Concepcion’s “purposes-and-objectives” FAA preemption test continues to cause conflicting lower court decisions. Some states find that a lack of mutuality in an arbitration agreement (whereby one party reserves the right to go to court for some or all claims, while the other party must arbitrate any claims they seek to assert) makes the arbitration agreement unconscionable. Some courts reason that the FAA preempts this type of unconscionability/lack of mutuality analysis because this analysis presumes that arbitration is inferior to litigation, and under Concepcion, the FAA preempts any state defense that derives its meaning from the fact that an arbitration agreement is at issue. See, e.g., THI of New Mexico at Hobbs Ctr., LLC v. Patton, 741 F.3d 1162 (10th Cir. 2014). However, other courts find that the FAA does not preempt this lack of mutuality analysis because such an analysis is based on the general contract defense of unconscionability. See, e.g., Figueroa v. THI of New Mexico at Casa Arena Blanca, LLC, 306 P.3d 480 (N.M.Ct.App. 2012). Thus, there is a developing conflict regarding how courts interpret Concepcion’s broad preemption test, which could preempt a state law because it presents an “obstacle” to the FAA’s objectives or has a “disproportionate impact” on arbitration.
In Berent v. CMH Homes, Inc., No. E2013–01214–SC–R11-CV (Tenn. June 5, 2015) (click here for a copy of the decision), the Tennessee Supreme Court recently held that the FAA does not preempt a lack of mutuality analysis that takes into account the degree of one-sidedness of the parties’ obligations to arbitrate, because the FAA permits such defenses based on general contract law.
The Berent case involved a broad arbitration clause in connection with the sale of a manufactured home. The consumer who purchased the home filed suit for breach of contract, and the seller asked the court to compel arbitration. The arbitration clause had exceptions or carve-outs whereby the seller could file a lawsuit in court to enforce a security interest in the manufactured home or to seek preliminary relief. The lower courts refused to enforce the arbitration clause, finding the arbitration clause to be unconscionable for lack of mutuality. The Tennessee Supreme Court, although acknowledging that a lack of mutuality can invalidate an arbitration clause, found that the degree of one-sidedness was not so severe in this case, and thus the arbitration clause is enforceable despite the carve-outs allowing for the seller to go to court. The court found there was a legitimate business justification for the carve-outs because an arbitrator would not have the ability to grant certain types of relief to protect the seller’s property interests.