Felts v. CLK Management, Inc.

I attest to the accuracy and
integrity of this document
New Mexico Compilation
Commission, Santa Fe, NM
'00'04- 15:25:35 2011.06.28

Certiorari Granted, June 8, 2011, No. 33,011
Certiorari Granted, June 8, 2011, No. 33,013

IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

Opinion Number: 2011-NMCA-062

Filing Date: April 8, 2011

Docket No. 30,142 consolidated with No. 29,702

ANDREA J. FELTS, on behalf of
herself and all others similarly
situated,

Plaintiff-Appellee,

v.

CLK MANAGEMENT, INC. f/k/a
BAT SERVICES, INC. and CASH
ADVANCE NETWORK, INC.,

Defendants-Appellants.

APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY
Nan G. Nash, District Judge

Feferman Warren & Treinen, P.A.
Rob Treinen
Albuquerque, NM

Schaefer Law Firm, L.L.C.
Richard J. Fuller
Douglas L. Micko
Minneapolis, MN

Public Justice, P.C.
F. Paul Bland, Jr.
Amy Radon
Washington, D.C.

for Appellee

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Fredericks Peebles & Morgan LLP
Conly J. Schulte
Joseph V. Messineo
Omaha, NE

Fredericks Peebles & Morgan LLP
Frances C. Bassett
Louisville, CO

for Appellant CLK Management, Inc.
f/k/a Bat Services, Inc.

Modrall, Sperling, Roehl, Harris & Sisk, P.A.
Jennifer G. Anderson
Emil J. Kiehne
Albuquerque, NM

Weir & Partners, LLP
Susan Verbonitz
Philadelphia, PA

for Appellant Cash Advance Network, Inc.

Gary K. King, Attorney General
Karen J. Myers, Assistant Attorney General
Santa Fe, NM

for Amicus Curiae

OPINION

FRY, Judge.

{1} The opinion filed in this case on March 2, 2011, is hereby withdrawn, and the
following opinion is filed in its place. The motions for rehearing filed by Defendants are
denied.

{2} In this consolidated case, Defendants CLK Management, Inc. (CLK) and Cash
Advance Network, Inc. (CANI) (collectively, Defendants) appeal the district court’s denial
of their respective motions to compel arbitration and to stay proceedings pursuant to a
binding arbitration provision located within three payday-type loan agreements that Plaintiff
Andrea J. Felts entered into with Defendants over the Internet. Defendants moved to compel
arbitration in response to a putative class action lawsuit filed by Felts in district court, in
which she alleged that Defendants’ payday lending enterprises are engaged in online lending

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practices in direct violation of a number of New Mexico laws. The district court declined
to order the parties to arbitrate their dispute after agreeing with Felts that the arbitration
provision in the loan agreements was unconscionable under New Mexico law.

{3} We conclude that the district court correctly determined that: (1) the threshold
question of arbitrability was for the court, and not an arbitrator, to decide; (2) the class action
ban in the arbitration provision was unconscionable and in the same vein as the class action
waiver invalidated by our Supreme Court in Fiser v. Dell Computer Corp., 2008-NMSC-
046, 144 N.M. 464, 188 P.3d 1215; and (3) the class action ban could not be severed from
the remainder of the arbitration provision and, therefore, the entire arbitration provision was
unenforceable. Accordingly, we affirm the district court’s orders denying each Defendant’s
motion to compel arbitration.

BACKGROUND

1. Terms of Loan Agreements and Binding Arbitration Provision

{4} This case stems from three different online loan transactions that Felts entered into
with various Internet-based payday lending companies, including Defendants, in which she
received immediate electronic deposits of cash into her bank account in exchange for a series
of post-dated automatic withdrawals from the account to be applied toward repayment of the
loan principal amounts plus interest and/or finance charges. For each separate transaction,
she electronically signed a “Loan Note and Disclosure” (Loan Agreement), which was
virtually identical across all three transactions and which included two provisions regarding
arbitration—an “Agreement to Arbitrate All Disputes” (arbitration provision) and an
“Agreement Not to Bring, Join or Participate in Class Actions” (class action waiver
provision). Given the similarity of these two provisions across all three Loan Agreements,
we rely on the language from Felts’ Loan Agreement with “MTE Financial Services, Inc.
d/b/a Cash Advance Network” for purposes of this appeal.1

{5} Under that particular Loan Agreement, the arbitration provision provided that “any
and all claims, disputes or controversies [between the borrower and lender] shall be resolved
by binding individual (and not class) arbitration by and under the Code of Procedure of the
National Arbitration Forum (‘NAF’).” Featured prominently in all capital letters within the
arbitration provision was a clause directing that the claims subject to arbitration could not

1
We note that two of the Loan Agreements contained identical arbitration provisions.
The third Agreement, a loan issued by Ameriloan, differed slightly in its language and
organization. The most notable difference is that in addition to the all-caps sentence
prohibiting class-based arbitration seen in the other two Loan Agreements, the Ameriloan
agreement included the following: “No class arbitration. All disputes including any
Representative Claims against us and/or related third parties shall be resolved by binding
arbitration only on an individual basis with you.” However, these differences are not
material to our discussion as the substantive nature of the Ameriloan Agreement is virtually
identical to that of the other two Loan Agreements.

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be arbitrated on a class-wide basis: “THE ARBITRATOR SHALL NOT CONDUCT
CLASS ARBITRATION; THAT IS, THE ARBITRATOR SHALL NOT ALLOW YOU TO
SERVE AS A REPRESENTATIVE, AS A PRIVATE ATTORNEY GENERAL, OR IN
ANY OTHER REPRESENTATIVE CAPACITY FOR OTHERS IN THE ARBITRATION”
(hereinafter “class action ban”). The arbitration provision also provided, in relevant part,
that: (1) the arbitration was to be governed by “the Federal Arbitration Act (FAA), 9 U.S.C.
§§ 1 to -16 (2006)”; and (2) both the borrower and lender waived their “right or opportunity
to litigate disputes through a court and have a judge or jury decide the disputes [and] agreed
instead to resolve disputes through binding arbitration.” The second provision of the Loan
Agreement, the class action waiver, directed that “[t]o the extent permitted by law, [the
borrower] will not bring, join or participate in any class action as to any claim, dispute or
controversy [the borrower] may have against [the lender].” Toward that end, it permitted
the lender to seek injunctive relief to end the lawsuit or to remove the borrower as a
participant in the class action lawsuit, with the borrower being held responsible for the
lender’s court costs and attorney fees.

{6} Thus, under the terms of the three Loan Agreements, Felts was precluded from
seeking or participating in any type of class-wide action, whether it was in arbitration or in
a judicial setting—which, for that matter, was not allowed in any event. We assume without
deciding, for the purpose of our analysis, that Felts assented to the terms of the Loan
Agreements when she electronically signed and submitted the forms online.

2. Procedural History

{7} On December 15, 2008, Felts filed a putative class action complaint against CLK and
other payday lenders purportedly responsible for originating and/or servicing her loans, in
which she claimed violations of the New Mexico Unfair Practices Act (UPA), NMSA 1978,
§§ 57-12-1 to -26 (1967, as amended through 2009), the New Mexico Small Loans Act
(SLA), NMSA 1978, §§ 58-15-1 to -39 (1955, as amended through 2007), and sought
equitable relief for unjust enrichment and disgorgement of profits, as well as injunctive relief
on behalf of herself and other New Mexico residents who had obtained loans under $2,500
from Defendants. She later amended the complaint to include CANI as a Defendant. We
note that Felts’ complaints did not make any arguments regarding the validity of the
arbitration provision—in fact, the amended complaint included only a one-line statement that
the Loan Agreements contained an arbitration provision. Rather, her amended complaint
focused on challenging the validity of the Loan Agreements as a whole.

{8} CLK filed its motion to compel arbitration and to stay trial proceedings pursuant to
the FAA, 9 U.S.C. Section 3, and NMSA 1978, Section 44-7A-8 (2001). CLK argued that,
under the arbitration provision of the Loan Agreements, Felts was required to individually
arbitrate her claims and was precluded from seeking class-wide relief. CLK also alleged that
because Felts had not challenged the validity of the arbitration provision in her complaint,
the district court could not consider any such challenges and was instead required to refer
the entire matter to arbitration. Felts opposed CLK’s motion, arguing that the arbitration
provision was unconscionable and therefore unenforceable pursuant to section 2 of the FAA,
which permits a court to refuse to enforce an arbitration agreement based on “generally

4
applicable contract defenses, such as fraud, duress, or unconscionability.” Doctor’s Assocs.,
Inc. v. Casarotto, 517 U.S. 681, 687 (1996). Specifically relying on our Supreme Court’s
rationale in Fiser, Felts argued that the class action ban in the arbitration provision amounted
to an exculpatory clause for CLK and therefore rendered the entire arbitration provision
substantively unconscionable and unenforceable under New Mexico law.

{9} After a hearing on CLK’s motion, the district court declined to order the parties to
arbitrate their disputes. After concluding that it had jurisdiction to decide the validity of the
arbitration agreement, the district court found that Felts’ claims constituted “small consumer
claims within the meaning of Fiser” and “[a]s such, [the] prohibitions against class relief [in
the arbitration provisions were] contrary to New Mexico’s fundamental public policy of
encouraging the resolution of small consumer claims.” On this basis, the district court
declared the entire arbitration provision unenforceable and denied CLK’s motion to compel
in its entirety.

{10} After it had been added as a Defendant, CANI also filed a motion to compel
arbitration and to stay trial proceedings. CANI alleged that the district court lacked
jurisdiction to decide the validity of the arbitration provision under existing United States
Supreme Court precedent, that Felts was required to arbitrate all of her disputes under the
terms of the arbitration provision, and that the district court could sever the unconscionable
class action ban and enforce the remainder of the arbitration provision. Felts opposed this
motion as well, arguing that: (1) CANI had failed to rebut the evidence she had raised
regarding the exculpatory nature of the class action ban in the arbitration provision, (2) the
arbitration provision was unenforceable on grounds of impossibility because the NAF—the
arbitral forum selected by Defendants under the arbitration provision—was prohibited from
arbitrating the parties’ disputes under the terms of a national consent decree it had signed in
another lawsuit, and (3) the class action ban was not severable from the rest of the arbitration
provision under Fiser.

{11} Without hearing oral argument on CANI’s motion, the district court again declined
to order arbitration. The district court’s order on CANI’s motion was virtually identical to
its earlier order denying CLK’s similar motion to compel, with the exception of an additional
finding that “the class action ban is not severable from the CANI arbitration provision.”

{12} CLK and CANI separately appealed the district court’s orders denying their
respective motions to compel arbitration. The appeals were later consolidated for our
review, and we also allowed the New Mexico Attorney General to submit an amicus brief
in support of Felts.

DISCUSSION

{13} On appeal, Defendants raise the following three primary arguments: (1) the district
court erroneously determined that it had jurisdiction to decide the parties’ disputes regarding
the validity of the arbitration provision, rather than referring the matter to an arbitrator; (2)
Fiser does not apply to the facts of this case, and even if it did, the arbitration provision is
not unconscionable because Felts has a meaningful remedy available to her through

5
arbitration; and (3) the district court incorrectly determined that the class action ban could
not be severed from the remainder of the arbitration provision. Defendants also refer us to
recent precedent from the United States Supreme Court, Rent-A-Center, W., Inc. v. Jackson,
____ U.S. ____, 130 S. Ct. 2772 (2010), which was decided after the district court declined
to compel arbitration in this case, and which Defendants argue mandates reversal of the
district court’s orders. We address each of these arguments in turn.

{14} We apply a de novo standard of review to the issues raised in this appeal. We review
de novo a district court’s order denying a motion to compel arbitration. Cordova v. World
Fin. Corp., 2009-NMSC-021, ¶ 11, 146 N.M. 256, 208 P.3d 901. Similarly, “whether the
parties have agreed to arbitrate presents a question of law, and we review the applicability
and construction of a contractual provision requiring arbitration de novo.” Id. (internal
quotation marks and citation omitted). Finally, whether a contract is unconscionable is a
matter of law, and we therefore also apply de novo review to the district court’s
determination in this case that the class action ban rendered the arbitration provision
unconscionable and unenforceable. Fiser, 2008-NMSC-046, ¶ 19.

1. Arbitrability

{15} We first address whether the district court correctly determined that it, and not an
arbitrator, had jurisdiction to decide the issue of arbitrability—that is, to decide the parties’
disputes regarding the validity of the arbitration provision rather than referring this gateway
issue to an arbitrator. Defendants essentially argue that under the terms of the arbitration
provision, an arbitrator should have determined whether the arbitration provision was
unconscionable and therefore unenforceable due to its inclusion of a class action ban.

a. Federal Framework

{16} We begin by reviewing the applicable federal law on arbitrability because our
analysis turns on recent precedent from the United States Supreme Court on this particular
issue. Under the FAA, which the parties agree governs the arbitration provision at issue
here, it is well established that “arbitration is a matter of contract.” AT&T Techs., Inc. v.
Commc’ns Workers of Am., 475 U.S. 643, 648 (1986) (internal quotation marks and citation
omitted). “By its terms, the [FAA] leaves no place for the exercise of discretion by a district
court, but instead mandates that district courts shall direct the parties to proceed to
arbitration on issues as to which an arbitration agreement has been signed.” Dean Witter
Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985). Section 2 of the FAA specifically
provides that arbitration provisions in written agreements “shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of any
contract.” 9 U.S.C. § 2. In other words, because arbitration provisions are treated like other
contracts, they can be invalidated and held unenforceable under “generally applicable
contract defenses, such as fraud, duress, or unconscionability.” Doctor’s Assocs., 517 U.S.
at 687; see Fiser, 2008-NMSC-046, ¶ 23. This principle is entrenched in New Mexico
jurisprudence as well. Id. ¶¶ 22, 23.

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{17} In this case, we are concerned with the question of who decides—a district court or
an arbitrator—whether an arbitration provision in a written agreement is invalid on grounds
of unconscionability. The general rule is that the arbitrability of a particular dispute is a
threshold issue to be decided by the district court unless there is clear and unmistakable
evidence that the parties decided otherwise under the terms of their arbitration agreement.
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). To explain more fully,
although the FAA has limited the role of courts in the arbitration context, certain gateway
issues involving arbitration provisions have remained within the purview of judicial review.
Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003) (“In certain limited
circumstances, courts assume that the parties intended courts, not arbitrators, to decide a
particular arbitration-related matter[] in the absence of clear and unmistakable evidence to
the contrary[.]” (alterations omitted) (internal quotation marks and citation omitted)). These
gateway questions of arbitrability “typically involve matters of a kind that contracting parties
would likely have expected a court to decide[,]” such as the validity of an arbitration
provision, the scope of an arbitration provision, or whether an arbitration agreement covers
a particular controversy. Id. (internal quotation marks and citation omitted); see Howsam,
537 U.S. at 84.

{18} However, courts have recognized an important exception to the general rule that
questions of arbitrability are typically for the courts to decide. Reflecting the principle that
arbitration is a contractual undertaking, courts have recognized that parties can agree to have
an arbitrator, rather than a court, decide gateway questions of arbitrability in addition to
deciding the parties’ underlying claims. See Rent-A-Center, 130 S. Ct. at 2777 (“We have
recognized that parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as
whether the parties have agreed to arbitrate or whether their agreement covers a particular
controversy.”); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995) (“Just
as the arbitrability of the merits of a dispute depends upon whether the parties agreed to
arbitrate that dispute, so the question [of] ‘who has the primary power to decide arbitrability’
turns upon what the parties agreed about that matter.” (citation omitted)). In Rent-A-Center,
decided in June 2010, the Supreme Court referred to this type of agreement between parties
as a delegation provision, i.e., “an agreement [between the parties] to arbitrate threshold
issues concerning the arbitration agreement [rather than having a court decide].” 130 S. Ct.
at 2777. As the Supreme Court explained in Rent-A-Center, a delegation provision “is
simply an additional, antecedent agreement the party seeking arbitration asks the federal
court to enforce, and the FAA operates on this additional arbitration agreement just as it does
on any other.” Id. at 2777-78. In referring questions of arbitrability to an arbitrator through
the enforcement of a delegation provision, courts must, however, ensure that there is “clear
and unmistakable evidence” that the parties agreed to arbitrate questions of arbitrability.
First Options, 514 U.S. at 944 (“Courts should not assume that the parties agreed to arbitrate
arbitrability unless there is clear and unmistakable evidence that they did so.” (alterations
omitted) (internal quotation marks and citation omitted)); AT&T Techs., 475 U.S. at 649
(“Unless the parties clearly and unmistakably provide otherwise, the question of whether the
parties agreed to arbitrate is to be decided by the court, not the arbitrator.”). We also note
that “[w]hen deciding whether the parties agreed to arbitrate a certain matter (including
arbitrability), courts generally . . . should apply ordinary state-law principles that govern the
formation of contracts.” First Options, 514 U.S. at 944.

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{19} Within this framework, we turn to the mechanism for determining whether a party
has challenged an arbitration agreement, and specifically a delegation provision, in a manner
such that a court can decide the challenge in the first instance. In Buckeye Check Cashing,
Inc. v. Cardegna, 546 U.S. 440, 444 (2006), the Supreme Court established that challenges
to the validity of arbitration provisions fall within two categories: (1) those “challeng[ing]
specifically the validity of the agreement to arbitrate”; and (2) those “challeng[ing] the
contract as a whole, either on a ground that directly affects the entire agreement . . . or on
the ground that the illegality of one of the contract’s provisions renders the whole contract
invalid.” The Court held that only the first type of challenge is for a court to decide. Id. at
445-46 (“[U]nless the challenge is to the arbitration clause itself, the issue of the contract’s
validity is considered by the arbitrator in the first instance.”). The Court noted that the class
in Buckeye had not specifically challenged the validity of the arbitration provision in certain
loan agreements that the individual class members had entered into with the lender. Id. at
446. Rather, “[t]he crux of the[ir] complaint [was] that the contract as a whole (including
its arbitration provision) [was] rendered invalid by [a] usurious finance charge.” Id. at 444.
Accordingly, the Court held that the arbitration provision was itself enforceable and the
challenge to the validity of the entire contract was therefore a matter to be decided by an
arbitrator and not a court. Id. at 446 (“[W]e conclude that because [the] respondents
challenge the [a]greement, but not specifically its arbitration provisions, those provisions are
enforceable apart from the remainder of the contract. The challenge should therefore be
considered by an arbitrator, not a court.”). The Court’s decision to enforce the arbitration
provision essentially established a rule of severability because the Court determined that “as
a matter of substantive federal arbitration law, an arbitration provision is severable from the
remainder of the contract.” Id. at 445.

{20} In circumstances where parties have decided to arbitrate arbitrability—that is, where
there is a delegation provision assigning questions of arbitrability to an arbitrator—the
Supreme Court’s recent holding in Rent-A-Center appears to stand for the proposition that
a party must specifically challenge the delegation provision in order for a court to consider
the challenge rather than referring the matter to an arbitrator. 130 S. Ct. at 2779. Rent-A-
Center involved an employment discrimination lawsuit in which the employer moved to
compel arbitration under the terms of an arbitration agreement signed by the employee. Id.
at 2775, 2777. The arbitration agreement contained a delegation provision that “gave the
arbitrator exclusive authority to resolve any dispute relating to the . . . enforceability . . . of
th[e] [a]greement.” Id. at 2779 (omissions in original) (internal quotation marks and citation
omitted). At issue before the Supreme Court was whether the district court could consider
the employee’s contention that the arbitration agreement was unconscionable in light of this
delegation provision which “explicitly assign[ed] that decision to the arbitrator.” Id. at 2775.
The Court held that the employee was required to have specifically challenged the delegation
provision in order for the district court to be able to consider the unconscionability claim
rather than submit the matter to an arbitrator. Id. at 2779 (“[U]nless [the employee]
challenged the delegation provision specifically, we must treat it as valid under [section] 2
[of the FAA], and must enforce it under [sections] 3 and 4, leaving any challenge to the
validity of the [a]greement as a whole for the arbitrator.”). The Court concluded that
because the employee had not specifically challenged the delegation provision during the
course of the litigation, his claim that the entire arbitration agreement was unconscionable

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could only be decided by an arbitrator. Id. at 2779-81. Thus, Rent-A-Center appears to
establish that in cases where a delegation provision granting an arbitrator the authority to
determine the validity of an arbitration agreement exists, a district court is precluded from
deciding a party’s claim of unconscionability unless that claim is based on the alleged
unconscionability of the delegation provision itself. Id.; see id. at 2781 (Stevens, J.,
dissenting) (stating that the majority had adopted a rule that “[e]ven when a litigant has
specifically challenged the validity of an agreement to arbitrate[,] he must submit that
challenge to the arbitrator unless he has lodged an objection to the particular line in the
agreement that purports to assign such challenges to the arbitrator—the so-called ‘delegation
clause’”). With this framework in mind, we turn to the parties’ specific arguments regarding
arbitrability in this case.

b. There Is Clear and Unmistakable Evidence That the Parties Intended to
Delegate Questions of Arbitrability to an Arbitrator under the Terms of the
Arbitration Provision

{21} Initially, the parties dispute whether the arbitration provision in the Loan Agreements
included clear and unmistakable evidence of a delegation clause requiring that questions of
arbitrability regarding the validity of the arbitration provision be submitted to an arbitrator.
Defendants argue that a clear and unmistakable delegation clause was included in the first
sentence of the arbitration provision.

AGREEMENT TO ARBITRATE ALL DISPUTES: By signing below .
. . , you and we agree that any and all claims, disputes or controversies that
we or our servicers or agents have against you or that you have against us . . .
that arise out of your application for one or more loans, the Loan Agreements
that govern your repayment obligations, the loan for which you are applying
or any other loan we previously made or later make to you, this Agreement
to Arbitrate All Disputes, collection of the loan or loans, or alleging fraud or
misrepresentation, whether under the common law or pursuant to federal or
state statute or regulation, or otherwise, including disputes as to the matters
subject to arbitration, shall be resolved by binding individual (and not class)
arbitration by and under the Code of Procedure of the National Arbitration
Forum (“NAF”) in effect at the time the claim is filed.

(Emphasis added.) Specifically, Defendants contend that the delegation clause in this
sentence is the language requiring arbitration of “any and all claims, disputes or
controversies . . . aris[ing] out of . . . this Agreement to Arbitrate All Disputes . . . including
disputes as to the matters subject to arbitration.” Additionally, CANI argues that the parties
clearly and unmistakably intended to arbitrate questions of arbitrability by incorporating the
rules of the NAF into the arbitration provision. The NAF Code of Procedure expressly
provides that an arbitrator has the authority to decide jurisdictional issues, including
arbitrability questions regarding the existence, validity, and scope of an arbitration provision.

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NAF Code of Procedure, pt. IV, r. 20(F), at 28 (Aug. 1, 2008)
(http://www.adrforum.com/main.aspx).2

{22} As we stated previously, applicable federal law provides that courts should apply
state law principles in deciding whether the parties to an arbitration agreement clearly and
unmistakably agreed to submit questions of arbitrability to an arbitrator. See First Options,
514 U.S. at 944. Under New Mexico law, arbitration agreements are governed by well-
established contract law principles. See Christmas v. Cimarron Realty Co., 98 N.M. 330,
332, 648 P.2d 788, 790 (1982); Santa Fe Techs, Inc. v. Argus Networks, Inc.,
2002-NMCA-030, ¶ 52, 131 N.M. 772, 42 P.3d 1221. Our Supreme Court has stated that
“[c]ourts must interpret the provisions of an arbitration agreement according to the rules of
contract law and apply the plain meaning of the contract language in order to give effect to
the parties’ agreement.” McMillan v. Allstate Indem. Co., 2004-NMSC-002, ¶ 10, 135 N.M.
17, 84 P.3d 65. Additionally, in examining the plain language of an arbitration agreement,
this Court has previously stated that arbitration clauses drafted with broad strokes require
broad interpretation. Santa Fe Techs., 2002-NMCA-030, ¶ 55. Likewise, our Supreme
Court has stated that “[w]hen the parties agree to arbitrate any potential claims or disputes
arising out of their relationships by contract or otherwise, the arbitration agreement will be
given broad interpretation unless the parties themselves limit arbitration to specific areas or
matters.” McMillan, 2004-NMSC-002, ¶ 10 (internal quotation marks and citation omitted).

{23} In this case, we hold that the plain language of the arbitration provision clearly and
unmistakably evidences the parties’ intent to have an arbitrator decide threshold issues of
arbitrability. The terms of the arbitration provision and, specifically, the first sentence of the
provision, unambiguously provide that all disputes were to be submitted to an arbitrator. In
particular, we refer to the title of the arbitration provision, “Agreement to Arbitrate All
Disputes,” as well as the language in the provision itself stating that the parties submit to
arbitration “any and all claims, disputes or controversies . . . aris[ing] out of . . . this
Agreement to Arbitrate All Disputes . . . including disputes as to the matters subject to
arbitration.” (Emphasis added.) We view this italicized language to be clear and
unmistakable evidence to the effect that the parties agreed to arbitrate all issues, including
issues of arbitrability. Additionally, given the lack of any sort of limiting language, we
interpret this sweeping language broadly and conclude that the parties expressly intended
to arbitrate “all disputes”—including arbitrability issues such as the validity of the
arbitration provision.

{24} Moreover, we agree with Defendants that the incorporation of the NAF Code of
Procedure constitutes clear and unmistakable evidence of the parties’ intent to delegate
arbitrability issues. Rule 20 of the NAF Code of Procedure expressly gives the arbitrator the

2
Rule 20 of the NAF Code of Procedure provides: “An Arbitrator shall have the
power to rule on all issues, [c]laims, [r]esponses, questions of arbitrability, and objections
regarding the existence, scope, and validity of the [a]rbitration [a]greement including all
objections relating to jurisdiction, unconscionability, contract law, and enforceability of the
Arbitration Agreement.”

10
authority to decide issues of arbitrability. Although New Mexico courts have not yet directly
addressed whether incorporation of an arbitral forum’s rules constitutes clear and
unmistakable evidence of the parties’ intent to delegate arbitrability, a number of federal
courts of appeal that have reached this issue have held that it is. See, e.g., Fallo v.
High-Tech Inst., 559 F.3d 874, 877-78 (8th Cir. 2009) (holding that the act of incorporating
the American Arbitration Association (AAA) rules provides “clearer evidence of the parties’
intent to leave the question of arbitrability to the arbitrator . . . because Rule 7(a) expressly
gives the arbitrator the power to rule on his or her own jurisdiction” and concluding that “the
arbitration provision’s incorporation of the AAA Rules . . . constitutes a clear and
unmistakable expression of the parties’ intent to leave the question of arbitrability to an
arbitrator” (internal quotation marks omitted); Contec Corp. v. Remote Solution, Co., 398
F.3d 205, 208 (2d Cir. 2005) (stating that “when . . . parties explicitly incorporate rules that
empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and
unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator”);
Terminix Int’l Co. v. Palmer Ranch Ltd. P’ship, 432 F.3d 1327, 1331-32 (11th Cir. 2005)
(determining that an arbitration agreement’s incorporation of arbitral forum rules, which
specifically included a rule that the arbitrator shall have the power to decide issues of
arbitrability, was clear and unmistakable evidence that the parties delegated arbitrability
issues to an arbitrator); Apollo Computer, Inc. v. Berg, 886 F.2d 469, 473 (1st Cir. 1989)
(“By contracting to have all disputes resolved according to the Rules of the [International
Chamber of Commerce] . . ., [the plaintiff] agreed to be bound by [specific articles]. These
provisions clearly and unmistakably allow[ed] the arbitrator to determine her own
jurisdiction when . . . there exists a prima facie agreement to arbitrate whose continued
existence and validity is being questioned.”); cf. P & P Indus., Inc. v. Sutter Corp., 179 F.3d
861, 867-68 (10th Cir. 1999) (“A party who consents by contract to arbitration before the
AAA also consents to be bound by the procedural rules of the AAA, unless that party
indicates otherwise in the contract. By agreeing to arbitrate before the AAA, [the parties]
impliedly agreed that they would be bound . . . by the procedural rules of the AAA, including
Rule 47(c) [which states that the parties consent to judicial confirmation of the disputed
arbitration award].”).

{25} We also note that previous New Mexico cases have incorporated and given effect to
the plain meaning of referenced rules in contractual agreements. See Christmas, 98 N.M.
at 332, 648 P.2d at 790 (incorporating and giving effect to a specific article of a realtors’
code of ethics, where the parties were both members of the same realtors association and had
agreed to submit disputes to arbitration “in accordance with the regulations of their board”
(internal quotation marks and citation omitted)); see also Monette v. Tinsley,
1999-NMCA-040, ¶¶ 15-17, 126 N.M. 748, 975 P.2d 361 (determining that an arbitration
agreement’s language that the parties were bound to arbitrate in accordance with the
Commercial Arbitration Rules of the American Arbitration Forum indicated that these rules
were considered the “guiding substantive and procedural rules for the arbitration”). In light
of this overwhelming authority giving effect to rules referenced in contracts and specifically
arbitration agreements, we conclude that the reference to the NAF Code of Procedure in the
arbitration provision is further evidence that the parties clearly and unmistakably delegated
arbitrability questions to an arbitrator.

11
{26} Given the plain language of the arbitration provision and its incorporation of the NAF
Code of Procedure, we hold that the parties in this case clearly and unmistakably delegated
arbitrability questions to an arbitrator. For purposes of resolving the remaining issues in this
appeal, we consider the delegation clause to be the following language in the first sentence
of the arbitration provision in the parties’ Loan Agreement:

you and we agree that any and all claims, disputes or controversies that we
or our servicers or agents have against you or that you have against us . . .
that arise out of . . . this Agreement to Arbitrate All Disputes, . . . including
disputes as to the matters subject to arbitration, shall be resolved by binding
individual (and not class) arbitration by and under the Code of Procedure of
the [NAF] in effect at the time the claim is filed.

c. Felts Properly Challenged the Delegation Clause and, Therefore, the District
Court Had Jurisdiction to Decide the Issue of Unconscionability

{27} We next address Defendants’ contention that because Felts did not specifically
challenge the validity of the delegation clause in her amended complaint, the district court
was precluded from deciding her claim that the arbitration provision was unconscionable due
to the class action ban. Defendants argue that under the Supreme Court’s decisions in Rent-
A-Center and Buckeye, the district court had no option but to submit the unconscionability
issue to an arbitrator along with Felts’ underlying claims.

{28} As we noted earlier, Felts’ amended complaint focused primarily on challenging the
legality of the Loan Agreements under New Mexico law. As the district court acknowledged
at the hearing on CLK’s motion to compel arbitration, Felts’ complaint did not contain a
specific challenge to the arbitration provision. It was only after CLK and CANI filed their
respective motions to compel arbitration that Felts raised any specific challenges to the
validity of the provision, arguing that the class action ban rendered the arbitration provision
unconscionable and also that it was impossible to compel arbitration because the agreed-
upon arbitral forum, the NAF, was precluded from handling consumer disputes. Defendants
maintain that Felts’ failure to challenge the arbitration provision in her complaint is similar
to Buckeye, where the Supreme Court determined that because the “crux of the complaint”
challenged the contract as a whole and not the arbitration provision specifically, the validity
of the provision was for an arbitrator to decide. See Buckeye, 546 U.S. at 444, 446
(“[B]ecause respondents challenge the [a]greement, but not specifically its arbitration
provisions, those provisions are enforceable apart from the remainder of the contract. The
challenge should therefore be considered by an arbitrator, not a court.”). They further
contend that under Rent-A-Center, Felts was required to have pleaded a specific challenge
to the delegation clause in her complaint and her failure to do so meant that an arbitrator
should have decided issues of arbitrability, rather than the court. In effect, Defendants urge
us to look only at the substance of Felts’ complaint and not her motion papers in deciding
whether she challenged the delegation clause specifically such that the district court would
be able to decide the challenge.

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{29} We disagree with Defendants and decline to adopt a narrow pleading rule requiring
plaintiffs to plead a specific and distinct challenge to the validity of an arbitration provision
in their complaints before a court may decide arbitrability issues. Although the Supreme
Court may have considered only the “crux of the complaint” in Buckeye, 546 U.S. at 444,
the Court looked beyond the complaint in Rent-A-Center when it examined whether the
respondent there had raised a specific and distinct challenge to the delegation provision of
the arbitration agreement at issue. In deciding the issue, the Court’s opinion in Rent-A-
Center referenced the respondent’s “response to Rent-A-Center’s motion to compel
arbitration” as well as his briefs to the Ninth Circuit and the Supreme Court on the issue and
his oral argument before the Supreme Court. 130 S. Ct. at 2779-81. From the Court’s
analysis in Rent-A-Center, it appears that the Court was more concerned with the substantive
nature of the respondent’s claims and arguments and not with where he had argued those
challenges. Id. We believe that the Ninth Circuit Court of Appeals, in Bridge Fund Capital
Corp. v. Fastbucks Franchise Corp., describes what the proper approach is in light of Rent-
A-Center: “Because the material question is whether the challenge to the arbitration
provision is severable from the challenge to the contract as a whole, the inclusion of, or
failure to include, a specific challenge in the complaint is not determinative. What matters
is the substantive basis of the challenge.” Bridge Fund Capital Corp., 622 F.3d 996, 1001
(9th Cir. 2010) (citations omitted). Accordingly, we consider not only Felts’ complaint but
also her motion papers and oral argument below to determine whether she raised a distinct
challenge to the delegation clause that was severable from her challenges to the validity of
the entire Loan Agreement.

{30} We conclude that Felts made two distinct arguments regarding the validity of the
delegation clause in her responses to CANI and CLK’s respective motions to compel
arbitration. First, because the delegation clause included a parenthetical prohibiting class
arbitration (“you and we agree that any and all claims, disputes or controversies . . . shall be
resolved by binding individual (and not class) arbitration”), Felts’ argument that the ban on
class actions rendered the arbitration provision unconscionable was directed to the
delegation clause as well. Second, we conclude that her argument that performance of the
delegation clause was rendered impossible under New Mexico law because the NAF had
ceased its consumer arbitration business was also a specific challenge to the delegation
clause, which assigned the NAF as the arbitral forum for resolving “any and all disputes”
between the parties. These arguments were both clearly directed against the validity of the
delegation clause alone, and were distinct from Felts’ claims against the Loan Agreements
under the UPA, SLA, etc.

{31} The next step in our analysis, based on Rent-A-Center, is to determine whether Felts’
specific challenges to the delegation clause, as described above, render that clause
unenforceable under Section 2 of the FAA. See Rent-A-Center, 130 S. Ct. at 2778-79
(stating that delegation clauses are enforced under § 2 of the FAA and are therefore valid
“save upon such grounds as exist at law or in equity for the revocation of any contract;”
further stating that unless a delegation clause is specifically challenged and found to be
unenforceable, courts must treat it “as valid under § 2, and must enforce it under §§ 3 and
4, leaving any challenge to the validity of the [a]greement as a whole for the arbitrator”).

13
{32} In this case, we have concluded that Felts’ argument under Fiser that the class action
ban in the arbitration provision was substantively unconscionable was directed to the
delegation clause as well. When Felts challenged the class action ban in the proceedings
below, she indicated that the class action ban was mentioned three times in the arbitration
provision—including the parenthetical in the delegation clause—and she argued that all
three of these prohibitions against class relief were unconscionable and unenforceable under
our Supreme Court’s rationale in Fiser. Therefore, when the district court held that these
“prohibitions against class relief” were unconscionable and unenforceable under Fiser, its
holding included an implicit finding that the class action ban in the delegation clause was
also unconscionable, thereby rendering it invalid under Section 2 of the FAA.

{33} With this framework in mind, we turn to address whether the district court’s
application of Fiser to this case was proper, and we clarify that our discussion below extends
to the validity of the delegation clause as well. For reasons that become apparent, we do not
reach Felts’ second argument targeting the validity of the delegation clause based on the
unavailability of the NAF as the arbitral forum.

2. Unconscionability Analysis

{34} We next address Defendants’ contention that the district court erroneously
determined that the class action ban in the arbitration provision was unconscionable under
our Supreme Court’s holding in Fiser. Specifically, the district court found that Felts’
claims constituted “small consumer claims within the meaning of Fiser” and “[a]s such, [the]
prohibitions against class relief [in the arbitration provisions were] contrary to New
Mexico’s fundamental public policy of encouraging the resolution of small consumer
claims.”

{35} “Unconscionability 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.” Cordova, 2009-NMSC-021, ¶ 21.
Contractual unconscionability consists of two types: substantive and procedural. Id.
“Substantive unconscionability relates to the content of the contract terms and whether they
are illegal, contrary to public policy, or grossly unfair.” Fiser, 2008-NMSC-046, ¶ 20.
“Procedural unconscionability is determined by analyzing the circumstances surrounding the
contract’s formation, such as whether it was an adhesive contract and the relative bargaining
power of the parties.” Id. In this case, the district court did not address procedural
unconscionability, nor did the parties argue it below; therefore, our review is limited to the
district court’s determination that the arbitration provision was substantively unconscionable
on public policy grounds.

{36} Because Defendants’ primary argument on appeal is that Fiser is factually
distinguishable from this case in a number of ways, we begin our analysis by summarizing
the Supreme Court’s decision in Fiser. In Fiser, our Supreme Court addressed whether an
arbitration provision in a computer purchase agreement was unconscionable and
unenforceable under New Mexico law because it banned any form of class action relief. Id.
¶¶ 12-22. The case involved a putative class action lawsuit filed against a computer

14
manufacturer for misrepresentation in the sale of computers, where each similarly situated
customer suffered damages of less than twenty dollars. Id. ¶¶ 2-4. The district court granted
the computer manufacturer’s motion to compel arbitration, agreeing that under the terms of
a binding arbitration clause in the plaintiff’s computer purchase agreement, the plaintiff was
not permitted to seek class action relief and was instead required to arbitrate all disputes.
Id. ¶¶ 4-5. The Supreme Court reversed after concluding that the class action ban in the
agreement was contrary to New Mexico’s public policy because “[t]he opportunity for class
relief and its importance to consumer rights is enshrined in the fundamental policy of New
Mexico and evidenced by our statutory scheme.” Id. ¶¶ 5, 13. Recognizing that it is
fundamental New Mexico policy that consumers have a viable mechanism for dispute
resolution, no matter the size of the claim, the Court reasoned that the class action
mechanism is an important device for providing consumers with a meaningful remedy in
small consumer cases where the “cost of bringing a single claim is greater than the damages
alleged.” Id. ¶¶ 9, 15. Applying this rationale to the arbitration provision at issue, the Court
held:

By preventing customers with small claims from attempting class relief and
thereby circumscribing their only economically efficient means for redress,
[the d]efendant’s class action ban exculpates the company from wrongdoing.
Denial of a class action in cases where it is appropriate may have the effect
of allowing an unscrupulous wrongdoer to retain the benefits of its wrongful
conduct. On these facts, enforcing the class action ban would be tantamount
to allowing [the d]efendant to unilaterally exempt itself from New Mexico
consumer protection laws. . . . Because it violates public policy by depriving
small claims consumers of a meaningful remedy and exculpating [the
d]efendant from potential wrongdoing, the class action ban meets the test for
substantive unconscionability.

Id. ¶ 21 (internal quotation marks and citation omitted).

{37} Defendants argue that Fiser is factually distinguishable from this case because Felts’
claims do not constitute “small consumer claims” within the meaning of Fiser. In support
of this argument, Defendants refer us to the $3,900 in damages Felts is seeking, an amount
they contend is over two hundred times greater than the ten to twenty dollars at issue in
Fiser. We are unpersuaded because we do not view Fiser as setting a numerical bar for what
constitutes a small consumer claim; rather, the Court there was concerned with
circumstances where “the cost of bringing a single claim is greater than the damages
alleged.” Id. ¶ 15. It is under these specific circumstances that the Court viewed class
actions to “function[] as a gatekeeper to relief” and to provide small claims plaintiffs with
“the right of access to the courts” to seek “a meaningful remedy for one’s claims.” Id.
Applying this reasoning to the facts of that case, the Court concluded that it did not need to
engage in extensive fact-finding to ascertain whether the plaintiff had met his “evidentiary
burden of proving that his damages [we]re outweighed by the cost of bringing an individual
claim.” Id. ¶ 17. Instead, given the “scant” amount of damages being sought, the Court
determined that “[i]n light of attorney[] fees, the costs of gathering evidence and preparing
the case, and the time spent educating himself on the issues and organizing and presenting

15
the claim, the likelihood that [the p]laintiff’s actual costs [would] exceed [the amount of
damages alleged] is certain.” Id. ¶¶ 3, 17. Thus, although it was presented in Fiser with a
scenario where it was virtually certain that costs would outweigh the amount of damages
alleged, the Supreme Court nevertheless indicated that evidentiary fact-finding should occur
on this issue. Id. We take this opportunity to clarify that, within the meaning of Fiser,
district courts are required to determine whether a plaintiff’s costs in bringing an individual
claim outweigh the amount of damages alleged, such that a meaningful remedy for the
plaintiff’s claims is only available through class action relief. The plaintiff bears the
evidentiary burden on this issue.

{38} In this case, therefore, the issue before the district court was not whether the actual
amount of damages alleged by Felts exceeded the ten to twenty dollar amount in Fiser, but
whether the costs of bringing an individual claim would exceed the amount of damages she
had alleged within the meaning of Fiser. Though the district court determined that it did not
need to undertake an evidentiary hearing on the issue, it nevertheless entered a factual
finding that “the amounts at issue here fall within the small consumer claims as envisioned
by Fiser.” It is apparent from the hearing transcript that the court considered the evidence
introduced by Felts on the issue, and we review whether substantial evidence exists to
support the court’s factual determination.

{39} Our review of the record indicates that substantial evidence supports the district
court’s finding that Felts brought a small consumer claim within the meaning of Fiser. Felts
submitted twelve different affidavits from attorneys, including two former New Mexico
attorneys general, all of which highlighted the numerous costs and perceived difficulties of
pursuing an individual claim against Defendants. The affidavits also contained evidence that
the class action ban in the arbitration provision acted as an exculpatory clause for Defendants
because it was economically unfeasible to bring an individual claim against Defendants
otherwise. The attorneys stated that they would not agree to represent a plaintiff in an
individual action involving the amount of damages alleged by Felts given the costs and the
complexity of the claims at issue, and that they were not aware of any New Mexico attorney
who would agree to bring such a lawsuit on an individual basis. We think it is significant
that Defendants had the opportunity to, but did not, submit any counter evidence indicating
that the class action ban was not exculpatory or that it was economically feasible for Felts
to bring her claim individually. We conclude that substantial evidence exists showing that
the likelihood that Felts’ costs will exceed her damages is reasonably certain and, therefore,
she has brought a “small consumer claim” within the meaning of Fiser.

{40} Defendants also argue that Fiser is distinguishable because Felts has raised statutory
claims under the UPA which allow her to recover attorney fees and costs in the event she is
successful in arbitrating her claims. We are not persuaded by this argument because Fiser
also involved a UPA claim and the Supreme Court nevertheless determined that the class
action ban in the arbitration agreement was unconscionable for public policy reasons. Fiser,
2008-NMSC-046, ¶¶ 2, 5. Accordingly, we affirm the district court’s determination that the
class action ban in the arbitration provision was substantively unconscionable within the
meaning of Fiser and was, therefore, unenforceable.

16
3. Severability

{41} Lastly, we address Defendants’ contention that the district court erroneously
determined that the entire arbitration provision was unenforceable rather than severing the
unconscionable class action ban from the arbitration provision and enforcing the remainder.
In cases where a provision of a contract is determined to be unconscionable, “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.

{42} We hold that the district court properly determined that the class action ban was not
severable from the rest of the arbitration provision because we conclude that the class action
ban was central to the means by which the parties could resolve their disputes under this
particular arbitration provision. See Fiser, 2008-NMSC-046, ¶ 24 (determining that an
unconscionable class action ban could not be severed from an arbitration agreement because
“the class action ban is part of the arbitration provision and is central to the mechanism for
resolving the dispute between the parties”); see also Cordova, 2009-NMSC-021, ¶ 40
(refusing to sever unconscionable portions of an arbitration agreement because these
provisions were “central to the original mechanisms for resolving disputes between the
parties”). The class action ban was mentioned several times throughout the arbitration
provision and then reinforced again within the separate class action waiver provision; it is
clear that it was a key limitation to the mechanisms by which the parties could resolve their
disputes. Cf. Padilla, 2003-NMSC-011, ¶ 18 (relying on guidance from other jurisdictions
and severing an unconscionable de novo appeals clause from an insurance contract because
the appeals clause was “separate and distinct” from the arbitration provision and did not
affect the “general conduct of the arbitration itself” (internal quotation marks and citations
omitted)). Moreover, we see no indication that Defendants have ever disputed that the class
action ban is not a key limitation under the terms of the arbitration provision; rather, they
have consistently maintained that class-based relief is not available to any party under the
provision. Under Fiser and Cordova, therefore, the district court correctly found that
severance was not an available remedy.

{43} We note that CANI argues that the class action waiver provision, which is separate
and distinct from the class action ban in the arbitration provision, evidences the parties’
intent that class action waivers are not “central to the parties’ bargain.” The class action
waiver provision states that “[t]o the extent permitted by law [the borrower] will not bring,
join or participate in any class action as to any claim, dispute or controversy [the borrower]
may have against [the lender].” (Emphasis added.) CANI contends that this language is
“clear evidence of the parties’ intent that the class action waiver would . . . only be enforced
by the arbitrator ‘to the extent permitted by law’ [and t]hus, the parties’ . . . desired
arbitration to proceed even if the class action waiver were not permitted by law.” In support,
CANI cites to out-of-state authority where a class action ban was severed from an arbitration
agreement because the class action ban clause contained a savings clause banning class
actions “unless your state’s laws provide otherwise.” See Kristian v. Comcast Corp., 446
F.3d 25, 61-62 (1st Cir. 2006) (emphasis omitted) (internal quotation marks omitted).

17
{44} However, even if we were to agree with CANI that the phrase “to the extent
permitted by law” indicates that the parties contemplated severability of the class action ban,
we determine that severing the class action ban in this case would excise major portions of
the arbitration provision in a manner that would lead to the very type of “judicial surgery”
that our Supreme Court warned against in Cordova. See Cordova, 2009-NMSC-021, ¶ 40
(“We are reluctant to try to draft an arbitration agreement [that] the parties did not agree on.
. . . [W]e must strike down the arbitration clause in its entirety to avoid a type of judicial
surgery that inevitably would remove provisions that were central to the original
mechanisms for resolving disputes between the parties.” (citation omitted)). This is a
legitimate policy concern that was also acknowledged by the out-of-state authority cited by
CANI. Kristian, 446 F.3d at 62 (noting that courts typically prefer “declaring an arbitration
agreement unenforceable rather than using severance as a remedy when fundamental
elements of the arbitration regime are at issue” and that severing the class arbitration bar
would be “difficult to justify” absent a savings clause). We follow this policy rationale and
uphold the district court’s determination that the class action ban could not be severed from
the arbitration provision and thus, the entire arbitration provision was unenforceable.

CONCLUSION

{45} For the foregoing reasons, we affirm the district court’s orders denying Defendants’
motions to compel arbitration.

{46} IT IS SO ORDERED.

______________________________________
CYNTHIA A. FRY, Judge

WE CONCUR:

______________________________________
JONATHAN B. SUTIN, Judge

______________________________________
RODERICK T. KENNEDY, Judge

Topic Index for Felts v. CLK Mgmt., Inc., Docket Nos. 30,142/29,702

AE APPEAL AND ERROR
AE-SR Standard of Review

CP CIVIL PROCEDURE
CP-AT Arbitration
CP-CA Class Actions

18
CM COMMERCIAL LAW
CM-CC Consumer Credit

CN CONTRACTS
CN-IN Interpretation
CN-UC Unconscionable

RE REMEDIES
RE-AN Arbitration

19