Opinion ID: 945213
Heading Depth: 3
Heading Rank: 3

Heading: new mexico’s unconscionability doctrine

Text: {31} We start with a discussion of New Mexico’s unconscionability doctrine, noting that both New Mexico law and federal law require courts to apply generally applicable principles of contract law to arbitration agreements. See Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 686 (1996) (“States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause upon such grounds as exist at law or in equity for the revocation of any contract.” (emphasis, internal quotation marks, and citation omitted)); Horne v. Los Alamos Nat’l Sec., L.L.C., 2013-NMSC-004, ¶ 16, 296 P.3d 478 (“[A]rbitration agreements are contracts enforceable by the rules of contract law.”). Following the district court’s dismissal of Plaintiff’s case, this Court issued two opinions discussing unconscionability, Rivera, 2011-NMSC-033, and Cordova, 2009NMSC-021. These precedents explain that “‘[u]nconscionability is an equitable doctrine, rooted in public policy, which allows courts to render unenforceable an agreement that is unreasonably favorable to one party while precluding a meaningful choice of the other party.’” Rivera, 2011-NMSC-033, ¶ 43 (quoting Cordova, 2009-NMSC-021, ¶ 21). {32} A New Mexico court may find that a contract or contractual term is unenforceable if the contract or term is procedurally unconscionable, substantively unconscionable, or a combination of both. See Cordova, 2009-NMSC-021, ¶¶ 21, 24. “While there is a greater likelihood of a contract’s being invalidated for unconscionability if there is a combination of both procedural and substantive unconscionability, there is no absolute requirement in our law that both must be present to the same degree or that they both be present at all.” Id. ¶¶ 24, 32-33 (holding that the contract at issue was so substantively unconscionable that an analysis of procedural unconscionability was unnecessary); see also Rivera, 2011-NMSC033, ¶ 54 (“As in Cordova, the arbitration provisions in this case are so substantively unconscionable that we need not consider whether the provisions are also procedurally unconscionable.”). 9 {33} To analyze whether a contract is substantively unconscionable, the court looks to the terms of the contract itself and considers whether the terms of the agreement are commercially reasonable, fair, and consistent with public policy. See Rivera, 2011-NMSC033, ¶ 45. For example, “[c]ontract provisions that unreasonably benefit one party over another are substantively unconscionable.” Cordova, 2009-NMSC-021, ¶ 25. In Cordova, this Court clarified that New Mexico contract law defines a substantively unconscionable contract provision as one that “is grossly unreasonable and against our public policy under the circumstances,” id. ¶ 31, and we overruled Guthmann, 103 N.M. at 511, 709 P.2d at 680, to the extent that Guthmann required the party asserting substantive unconscionability to demonstrate that the contract is one “such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other.” Cordova, 2009-NMSC-021, ¶ 31 (internal quotation marks and citations omitted). {34} Applying these principles, this Court held in Rivera and Cordova that the contract at issue in each case was substantively unconscionable because the terms were one-sided and unreasonably benefitted one party over the other. See Rivera, 2011-NMSC-033, ¶¶ 53-54 (holding that an arbitration agreement in a title loan contract was substantively unconscionable because the lender “unilaterally chose the forum in which it wanted to resolve its disputes . . . while extinguishing [the borrower’s] right to access the courts for any reason”); Cordova, 2009-NMSC-021, ¶¶ 26-27, 32 (holding that an arbitration agreement in a small loan contract was substantively unconscionable because the lender reserved nonarbitration remedies exclusively to itself while requiring the borrower to arbitrate all claims). {35} To evaluate whether a contractual provision is procedurally unconscionable, a court considers the “factual circumstances surrounding the formation of the contract, including the relative bargaining strength, sophistication of the parties, and the extent to which either party felt free to accept or decline terms demanded by the other.” Id. ¶ 23. A court evaluating procedural unconscionability should consider whether the agreement is a contract of adhesion, i.e., a “standardized contract offered by a transacting party with superior bargaining strength to a weaker party on a take-it-or-leave-it basis, without opportunity for bargaining.” Rivera, 2011-NMSC-033, ¶ 44 (internal quotation marks and citation omitted). “[A]n adhesion contract is procedurally unconscionable and unenforceable when the terms are patently unfair to the weaker party.” Id. (internal quotation marks and citation omitted). D. UNCONSCIONABILITY IS AN AFFIRMATIVE CONTRACT DEFENSE THAT MUST BE PROVEN BY ITS PROPONENT. {36} We now address three principles of New Mexico law which, considered together, demonstrate that Plaintiff has the burden to prove unconscionability. First, as a general rule, the party alleging an affirmative defense has the burden of proof. See Ortiz v. Overland Express, 2010-NMSC-021, ¶ 30, 148 N.M. 405, 237 P.3d 707; see also Tafoya v. Seay Bros. Corp., 119 N.M. 350, 352, 890 P.2d 803, 805 (1995) (“The party alleging an affirmative defense has the burden of persuasion.”); J.A. Silversmith, Inc. v. Marchiondo, 75 N.M. 290, 10 294, 404 P.2d 122, 124 (1965) (noting that “it is well settled that the party” asserting an affirmative defense has the burden of proof). {37} Second, New Mexico courts apply this general rule to affirmative contract defenses. See, e.g., Pucci Distrib. Co. v. Nellos, 110 N.M. 374, 376, 796 P.2d 595, 597 (1990) (explaining that the party seeking to preclude contract enforcement based on illegality, an affirmative defense, bore the burden of proving illegality at trial); Hickey v. Griggs, 106 N.M. 27, 29, 738 P.2d 899, 902 (1987) (“Mitigation of damages is an affirmative defense and its burden of proof is on the defaulting party.”); Mason v. Salomon, 62 N.M. 425, 429, 311 P.2d 652, 654 (1957) (“[T]he burden is upon the party alleging fraud to establish its existence.”). {38} Third, New Mexico contract law treats unconscionability as an affirmative contract defense, i.e., an equitable exception to the rule that a contract should be enforced according to its terms. See Rivera, 2011-NMSC-033, ¶ 17 (“Agreements to arbitrate may . . . be invalidated by generally applicable contract defenses, such as . . . unconscionability.” (internal quotation marks and citation omitted)); see also State ex rel. State Highway & Transp. Dep’t v. Garley, 111 N.M. 383, 389-91, 806 P.2d 32, 38-40 (1991) (discussing unconscionability as one “exception” to the general principle that parties are bound by the terms of a written contract with plain, unequivocal terms); Fid. Nat’l Bank v. Tommy L. Goff, Inc., 92 N.M. 106, 107, 583 P.2d 470, 471 (1978) (referring to the “affirmative defense” of unconscionability); Montano v. N.M. Real Estate Appraiser’s Bd., 2009-NMCA009, ¶ 12, 145 N.M. 494, 200 P.3d 544 (“We will allow equity to interfere with enforcing clear contractual obligations only when well-defined equitable exceptions, such as unconscionability, mistake, fraud, or illegality justify deviation from the parties’ contract.” (internal quotation marks and citation omitted)). {39} Thus, we conclude that Plaintiff, the party alleging unconscionability in this case, bears the burden of proof because unconscionability is an affirmative contract defense, and under settled principles of New Mexico contract law, the party alleging an affirmative contract defense has the burden to prove that the contract is unenforceable on that basis. {40} Other jurisdictions likewise place the burden of proving affirmative defenses to contract enforcement, including unconscionability, on the party seeking to set aside a contract. See, e.g., Pinnacle Museum Tower Ass’n v. Pinnacle Mkt. Dev. (US), LLC, 282 P.3d 1217, 1224-25 (Cal. 2012) (“The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability.”); Norwest Fin. Miss., Inc. v. McDonald, 905 So. 2d 1187, 1193 (Miss. 2005) (“The party resisting arbitration must shoulder the burden of proving a defense to arbitration.”); Tillman v. Commercial Credit Loans, Inc., 655 S.E.2d 362, 369 (N.C. 2008) (“[U]nconscionability is an affirmative defense, and the party asserting it has the burden of proof.”). Courts have applied this contract law principle in cases involving nursing home arbitration agreements. See, e.g., Briarcliff Nursing Home, 894 So. 2d at 665 (“The burden of proving unconscionability of an arbitration agreement 11 rests with the party challenging the agreement.” (internal quotation marks and citations omitted)); Hayes v. Oakridge Home, 908 N.E.2d 408, 412 (Ohio 2009) (“The party asserting unconscionability of a contract bears the burden of proving that the agreement is . . . unconscionable.”). {41} Plaintiff has not cited, nor has this Court found, a case from any jurisdiction holding that the party seeking contract enforcement has the burden to prove the absence of unconscionability. In fact, even Genesis Healthcare, on which the Court of Appeals’ majority relied, states that “[t]he burden of proving that a contract term is unconscionable rests with the party attacking the contract.” 724 S.E.2d at 284, vacated by Marmet Health Care Ctr., 565 U.S. at ___, 132 S. Ct. at 1204. {42} By holding that the party seeking to compel arbitration has the burden to prove the absence of unconscionability, the Court of Appeals’ majority conflated the elements required for the formation of a valid contract with the affirmative defense of unconscionability. We agree with the Court of Appeals, see Strausberg, 2012-NMCA-006, ¶ 15, that the party seeking to compel arbitration bears the initial burden to prove that a valid contract exists. See Cunningham v. Springer, 13 N.M. 259, 285, 82 P. 232, 237-38 (1905) (recognizing that the plaintiffs carried the burden to establish the existence of a contract and the terms to be enforced under it), aff’d, 204 U.S. 647 (1907); see also Farmington Police Officers Ass’n Commc’n Workers of Am. Local 7911 v. City of Farmington, 2006-NMCA-077, ¶ 16, 139 N.M. 750, 137 P.3d 1204 (“A party seeking judicial enforcement of a contract bears the burden of persuasion.”). To prove the formation of a valid contract under New Mexico law, the party seeking enforcement generally must show that the contract is “factually supported by an offer, an acceptance, consideration, and mutual assent.” Garcia v. Middle Rio Grande Conservancy Dist., 1996-NMSC-029, ¶ 9, 121 N.M. 728, 918 P.2d 7 (internal quotation marks and citation omitted). {43} However, once the party who seeks to compel arbitration has satisfied the initial burden of proving the formation of a valid contract, our analysis diverges from that of the Court of Appeals, in that the burden shifts to the party opposing arbitration to demonstrate that an affirmative defense, such as unconscionability, renders the contract unenforceable. See Newcum v. Lawson, 101 N.M. 448, 454, 684 P.2d 534, 540 (Ct. App. 1984) (“The general rule in contract actions is that the burden of proof is on the party seeking to prove the existence of a fact.”). In this case, Plaintiff does not argue that any of the elements required for valid contract formation are lacking, but instead argues that the district court should not enforce the contract because it is unconscionable. Thus, Plaintiff carries the burden to prove her position that the arbitration agreement should not be enforced because it is unconscionable. {44} Plaintiff’s arguments do not convince us to disregard these well-settled principles of contract law and put the cart before the horse. First, Plaintiff argues that Defendants cannot demonstrate the existence of a valid contract without first proving the absence of unconscionability because unconscionability renders a contract void, and “a void contract 12 is a nullity and has no effect.” For support, Plaintiff relies on precedents of this Court, which state that unfair contract terms may render a contract “‘void as unconscionable.’” Rivera, 2011-NMSC-033, ¶ 46 (quoting Cordova, 2009-NMSC-021, ¶ 1). However, our precedents make clear that an unconscionable contract or contract term does not render the contract null and void immediately upon formation. Instead, if a court decides that a contract or contract term is unconscionable, the court must determine what remedy is warranted under the circumstances. As this Court has explained, If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result. Padilla v. State Farm Mut. Auto. Ins. Co., 2003-NMSC-011, ¶ 15, 133 N.M. 661, 68 P.3d 901 (internal quotation marks and citations omitted); see also Cordova, 2009-NMSC-021, ¶ 39 (“There are two possible remedial actions we can take to give effect to our holding that the one-sided arbitration provisions separately attached to the loan agreements are unenforceable: We can strike the arbitration provisions in their entirety, or we can attempt to refashion parts of them into a fair and balanced arbitration arrangement.”). A showing of unconscionability may render an otherwise valid contract voidable, revocable, and unenforceable, but this does not mean that the contract was void from its inception. See Cordova, 2009-NMSC-021, ¶ 21 (explaining that unconscionability may render a contract unenforceable); Fiser, 2008-NMSC-046, ¶ 23 (noting that unconscionability is grounds for the revocation of any contract); cf. Curtis v. Curtis, 56 N.M. 695, 702-05, 248 P.2d 683, 68889 (1952) (discussing the circumstances under which fraud will render a contract void from the beginning, as opposed to the circumstances under which fraud will render a contract voidable upon the successful assertion of fraud as a defense). Thus, we conclude that the burden to prove the formation of a valid contract does not include the burden to prove the absence of unconscionability. {45} Next, anticipating our holding that the proponent of an affirmative defense bears the burden of proof, Plaintiff argues that Defendants’ motion to compel arbitration is itself an affirmative defense to Plaintiff’s lawsuit and, accordingly, that Defendants bear the burden of proof. However, as this Court has explained, “a motion to compel arbitration is essentially a suit for specific performance,” not an affirmative defense. McMillan v. Allstate Indem. Co., 2004-NMSC-002, ¶ 10, 135 N.M. 17, 84 P.3d 65 (internal quotation marks and citation omitted). In addition, as we explained above, although Defendants bear the initial burden to prove the formation of a valid arbitration agreement, Plaintiff bears the burden to prove any defense to enforcement. {46} In the alternative, Plaintiff urges this Court to take the relative bargaining strength of the parties into account for purposes of determining which party has the burden to prove unconscionability. This we will not do. We disagree that the burden to prove an affirmative 13 contract defense should depend upon the relative bargaining strength of the parties, but we note that consideration of the parties’ relative bargaining strength is built into the doctrine of unconscionability itself. See Rivera, 2011-NMSC-033, ¶ 44 (explaining that the relative bargaining strength of the parties is one factor for the court to consider when deciding whether a contract is procedurally unconscionable). In this case, the district court properly considered the relative bargaining strength of the parties and concluded that Defendants’ bargaining position was vastly superior to Plaintiff’s. Although the parties’ relative bargaining strength is a factor in the unconscionability analysis, it cannot function to shift the burden of proof. {47} Finally, Plaintiff invites this Court to consider whether a fiduciary relationship exists between Plaintiff and Defendants, and if so, whether that fiduciary relationship might justify a special rule for allocating the burden of proof. Plaintiff cites no New Mexico law to support her argument, relying instead on cases from other jurisdictions and asserting that “courts have explored the possibility of a fiduciary relationship existing” in the nursing home context. Plaintiff admits that she has not preserved her argument regarding any fiduciary relationship and did not claim a breach of fiduciary duty in her complaint. See Rule 12-216(A) NMRA (“To preserve a question for review it must appear that a ruling or decision by the district court was fairly invoked . . . .”). We conclude that Plaintiff’s fiduciary relationship argument is not properly before this Court, and we decline to address it. {48} Finding none of Plaintiff’s arguments persuasive, we conclude that unconscionability is an affirmative defense to contract enforcement and that the party asserting unconscionability bears the burden to prove that a contract should not be enforced on that basis. Accordingly, we hold that Plaintiff has the burden to prove that the arbitration agreement is unconscionable. E. THIS COURT’S HOLDING IS CONSISTENT WITH THE FAA AND THE UAA. {49} This Court’s holding, that Plaintiff has the burden to prove unconscionability, is not only dictated by settled principles of New Mexico law, but it is also consistent with both the FAA and the UAA, which require a court to enforce a valid arbitration agreement unless the agreement is revocable under established principles of contract law. See 9 U.S.C. § 2 (“A written provision in . . . a contract . . . to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”); Section 44-7A-7(a) (“An agreement contained in a record to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable and irrevocable except upon a ground that exists at law or in equity for the revocation of a contract.”). Thus, a court may, consistent with the FAA and UAA, invalidate an arbitration agreement through the application of an existing common law contract defense such as unconscionability. See Rivera, 2011-NMSC-033, ¶ 17 (noting that arbitration agreements 14 may “‘be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability’” (quoting Rent-A-Center, W., Inc. v. Jackson, 561 U.S. ___, ___, 130 S. Ct. 2772, 2776 (2010))). {50} Unlike this Court’s holding, which rests on generally applicable principles of contract law, the Court of Appeals created a rule in this case that applies only to nursing home arbitration agreements. See Strausberg, 2012-NMCA-006, ¶ 20 (“[W]hen a nursing home relies upon an arbitration agreement signed by a patient as a condition for admission to the nursing home, and the patient contends that the arbitration agreement is unconscionable, the nursing home has the burden of proving that the arbitration agreement is not unconscionable.”). {51} Defendants argue that the rule espoused by the Court of Appeals in this case is preempted by the FAA. We agree. “Congress enacted the FAA to counteract judicial hostility to arbitration” and to ensure that states place arbitration agreements on equal footing with other contracts. Fiser, 2008-NMSC-046, ¶ 23; see Doctor’s Assocs., 517 U.S. at 682 (“Congress precluded States from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed upon the same footing as other contracts.”). Thus, the FAA preempts state law “‘to the extent that it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’” Rivera, 2011-NMSC-033, ¶ 17 (quoting Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 477 (1989)); see U.S. Const. art. VI, cl. 2 (supremacy clause); see generally N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 654 (1995) (explaining that federal law may preempt state law when there is “a conflict between federal and state law”). Specifically, the FAA preempts any state law that “prohibits outright the arbitration of a particular type of claim.” AT&T Mobility LLC v. Concepcion, 563 U.S. ___, ____, 131 S. Ct. 1740, 1747 (2011). Additionally, the FAA preempts any “state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue” because such a principle directly conflicts with the FAA. Doctor’s Assocs., 517 U.S. at 685. {52} Congress did not, however, intend the FAA to entirely displace state law governing contract formation and enforcement. See Volt Info. Scis., 489 U.S. at 477 (“The FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration.”). Courts may invalidate arbitration agreements through the application of “‘generally applicable contract defenses, such as fraud, duress, or unconscionability,’” without violating the FAA. See Rent-A-Center, 561 U.S. at ___, 130 S. Ct. at 2776 (quoting Doctor’s Assocs., 517 U.S. at 687); see also Concepcion, 563 U.S. at ___, 131 S. Ct. at 1748 (explaining that Section 2 of the FAA “preserves generally applicable contract defenses”). However, state courts cannot refuse to enforce arbitration agreements through the application of “‘defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’” Rivera, 2011-NMSC033, ¶ 17 (quoting Concepcion, 563 U.S. at ____, 131 S. Ct. at 1746). As this Court has recognized, New Mexico’s common law of contracts applies to arbitration agreements only 15 if “‘that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.’” Rivera, 2011-NMSC-033, ¶ 17 (quoting Perry, 482 U.S. at 492-93 n.9). {53} We conclude that the rule announced by the Court of Appeals in this case is preempted by the FAA because the rule singles out arbitration agreements for special treatment, thereby failing to “place arbitration agreements on an equal footing with other contracts.” Rivera, 2011-NMSC-033, ¶ 16 (internal quotation marks and citation omitted); cf. Cordova, 2009-NMSC-021, ¶¶ 37-38 (explaining that New Mexico’s generally applicable unconscionability analysis is not preempted by the FAA because it “is applied in the same manner to arbitration clauses as to any other clauses of a contract”); Fiser, 2008-NMSC-046, ¶ 23 (explaining that the FAA does not preempt a rule that rests on generally applicable grounds for the revocation of any contract). {54} Our conclusion is reinforced by the United States Supreme Court’s reversal of Genesis Healthcare, the West Virginia Supreme Court of Appeals’ opinion upon which our Court of Appeals relied. In Marmet Health Care Center, the Supreme Court vacated the decision of the West Virginia court because it had created “a categorical rule prohibiting arbitration of a particular type of claim, and that rule is contrary to the terms and coverage of the FAA.” 565 U.S. at ___, 132 S. Ct. at 1203-04. The Supreme Court remanded the case to the West Virginia Supreme Court of Appeals to consider whether the arbitration agreements at issue were enforceable under state common law principles that are “not specific to arbitration.” Id. at ___, 132 S. Ct. at 1204. {55} Plaintiff and AARP contend that the FAA does not preempt the rule announced by the Court of Appeals’ majority because, unlike Genesis Healthcare, the Court of Appeals’ opinion does not categorically prohibit nursing home arbitration agreements. However, as we have explained, the FAA preempts not only state laws that prohibit arbitration outright, but also state laws that stand “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Rivera, 2011-NMSC-033, ¶ 17 (internal quotation marks and citation omitted). In this case, the Court of Appeals created a presumption that all nursing home arbitration agreements are unconscionable, in clear violation of the FAA’s mandate that an arbitration agreement must be treated the same as any other contract. Accordingly, we hold that the rule announced by the Court of Appeals’ majority is preempted by the FAA. F. WE DECLINE TO CONSIDER THE MERITS OF PLAINTIFF’S UNCONSCIONABILITY DEFENSE. {56} Plaintiff invites this Court to decide the merits of her substantive unconscionability defense and hold that the arbitration agreement at issue is substantively unconscionable. Plaintiff argues that the arbitration agreement is substantively unconscionable because it requires arbitration of the types of claims that the resident might bring against the nursing home while reserving to the nursing home the ability to litigate collections actions, the only 16 claims that a nursing home is likely to bring against a resident. Plaintiff contends that, like the arbitration agreements at issue in Rivera and Cordova, the arbitration agreement in this case is so one-sided and substantively unconscionable that this Court should declare it unenforceable and it need not consider whether the arbitration agreement is also procedurally unconscionable. Plaintiff also asserts that her claim of unconscionability presents an issue of substantial public interest because at least seven cases involving similar or identical arbitration agreements are pending before the Court of Appeals. {57} Defendants argue that this Court should decline to reach the merits of Plaintiff’s defense without first obtaining the benefit of an opinion from the Court of Appeals. Defendants also contend that it would be unfair for this Court to decide whether the arbitration agreement is substantively unconscionable without allowing participation and briefing from any parties litigating similar or identical arbitration agreements in the Court of Appeals. Finally, Defendants note that Plaintiff did not submit either a petition for writ of certiorari or a conditional cross-petition under Rule 12-502(F) NMRA asking this Court to address the merits of her substantive unconscionability defense. {58} In light of these concerns, we agree with Defendants that the merits of Plaintiff’s unconscionability defense should first be addressed by the Court of Appeals, and we decline to consider whether the arbitration agreement is enforceable.