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The New Mexico Supreme Court held that a class waiver was unconscionable and thus unenforceable under New Mexico law because under the facts of the case, the class waiver would operate as an exculpatory clause and thus exempt the drafting party from New Mexico's consumer protection laws.
In Fiser v. Dell Computer Corp., 188 P.3d 1215 (N.M. 2008), Fiser bought a Dell computer over the Internet. The terms and conditions of sale included an arbitration agreement with two pertinent provisions: (1) a class waiver precluding class-wide arbitration; and (2) a Texas choice-of-law provision.
After the sale, Fiser filed a class action lawsuit against Dell, alleging that Dell systematically misrepresented the memory size of its computers. The estimated damages totaled approximately $20 per sale. In response to the lawsuit, Dell filed a motion to compel arbitration. The trial court granted the motion, and the New Mexico Court of Appeals affirmed that ruling on appeal. See Fiser v. Dell Computer Corp., 165 P.3d 328 (N.M. Ct. App. Apr. 30, 2007).
The New Mexico Supreme Court (the Court) granted review to determine the enforceability of the class waiver. The first issue underlying this determination was whether Texas law or New Mexico law governed the issue. As the Court explained, New Mexico courts will honor a proper choice-of-law provision if application of the chosen law does not violate a fundamental public policy of New Mexico.
According to the Court, the application of Texas law in this case would violate a fundamental public policy of New Mexico. Specifically, as the Court noted, the waiver would be upheld under Texas law, but the Court concluded that "the prohibition on class relief, when applied to small claim plaintiffs, is contrary to New Mexico's fundamental public policy to provide a forum for relief for small consumer claims."
The Court thus applied New Mexico law in deciding whether to enforce the class waiver. On the enforceability question, the Court reasoned: "On these facts, enforcing the class action ban would be tantamount to allowing [Dell] to unilaterally exempt itself from New Mexico consumer protection laws." Based on its view that, given the small amount of damages, the waiver would operate as an exculpatory clause the Court found that Fiser had made an "overwhelming showing of substantive unconscionability" which rendered the class waiver unenforceable under New Mexico law.
Lastly, the Court concluded that the arbitration agreement could not be preserved by severing the class waiver because the waiver was an integral part of the arbitration agreement. The Court thus held that the arbitration agreement was unenforceable in its entirety and, accordingly, remanded the case with instructions for the lawsuit to proceed.
As this case illustrates, in those jurisdictions that limit the enforceability of class waivers, the enforceability determination is a fact-specific inquiry that turns on various factors, including the terms of the agreement, the nature of the transaction, the details of the dispute, and the posture of the proceeding. It is important to keep in mind that a class waiver does not render an arbitration agreement unenforceable on its face or in every situation. On the contrary, a class waiver raises enforceability concerns only if the waiver is operating as an exculpatory clause in those cases where a non-drafting claimant has suffered a small amount of damages and seeks relief on behalf of a class.
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