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New Mexico Supreme Court Invalidates Arbitrations Clause, but Sidesteps Class Action Ban

The New Mexico Supreme Court was asked to find an arbitration clause with a class action ban unconscionable because it eliminates a consumer’s day in court. Ruling in favor of plaintiffs, it did not accept that invitation.


Andrea Felts entered into contracts with several Internet payday lenders. Loans made to cash-strapped borrowers by payday lenders have exorbitant interest rates and fees that trap borrowers into a cycle of debt. Most borrowers are unable to repay the short term loans when they become due, so they roll the loans over, each time paying more fees while interest mounts. By collecting high fees every time the loan “rolls over” the lender ensures the borrower will experience significant difficulty in repaying the loan and the lender will have a steady source of profit.

Felts sued on behalf of herself and all other New Mexico borrowers, alleging violation of New Mexico’s statutory limit on consumer interest. The lenders claimed they were not subject to New Mexico’s limits because they are Internet-based businesses. They also claimed that Felts had to bring her case in arbitration rather than in court and that all borrowers would have to arbitrate individually because the arbitration clause contained a ban on class actions.

Class actions provide an efficient, cost-effective way to litigate claims of similarly situated people who are subjected to identical illegal treatment by a company. By aggregating legal claims into one single proceeding, everyone who loses money to an illegal practice — whether they know they have been wronged or not — can obtain a recovery. Class actions also deter bad acts and can change corporate-wide policies, making the marketplace safer for all consumers. Class actions are particularly important because many consumer disputes involve such small dollar amounts that they are not worth the time and expense to litigate. It would cost much more to pursue a remedy for an individual consumer who is overcharged a few dollars than he could ever hope to recover. Such small individual losses nevertheless amount to huge ill-gotten gains for companies that have thousands or millions of customers who have each been overcharged a few dollars in identical ways.

Unfortunately, many consumer contracts now include forced arbitration clauses that ban class actions. Arbitration severely limits consumers’ rights because it forces claims to be brought individually, it is expensive, access to discovery is very limited and there is virtually no opportunity to seek court review of an arbitrator’s decision.

AARP Foundation Litigation attorneys filed AARP’s friend-of-the-court brief arguing that arbitration clauses are unenforceable if they preclude the effective vindication of statutory rights, as here, and that the case belonged in court as both the trial and appeals court had ruled. The brief also urged the court to interpret a decision from the U.S. Supreme Court (AT&T Mobility v. Concepcion, a case in which AARP also filed a brief) to stand for the proposition that class action waivers in arbitration clauses must be evaluated on a case-by-case basis to ensure the arbitral forum will not waive substantive statutory rights.

The New Mexico Supreme Court expressly declined to address the issue of whether arbitration clauses with class action bans are unconscionable. The court instead ruled that the arbitration clause at issue could not be enforced because the named arbitration agency, National Arbitration Forum, was no longer operating. NAF had been discredited and forced to close its doors after it was revealed in a complaint by the Minnesota attorney general that the arbitrator was owned and operated by the debt collection industry that provided most of the company’s business.

What’s at Stake

A right that cannot be enforced is no right at all. Many of the nation’s most important statutes, including those protecting civil rights, consumers, nursing home patients and employees, were drafted to be enforced primarily through private litigation, rather than by taxpayer-funded government enforcement agencies. Arbitration clauses prevent people from enforcing their substantive rights. Laws that are not enforced, and that companies know are unlikely ever to be enforced, are effectively meaningless. If people are forced to forego the only effective remedies they have, then the consumer protection laws enacted by the states are meaningless.

Case Status

Felts v. CLK Management was decided by the Supreme Court of New Mexico.

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