The Tenth Circuit ruled last week that arbitration case law from New Mexico is preempted by the FAA. This decision calls into question whether states can find arbitration agreements unconscionable simply for being unilateral, i.e. one party is bound to arbitrate its claims while the other party is free to litigate in court.
In 2012, the New Mexico appellate court had found that arbitration agreements are unconscionable, and thereby unenforceable, if they are one-sided. Figueroa v. THI of New Mexico at Casa Arena Blanca, LLC, 306 P.3d 480 (N.M. Ct. App. 2012). The context was an arbitration agreement in a contract between a nursing home resident and the facility itself.
In THI of New Mexico at Hobbs Ctr, LLC v. Patton, __ F.3d __, 2014 WL 292660 (10th Cir. Jan. 28, 2014), the very same arbitration agreement was at issue, but this time in federal court. The wife of a deceased nursing home resident sued the facility for negligence and misrepresentation, and the facility moved to compel arbitration. The wife opposed the motion, pointing out that the agreement required arbitration of claims that residents are likely to have (like personal injury and consumer protection claims) while allowing court litigation of claims that the facility is likely to have (“guardianship proceedings, collection and eviction”). The federal district court denied the motion to compel arbitration, finding that under the generally applicable uncosncionability law of New Mexico, the arbitration agreement was unenforceable, citing Figueroa.
After marching through thirty years of arbitration case law (a little overboard, law clerk, Concepcion probably would have sufficed!), the Tenth Circuit reversed the district court and found arbitration must be compelled. In short, the opinion found that “the only way the [agreement] can be deemed unfair or unconscionable is by assuming the inferiority of arbitration to litigation. After all the state court spoke of ‘subjecting the weaker party to arbitration’ clearly evincing the view that having to arbitrate a claim is disadvantageous.” Put more succinctly “A court may not invalidate an arbitration agreement on the ground that arbitration is an inferior means of dispute resolution.” Because Concepcion made clear that the FAA preempts state common law contract defenses that depend on the underlying contract being one for arbitration, the FAA preempted Figueroa. The Tenth Circuit went further and noted that a 2008 decision from the New Mexico Supreme Court (Fiser v. Dell) is also preempted by the FAA.
Whether arbitration agreements are enforceable in personal injury cases against nursing homes has been a repeat issue in courts across the country in the past year. At least five state courts and the Eighth Circuit have opined on whether arbitration agreements signed by family members of the residents are enforceable. In two additional decisions last month, the Massachusetts Supreme Court found arbitration agreements unenforceable because neither a resident’s child or spouse had authority to execute an arbitration agreement for the resident, even if the relative had been named a health care proxy under state law. Johnson v. Kindred Healthcare, Inc., __ N.E.2d __, 2014 WL 92187 (Mass. Jan. 13, 2014); Licata v. GGNSC Malden Dexter LLC, __ N.E.2d __, 2014 WL 92185 (Mass. Jan. 13, 2014).