New Mexico Appeals Court Strikes Class Action Waiver and Arbitration Clause

Today, we write to highlight a New Mexico decision continuing the trend of striking arbitration clauses and class action waivers from consumer contracts.  This decision is not the first in New Mexico to strike down a class action waiver, but it does touch on a topic that we have not previously discussed in this blog: severability, or, to put it differently, viewing the “arbitration clause” and “class action waiver” separately from one another. In theory, a court can sever the class action waiver, but enforce the arbitration clause.  The effect of such an action would be to send the case to classwide arbitration.

In federal court, the Supreme Court’s decision in Stolt-Nielsen appears to have ended the severance of class action waivers.  However, the possibility of such a result still comes up in state court proceedings.

In Felts v. CLK Management, Inc., the plaintiff brought a class action against several “payday loan” companies who were charging the plaintiff well over 500% interest on several loans she took out and could not pay back.

The defendants asked the court to send the case to arbitration on an individual basis because the loan contracts had an arbitration clause and class action waiver.  The district court allowed the case to go forward in court as a class action. The defendants appealed and asked appeals court the court to sever the class action waiver and send the case to class arbitration.

The appeals court opined that the class action waiver was not severable because it was “central to the means by which the parties could resolve their disputes[.]”  The court said the arbitration clause placed so much emphasis on the waiver of rights to bring a class action, that, in order to remove only the class action waiver, the court would have to perform “judicial surgery” and rewrite the contract for the parties.  Courts, as a general matter, strongly disfavor meddling in the parties’ affairs in such a manner.