John v. Rehabilitation Center, 34,561

Background

In 2012 Harley John suffered a spinal cord injury and was admitted to the Rehabilitation Center of Albuquerque (RCA); he signed an admission agreement containing an arbitration agreement with a small-claims carve-out.
The arbitration agreement required arbitration of disputes arising from care, but excepted claims for monetary damages within the jurisdictional limit of New Mexico small-claims courts.
Appellees (John and his wife Christina Parkett) sued RCA and others in district court alleging negligence and loss of consortium; defendants moved to compel arbitration.
Appellees moved for summary judgment arguing the small-claims carve-out made the arbitration clause substantively unconscionable; the district court granted summary judgment, finding the carve-out one-sided.
On appeal the Court of Appeals reversed, concluding New Mexico Supreme Court precedent in Dalton controls and that the small-claims carve-out is not substantively unconscionable as a matter of law; the appellate court also upheld the district court’s rulings that appellees did not waive the argument and that FAA preemption did not apply.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the small-claims carve-out renders the arbitration agreement substantively unconscionable	The carve-out reserves judicial forum for claims RCA is likely to bring (e.g., collections) while forcing residents to arbitrate negligence claims—creating an unfair, one-sided agreement	The carve-out is bilateral and neutral; defendants offered evidence (affidavit) that RCA rarely sues in small claims and sought to present facts at an evidentiary hearing	Reversed district court: under Dalton the small-claims exception is not substantively unconscionable on its face; remanded for further proceedings
Whether appellees waived the right to assert substantive unconscionability by earlier statements limiting argument to procedural unconscionability	Appellees said procedural unconscionability would be addressed at hearing but maintained unconscionability defense generally	Defendants argued appellees had intentionally abandoned the substantive claim and were prejudicially late	Held: No waiver; district court’s factual determination was not an abuse of discretion
Whether the Federal Arbitration Act preempts state unconscionability analysis of arbitration clauses (Tenth Circuit Patton argument)	Appellees relied on New Mexico precedent permitting unconscionability defense under generally applicable contract law	Defendants urged Patton (10th Cir.) preempts state unconscionability analysis that treats arbitration as inferior	Held: FAA does not preempt New Mexico’s generally applicable unconscionability analysis; district court correctly rejected Patton as controlling in New Mexico

Key Cases Cited

Dalton v. Santander Consumer USA, Inc., 385 P.3d 619 (N.M. 2016) (holding small-claims carve-out is not substantively unconscionable on its face)
Strausberg v. Laurel Healthcare Providers, LLC, 304 P.3d 409 (N.M. 2013) (unconscionability is an affirmative defense and burden is persuasion; may be shown from contract on its face)
Cordova v. World Fin. Corp. of N.M., 208 P.3d 901 (N.M. 2009) (explaining substantive unconscionability factors and §55-2-302 authority)
THI of New Mexico at Hobbs Ctr., LLC v. Patton, 741 F.3d 1162 (10th Cir. 2014) (Tenth Circuit view that some state unconscionability analyses impermissibly disparage arbitration; discussed but not followed)
Figueroa v. THI of N.M. at Casa Arena Blanca, LLC, 306 P.3d 480 (N.M. Ct. App. 2013) (healthcare arbitration carve-outs found unconscionable in prior cases)
Ruppelt v. Laurel Healthcare Providers, LLC, 293 P.3d 902 (N.M. Ct. App. 2013) (same)