ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Friday, March 7, 2014

Tenth Circuit Holds New Mexico Law Preempted by the Federal Arbitration Act

10th Cir.A New Mexico law permits a court to strike down as unconscionable arbitration agreements that apply only or primarily to claims that only one party would bring.  That is, if an arbitration agreement is drafted so that one party always has to go to arbitration while the other party can always go to court, such an agreement may well be unconscionable.   In THI of New Mexico at Hobbs Center, LLC v. Patton, a Tenth Circuit panel unanimously held that the Federal Arbitration Act (FAA) preempts the New Mexico law.  The Court reversed the District Court's ruling and remanded the case for the entry of an order compelling arbitration.

Lillie Mae Patton's husband was admitted to a nursing home in Hobbs, New Mexico operated by THI.  When he was admitted, he agreed to an arbitration clause that required "the parties to arbitrate any dispute arising out of his care at the home except claims relating to guardianship proceedings, collection or eviction actions by THI, or disputes of less than $2,500."  After he died, Ms. Patton sued THI on behalf of his estate, alleging negligence and misrepresentation.  THI brought a claim in the federal district court to compel arbitration.  At first, the District Court granted THI the relief it sought, but it reversed itself when the New Mexico Supreme Court found an identical arbitration clause unconscionable in Figueroa v. THI of New Mexico at Casa Arena Blanca, LLC, 306 P.3d 480 (N.M. Ct. App. 2012).

The Tenth Circuit reviewed the legislative purposes underlying the FAA and the case law firmly establishing the view that arbitration agreements are to be enforced notwithstanding federal statutes that seemd to imply hostility to arbitration or state law invalidating arbitration agreements.  While a court may invalidate an arbitration agreement based on common law grounds such as unconscionability, it may not apply the common law in a way that discriminates against arbitral fora. Assuming that the agreement did indeed consign Ms. Patton to arbitration while allowing THI to bring its claims in court, and accepting the Figueroa Court's holding that the agreement is unsconscionable, the Tenth Circuit found that "the only way the arrangement can be deemed unfair or unconscionable is by assuming the inferiority of arbitration to litigation."  However, "[a] court may not invalidate an arbitration agreement on the ground that arbitration is an inferior means of dispute resolution.  As a result, the Court found that the FAA precludes Ms. Patton's unconscionability challenge to the enforceability of the arbitration agreement.

The Court distinguished this case from a Fifth Circuit case, Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159, 168–71 (2004), in whichthe Fifth Circuit found an arbitration agreement to be unenforceable where one party's claims had to be arbitrated while the other's could be either litigated or arbitrated.  On the Court's reading of the arbitration agreement, THI did not have the option of arbitrating its claims; it would have to go to court.  Rather ominously, the Tenth Circuit expressed its doubt about the Fifth Circuit's reasoning in Iberia Credit that having the option to choose between arbitration and litigation was superior to having arbitration as the only option.  

There is a remarkable formalism to the Tenth Circuit's opinion.  Absolutely nothing that smells of denigration of arbitration is permissible.  The Court does not inquire into what might have motivated THI to provide that it gets to go to court with its claims, while its patients have to go to arbitration.  Given that THI drew up the contract, that seems a relevant line of inquiry.  If THI exploited its superior bargaining power and knowledge to create an unreasonably lopsided agreement that would not be detectable by the average consumer, the arbitration agreement is unconscionable and should not be enforced.  Refusing to do so is not a global rejection of arbitration but a recognition that both litigation and arbitraiton have their advantages and disadvantages. The Tenth Circuit's approach permits the party with superior bargaining power exploit its superior knowledge to extract benefits from form contracts to which the other party cannot give meaningful assent.

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