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March 16, 2014
  THI v. Patton - 10th Circuit
Case Name: THI of New Mexico v. Lillie Mae Patton

Headline: Tenth Circuit holds that the Federal Arbitration Act preempts unconscionability determinations rooted in state-level hostility to arbitration.

Area(s) of Law: Arbitration, Contracts, Constitutional Law

Issue(s) Presented: Does the Federal Arbitration Act preempt a state law determination that an arbitration clause is unconscionable because it applies primarily to claims that only one party to the contract is likely to bring?

Brief Summary:

The Federal Arbitration Act (FAA) articulates a strong federal policy in favor of arbitration. In interpreting the Act, various courts have held that that the FAA preempts both state statutes and state common law predicated on the view that arbitration is inferior to litigation as a means of vindicating rights.

In THI v. Patton, the Tenth Circuit held that the FAA preempted a determination of the unconscionability of an arbitration clause under the common law of New Mexico, insofar as that determination was rooted in an assumption by the New Mexico Court of Appeals that arbitration was inferior to litigation as a means of vindicating rights. The Tenth Circuit added that a court's reasons for finding an arbitration clause unconscionable must be carefully examined to ensure that they are not rooted in this statutorily prohibited assumption.

Extended Summary:

The FAA was passed in 1925, with the objective of overcoming judicial hostility to arbitration agreements and leveling the playing field between arbitration and litigation as methods of dispute resolution. Since the passage of the FAA, arbitration has assumed a prominent role in federal dispute resolution, and numerous opinions in recent years have reinforced the federal courts' "strong endorsement" of arbitration.
In acknowledgment of the purpose of the Act, federal courts have held that the FAA preempts both state statutes and state common law predicated on the view that arbitration is inferior to litigation as a means of vindicating rights. While acknowledging that state common law may still indicate that an arbitration clause is invalid - because it is unconscionable, for instance - the courts have repeatedly emphasized that the invalidity of an arbitration clause may not hinge on the simple fact that the clause mandates arbitration.

In THI v. Patton, a nursing home resident entered into an agreement requiring arbitration for all claims except guardianship proceedings, collection/eviction actions, and claims under $2,500. When the resident died, his estate sued THI (the nursing home operator) for negligence and misrepresentation. Pursuant to its agreement with the resident, THI sought to compel arbitration.

The district court initially ordered arbitration in keeping with the agreement. However, in the relatively simultaneous case of Figueroa v. THI, the New Mexico Court of Appeals held an identical arbitration agreement to be unconscionable, and the district court subsequently reversed its prior decision under Rule 60(b)(6). Included in the district court's reversal was a holding that the FAA did not preempt the holding of Figueroa because the holding of Figueroa hinged on the generally applicable common law rule that grossly one-sided contracts were unconscionable and thus unenforceable. THI appealed to the Tenth Circuit on the federal preemption question.

The Tenth Circuit began (and essentially ended) its analysis by noting that the New Mexico Court of Appeals found the arbitration agreement in Figueroa to be unconscionable because it "reserved" litigation for THI's most likely claims while "subjecting" residents to arbitration for their most likely claims. Finding such an arrangement unconscionable, the panel stated, depended entirely on "assuming the inferiority of arbitration to litigation" - the exact assumption prohibited by the FAA.
Stated differently, an agreement requiring litigation for THI claims and arbitration for resident claims could only be unfair to residents if arbitration was inferior to litigation in some way. Under the FAA, this could not be the case. Thus, the agreement could not be unfair to residents (much less "unconscionable"). Because the agreement could not be unconscionable, THI was entitled to compel arbitration of the claim at issue.

The Tenth Circuit noted that "the view of the New Mexico courts appears to be that so long as they are applying general unconscionability doctrine, the FAA does not limit their reasons for ruling an arbitration agreement unconscionable." This, the court declared, could not be the case: the reasons for a court's finding of unconscionability must be examined to ensure that those reasons are not "based on a policy hostile to arbitration."

Importantly, the panel concluded its opinion by distinguishing the arbitration clause at issue from a clause "that required consumers to arbitrate all their claims but allowed [a corporation] to choose between arbitration and litigation for its claims." See Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159, 168 - 71 (2004). The Tenth Circuit allowed the possibility that such a clause might not be preempted by the FAA - that is, might be legitimately unconscionable - because it allowed a choice of remedies for one party without allowing choice for the other. As such, a clause of this nature might be found unconscionable without assuming that arbitration was in some way inferior to litigation - the only necessary assumption being that lack of choice was in some way inferior to choice.

To read the full opinion, please visit: https://www.ca10.uscourts.gov/opinions/13/13-2012.pdf

Panel: Circuit Judges Hartz and Tymkovich, and District Judge Jackson

Date of Issued Opinion: January 28, 2014

Docket Number: 13-2012

Decided: New Mexico district court's grant of Rule 60(b)(6) relief is REVERSED; case is REMANDED to the district court with instructions to reinstate its original order compelling arbitration.

Counsel: Lori D. Proctor, Proctor & Associates, P.C., Houston, Texas, for Plaintiffs - Appellants. Jennifer J. Foote (Dusti D. Harvey, with her on the brief), Harvey Law Firm, LLC, Albuquerque, New Mexico, for Defendant - Appellee.

Author: Hartz

Case Alert Author: Levi A. Monagle

Case Alert Circuit Supervisor: Barbara Bergman

    Posted By: Dawinder Sidhu @ 03/16/2014 04:15 PM     10th Circuit  

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