Tenth Circuit Holds FAA Preempts New Mexico Law On Unenforceability Of Unconscionable Arbitration Provisions

Arbitration

On January 28, the U.S. Court of Appeals for the Tenth Circuit held that the Federal Arbitration Act (FAA) preempts New Mexico common law that a compulsory-arbitration provision in a contract may be unconscionable and therefore unenforceable. THI of New Mexico at Hobbs Center, LCC v. Patton, No. 13-2012, 2014 WL 292660. (10th Cir. Jan. 28, 2014). In this case, a nursing home operator filed suit in federal district court to compel arbitration of claims brought by the widow of a former nursing home resident. The district court initially ruled that the arbitration agreement in the governing contract was not unconscionable and ordered arbitration. After a New Mexico appeals court came to the opposite conclusion, the district court reversed itself and further held that the FAA does not preempt state law because the state appeals court “applied . . . generally applicable unconscionability law against grossly unreasonable one-sided contracts.” On appeal the Tenth Circuit explained that “just as the FAA preempts a state statute that is predicated on the view that arbitration is an inferior means of vindicating rights, it also preempts state common law—including the law regarding unconscionability—that bars an arbitration agreement because of the same view.” Accordingly, the court rejected the state court’s view that the FAA does not limit their ability to hold an arbitration agreement unconscionable provided they are applying a general unconscionability doctrine, explaining that under such reasoning any statute preempted by the FAA could be enforced by applying the “public policy” of the statute under a common-law doctrine such as unconscionability. The court thus held that the FAA preempts the New Mexico common law on unenforceability based on unconscionability and held the operator is entitled to compel arbitration.