regard for the federal policy favoring arbitration . . . [and] any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Arbitration of a 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." ATT Technologies, 475 U.S. at 650 (citations omitted) (emphasis added).
DISCUSSION
Section 20 of the Policy provides that:
(a) If you and we fail to agree on any factual determination, the disagreement will be resolved in accordance with the rules of the American Arbitration Association. Failure to agree with any factual determination made by FCIC must be resolved through the FCIC appeal provisions published at 7 C.F.R. part 11.
(b) No award determined by arbitration or appeal can exceed the amount of liability established or which should have been established under the policy.
Hoeft concedes that this provision is applicable to his claim for breach of contract. However, Hoeft argues that the provision violates Oregon's constitutional right to a jury trial and is, therefore, unenforceable. Defendants contend that the provision is not mandatory and is enforceable under Oregon law. In the alternative, Defendants assert that the Act preempts any state law that is inconsistent with the provisions of the Act.
In Molodyh v. Truck Insurance Exchange, 304 Or. 290, 299 (1987), the Oregon Supreme Court upheld the constitutionality of a statute which required all insurance policies providing fire coverage issued in Oregon to include a clause allowing a party to send a dispute on the actual case value of the amount of loss through an appraisal process. The court agreed that the mandatory inclusion of the language in all fire insurance policies issued in the state of Oregon threatened a plaintiff's right to a jury trial guaranteed by Article I, Section 17, of the Oregon Constitution. Id. at 295. The court then looked to the specific language of the policy to determine the effect the provision had on the constitutional right. The policy allowed a party to elect to initiate the appraisal process by making a written demand on the other party. Therefore, a party was not bound by the appraisal process by the language, but rather by an election made by the opposing party. Id. at 298. The court then protected the constitutionality of the statute by finding that the appraisers' award was not binding on the party not electing the appraisal process. Id. at 299. Accordingly, Molodyh stands for the proposition that a statute which mandates the inclusion of a alternative remedy provision in all policies issued within the state will violate a plaintiff's constitutional right to a jury trial if the plaintiff is forced to pursue the alternative remedy and where the award is binding on the plaintiff. Id. at 298-99.
There is no dispute that the language in the Policy forces Hoeft to pursue arbitration or that the arbitration award will be binding on Hoeft. Similarly, there is no dispute that all companies issuing crop insurance in the United States use the FCIC as a reinsurer. Because the regulations promulgated under the Act require that the arbitration language at issue be included in policies issued or reinsured by the FCIC, it is evident that crop insurance policies issued in the United States contain the arbitration language. The court finds that the crop insurance purchased by Hoeft was a true contract of adhesion and that the arbitration provision contained therein, which deprives Plaintiffs of their right to a jury trial, is unconstitutional and unenforceable under Oregon law.
Defendants argue, in the alternative, that "even if the court finds the arbitration clause would be unconstitutional under the reasoning of Molodyh II and Foltz, Defendants' motion should still be granted, because, to the extent Oregon law conflicts with the Policy provisions, it is preempted by federal law." The court agrees.
Molodyh v. Truck Insurance Exchange, 304 Or. 290, 299 (1987).
Foltz v. State Farm Mut. Ins. Co., 326 Or. 294 (1998).
The United States Supreme Court has long recognized that "the Supremacy Clause, U.S. Const., Art. VI, cl. 2, invalidates state laws that `interfere with, or are contrary to,' federal law." Hillsborough County v. Automated Medical Laboratories, Inc., 471 U.S. 707, 712 (1985). As explained in Hillsborough, federal law may preempt state law under three scenarios: 1)Congress uses specific language in a statute expressly preempting state law; 2)Congress does not use language expressly preempting state law but the wording of the statute or its legislative history evidences Congressional intent to exclusively regulate a given field; and 3) Congress implicitly preempts state law by enacting legislation which actually conflicts with state law and where "`compliance' with both federal and state regulations is a physical impossibility" or when state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Id. at 713. State laws can be preempted by federal regulations as well as by federal statutes provided the regulations are not "unreasonable, unauthorized or inconsistent" with the underlying statute. Fidelity Federal v. Cuesta, 458 U.S. 141, 154 (1982) (citing Free v. Bland, 369 U.S. 663, 668 (1962)).
The Congressional purpose in formulating the Act was to "promote the national welfare by improving the economic stability of agriculture through a sound system of crop insurance and providing the means for the research and experience helpful in devising and establishing such insurance." Congress created the FCIC to carry out the purposes of the Act.
There is no evidence that Congress expressly preempted state laws nor did it demonstrate a desire to so totally regulate the field of agricultural insurance to inherently preempt state laws. Congress did, however, specifically grant the FCIC the power to limit the application of state law to its contracts. 7 U.S.C. § 1507(l) provides, in pertinent part, that;
State and local law or rules shall not apply to contracts, agreements, or regulations of the Corporation or the parties thereto to the extent that such contracts, agreements, or regulations provide that such laws or rules shall not apply, or to the extent that such laws or rules are inconsistent with such contracts, agreements, or regulations.
The Policy provisions, which were specifically promulgated by the FCIC and are found in Volume 7 of the Code of Federal Regulations at part 11, contain the following language:
If the provisions of this policy conflict with statutes of the State or locality in which this policy is issued, the policy provisions will prevail. State and local laws and regulations in conflict with federal statutes, this policy, and the applicable regulations do not apply to this policy.
Plaintiffs' right to a jury trial on their claim under the Policy and the Policy's provision that all claims under the Policy be arbitrated are more than inconsistent, they are in direct conflict. The FCIC clearly had the authority to preempt state law when such laws were inconsistent with the Policy provisions. It is just as clear that the FCIC had the authority to elect arbitration, rather than trial, as the venue for resolving disputes under the Policy. The regulations at issue are not unreasonable, unauthorized or inconsistent with the purposes of the Act.
Congress authorized the FCIC to implement the Act and create a federally-supported program for crop insurance. In doing so, the FCIC enacted regulations creating an insurance policy that preempted all applicable state laws that were inconsistent with the terms of the policy. The policy contained a provision which required the parties to submit their disputes to binding arbitration. Oregon's constitutional right to a jury trial is inconsistent with this arbitration provision and is preempted by application of the Supremacy Clause. Plaintiffs are bound by the arbitration clause set forth in the Policy.
Plaintiffs contend that even if their breach of contract claim is subject to mandatory arbitration under the Policy, the defamation claim should proceed in this court. Plaintiffs allege in the defamation claim that Defendants' published a statement that Plaintiffs spread Roundup on canola crops. This allegation mirrors one of the grounds Defendants gave for denying Hoeft's claim. The accuracy of the statement will be an issue in the arbitration. The Ninth Circuit has held that an arbitration decision can have collateral estoppel effect on federal litigation. Clark v. Bear Stearns Co., Inc., 966 F.2d 1318, 1321 (9th Cir. 1992). To avoid possible inconsistent outcomes on the issue of whether Plaintiffs sprayed canola crops with Roundup, or its derivative, the court elects to stay both the breach of contract claim and the defamation claim pending the outcome of the mandatory arbitration.
CONCLUSION
Defendants' motion (3) to compel arbitration should be GRANTED and this action should be stayed pending the outcome of the arbitration.