In March of 2011, I wrote about a number of recent and interesting SCOTUS decisions concerning arbitration, including Rent-a-Center, West, Inc. v. Jackson, 130 S.Ct. 2772 (2010), and Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010). As I wrote in March, "[i]n the last few years, the legitimacy and reach of arbitration and arbitration clauses have been considerably expanded by the U.S. Supreme Court," with these and other cases. Thereafter, in April, the Court issued an even more striking arbitration related decision, AT&T Mobility LLC v. Concepcion, No. 09-893 (Apr. 27, 2011), which held that California law declaring unconscionable the ban on class-wide arbitration is preempted by the Federal Arbitration Act.
However, in a decision just published in the New Mexico Bar Bulletin this month--but dated April 8, 2011, before the date of Concepcion--the New Mexico Court of Appeals came to a different conclusion. See Felts v. CLK Management, 2011-NMCA-062, cert. granted. It turns out the State Court of Appeals hadn't gotten the memo on the direction of prior SCOTUS drift à la arbitration. Then again, neither has the NLRB or California, by some accounts.
In Rent-a-Center, SCOTUS rejected claims that the courts should decide whether an arbitration agreement was unenforceable as unconscionable, and reiterated the already well-established principle that if an agreement to arbitrate includes an agreement that the arbitrator will determine the enforceability of the agreement in the first instance, the district court only hears challenges to the enforceability of that “gateway” or “delegation” clause, and the arbitrator continues to hear challenges to the enforceability of the overall agreement. Id. at 2776-81.
In Stolt-Nielsen, SCOTUS concluded that arbitrators exceeded their authority by imposing class arbitration where the parties had not previously agreed to it, because class-arbitration represents a significant game changer in that it entails higher costs, and loss of efficiency, speed and party choice.
In light of these cases, the SCOTUS decision in Concepcion less than a year later was not a huge surprise to folks in the industry. Nonetheless, a lot of outrage was vented in its wake, as many practitioners decried it as "anti-plaintiff." See, e.g., http://dangerousintersection.org/2011/04/29/att-v-concepcion-lack-of-class-lack-of-ethics/. The back story is a bit complicated.
In Concepcion, Plaintiffs had brought claims against AT&T for charging tax on phones advertised as "free," and their claim was consolidated into an existing putative class action. The California the California District Court and the Ninth Circuit Court relied on a California decision, Discover Bank v. Superior Court, 36 Cal. 46th 148, 113 P.3d 1100 (2005), in refusing to compel arbitration under a consumer mobile phone contract. The so-called "Discover rule" had held that class action waivers in consumer contracts are unconscionable and unenforceable under California law where (i) the consumer contract is one of adhesion; (ii) disputes between the parties will predictably involve small amounts of damage; and (iii) it is alleged that the party with superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers. Id. at 162, 1100.
In Concepcion, SCOTUS concluded that the "Discover rule" is preempted by the Federal Arbitration Act, Section 2 of which provides that "[a] written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. See 9 USC Sec. 2. In so ruling, the Court relied on numerous cases that "have repeatedly described the [Federal Arbitration] Act as 'embod[ying[ [a] national policy favoring arbitration,'" id., citing Buckey Check Cashing, 546 US 443, and others, as well as the efficiency considerations raised in Stolt-Nielsen. The Court noted that although the Discover rule "does not require classwide arbitration, it allows any party to a consumer contract to demand it ex post." The Court also pragmatically noted that while "[t]he rule is limited to adhesion contracts ... the times in which consumer contracts were anything other than adhesive are long past."
The plaintiffs and lower courts in Concepcion argued/ruled that the Discover rule was no more than a refinement of the State's doctrine of unconscionability, and that it was directed evenly at arbitration and non-arbitration contracts. SCOTUS did not buy this, concluding that the practical effect would be to obstruct modern consumer arbitration provisions, as prohibited in Section 2 of the Act.
Then, lo, comes the New Mexico Court of Appeals decision, Felts v. CLK Management, 2011-NMCA-062, cert. granted--well, two of them. The Court issued an initial decision in March, then retracted that and issued a replacement decision in April; I don't know what was the difference between the two since the former is no longer available. In either event, both decisions were dated before the issue date of Concepcion, but after oral arguments and after the drift had already become apparent. See, e.g., http://www.law.gwu.edu/News/2010-2011Events/Documents/STIPANOWICH%20Paper.pdf at 2 (describing "Stolt-Nielsen as a portent of the Court’s likely curtailment of state-law-based policies against enforcement of contractual waivers of the ability to participate in a class action when coupled with an agreement to arbitrate").
In Felts, the N.M. Court of Appeals agreed that the plain intent of the arbitration provision was that an arbitrator, not the courts, should determine the threshold issue of arbitrability. Nonetheless, the Court concluded that the plaintiff properly challenged that delegation clause, in the course of pleadings if not in the original complaint, by challenging the ban on class-wide arbitration and the agreed to forum, National Arbitration Forum (NAF), which had ceased to handle consumer arbitration cases in July 2009, in the face of numerous complaints that it had become "captive" to the industries utilizing it. See, e.g., http://arbitration-forum.blogspot.com/; see also http://apps.americanbar.org/buslaw/committees/CL230000pub/materials/2010/winter/07.pdf at 1-11.
As the Court stated, "Felts' argument that the ban on class actions rendered the arbitration provision unconscionable was directed to the delegation clause as well," since the class action ban was mentioned several times in the arbitration and delegation clauses. Additionally, the Court concluded the argument that the forum was no longer available also went to the delegation clause.
Having concluded the question of arbitrability was properly before the courts, not the arbitrator, the Court of Appeals quickly concluded the arbitration provision at issue was unenforceable as unconscionable, under authority of a prior N.M. Supreme Court ruling, Fiser v. Del Computer Corp., 2008-NMSC-046. Was the Court of Appeals correct to follow established State Supreme Court law that was was poised to be overruled by SCOTUS? Probably, technically, but since the whole thing now goes up on appeal in the wake of Concepcion, the public can fairly wonder if that's a very efficient way of handling matters, particularly as the Court of Appeals did not discuss the "signals" of Stolt-Nielsen.
Notably, the apparent resistance or willful blindness of the New Mexico Court of Appeals to the SCOTUS pro-arbitration stance is not unique. An interesting blogger, Kevin M. "Casey" Christenson has written several blogs in the past few months documenting legislative and judicial push back against Concepcion. The U.S. House and Senate are proposing the Arbitration Fairness Act, "which would void any class waivers in mandatory consumer, employment and civil rights cases." Christenson notes a "more subtle, flank attack" by the National Labor Relations Board," in D.R. Horton Inc. v. Micheal Cuda, in which the NLRB is reviewing an ALJ's conclusion that a mandatory arbitration agreement that bans class wide arbitration does NOT violate the National Labor Relations Act. See http://emptlaw.wordpress.com/2011/06/24/concepcion-pushback-does-nlra-bar-class-waivers-in-arbitration/. Finally, Christenson points out that California itself has essentially thumbed its nose at SCOTUS/Concepcion, by concluding in the recent wage and hour case of Brown v. Ralphs Grocery Company, that Concepcion does not speak to the issue of whether representative actions under California's Private Attorney General Act (NOT class-wide claims) may be barred. See http://emptlaw.wordpress.com/2011/07/13/california-court-strikes-back-against-concepcion/.
Hmmm, isn’t it nice to have legal rights and limitations settled by precedent?? As Mr. Christenson notes, "it ain't over. Not by a long shot."
For more information on the author’s arbitration services, please contact Pilar Vaile, P.C. at (505) 247-0802 or info@pilarvailepc.com, or check out our website at http://www.pilarvailepc.com/.
