Mississippi Cooperatives Win Big on Arbitration Clause in Bylaws

In a lawsuit brought against a nonprofit, member-owned electric cooperative corporation, the plaintiff-members (“Plaintiffs”) alleged that Southwest Mississippi Electric Cooperative (the “Cooperative”) unlawfully failed to return to its members patronage capital totaling more than $13M.[1]  The trial court granted the Cooperative’s motion to compel arbitration in accordance with its bylaws.  On appeal, the Plaintiffs argued that the trial court erred in finding that: (1) there was a valid arbitration agreement; (2) the dispute fell within the scope of the arbitration provision; and (3) the arbitration provision was not unconscionable.

The Supreme Court of Mississippi held that there was a valid arbitration agreement between the Plaintiffs and the Cooperative.  By statute in Mississippi, membership requires compliance with the Cooperative’s bylaws.[2]  The membership application also advised that members are bound by the bylaws, which could be amended from time to time.  The board of directors is statutorily empowered to amend the bylaws.[3]  By filling out the membership application, a member “‘specifically and contractually agreed’ to be bound by the association’s bylaws . . . .”  Furthermore, Members receive notice of bylaw amendments at annual meetings and through the Today in Mississippi newspaper.  Thus, absent evidence that the board of directors acted unlawfully or in excess of authority in amending the bylaws, the Cooperative’s amendment to add the arbitration provision was legal and proper, and the trial court did not err in finding a valid arbitration agreement.

The Court also determined that the arbitration language in the bylaws was broad enough that it covered this exact dispute.  The arbitration provision set forth, in relevant part, that “[a]ny controversy or claim arising out of or relating to these bylaws, or the breach thereof, or any controversy or claim arising out of or relating to patronage capital shall be resolved by binding arbitration . . . .”  Accordingly, the Plaintiff’s claims about excess patronage capital and the board of directors’ allocation of such patronage capital “touch matters covered by the parties’ agreement to be arbitrated.”

On appeal, the Plaintiffs contended that there was a lack of knowledge and lack of voluntariness as to the arbitration provision, which rendered it unconscionable.  In striking both arguments down, the Court, first, emphasized again that members had notice of the board of directors’ authority and ability to amend the bylaws.  Further, although the arbitration provision was not included in the bylaws at the time the Plaintiffs signed the membership application, the Plaintiffs were aware that the bylaws could be amended.

Turning to the lack of voluntariness argument, the Court found that members were afforded opportunities to participate in the governance of the Cooperative.  Each member has one vote regardless of the amount of energy purchased from the Cooperative, only members may participate in director elections, directors must be members of the Cooperative, directors are elected for three year terms, and members are statutorily “entitled to address the board at any regular meeting regarding any suggestions for better service, grievances, or any other matter affecting the corporation.”[4]  “[T]he statutes and bylaws ensure that the power to enact and amend terms of membership rests with the members of the cooperative” and such ability “makes the terms of the membership negotiable.”

The Plaintiffs did not contend that the bylaws in its entirety were procedurally unconscionable but rather, only targeted the arbitration provision.  In singling out the arbitration provision for the contract defense of unconscionability, the Court stated that such application would have a “a disproportionate effect on arbitration” in contravention of the principles outlined in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 342 (2011) and Kindred Nursing Ctrs, Ltd. P’ship v. Clark, 137 S.Ct. 1421, 1424, 1428 n.2 (2017).  The Court also reasoned that if the Cooperative’s bylaws and amendments were adopted in the same manner as the arbitration provision, any invalidation of the arbitration provision likewise required the Court to invalidate all of the Cooperative’s bylaws as procedurally unconscionable.  Thus, it would render the bylaws and membership agreement unenforceable and the Plaintiffs would no longer be members with standing to pursue their claims.

Finally, the Plaintiffs argued that the arbitration provision was ambiguous due to conflicting provisions in the bylaws.  The Court ruled that the arbitration provision contained in Section 11.05 of the bylaws was not rendered ambiguous by Section 8.03(k).  The two sections were to be read together.  Section 8.03(k) simply required that before a member initiated arbitration under Section 11.05, the member must provide written notice to the board of directors.  Section 8.03 did not provide a separate permissive arbitration provision, but rather, Section 8.03(k) refers to the mandatory arbitration provision contained in Section 11.05.

Interestingly, the Court noted that this particular dispute was one of “several similar cases . . . that have been filed around the state of Mississippi against electric power cooperatives . . . .”  There is no doubt that this ruling, as the Court acknowledged, affects many of the similar cases pending in Mississippi.

[1] Virgil v. Southwest Miss. Elec. Power Corp., 296 So.3d 53 (Miss. 2020).

[2] See Miss. Code Ann. § 77-5-225.

[3] Miss. Code Ann. § 77-5-223(a).

[4] Miss. Code Ann. § 77-5-221.