United States District Court, D. New Mexico
L. SiegelSiegel Law Group, P.L.L.C. J. Derek Braziel Travis
Andrew Gasper Lee & Braziel, L.L.P. Dallas, Texas
Attorneys for the Plaintiff
Christopher S. Mann Jones Walker, L.L.P. Jennifer L. Anderson
Jones Walker, L.L.P. Baton Rouge, Louisiana Attorneys for the
MEMORANDUM OPINION AND ORDER
MATTER comes before the Court on: (i) the Defendant's
Motion to Dismiss the First Amended Class Action Complaint
(R. Doc. 3) and Compel Arbitration, filed December 6, 2017
(Doc. 5)(“Motion”); and (ii) the Surreply in
Opposition to Defendant's Motion to Dismiss the Class
Action Complaint and Serve [sic], filed January 10, 2018
(Doc. 16)(“Surreply Motion”). The Court held a
hearing on June 27, 2018. The primary issues are: (i) whether
the Court has diversity jurisdiction to adjudicate this case
when the citizenship of one of the parties is unclear; (ii)
whether the arbitration agreement into which Plaintiff Ryan
Patterson and Defendant Nine Energy Service, LLC (“Nine
Energy”) entered contains adequate consideration; (iii)
whether the arbitration agreement is substantively
unconscionable, because it contains a unilateral carve-out
allowing Nine Energy to request injunctive relief in court to
protect its confidential information; and (iv) whether the
arbitration agreement is substantively unconscionable,
because it provides only sixty days after a dispute arises in
which to file a demand for arbitration. The Court concludes
that the parties have not established diversity jurisdiction,
so the Court will order the parties to show cause why the
Court should not dismiss this case for lack of subject-matter
jurisdiction. On the merits, if the Court has subject-matter
jurisdiction, the Court is inclined to conclude that the
Arbitration Agreement contains adequate consideration, and,
although the injunctive relief provision is substantively
unconscionable, it is also severable. Further, the Court is
not inclined to hold the Arbitration Agreement's
sixty-day limitations period unconscionable. Finally, if the
Court has subject-matter jurisdiction, the Court is inclined
to stay proceedings in this case, rather than dismissing it.
Accordingly, the Court is inclined to grant the Motion in
worked for Nine Energy, an oilfield services company, from
March to October of 2017. See First Amended Class
Action Complaint ¶ 5, at 2, filed November 13, 2017
(Doc. 3)(“Amended Complaint”). His “primary
job duty consisted of operating pressure control equipment
and tools.” Amended Complaint ¶ 15, at 3. Nine
Energy first offered Patterson employment via letter on
February 28, 2017. See Letter from Sally Haynes,
Human Resources Manager, to Ryan Patterson at 1-2, (dated
February 28, 2017), filed January 3, 2018 (Doc.
14-2)(“Offer Letter”). Patterson's Offer
Letter states that his employment is contingent upon an
enumerated list of items, including drug testing, physical
capacity testing, and other things. See Offer Letter
at 1. The Offer Letter does not mention arbitration.
See Offer Letter at 1-2. Patterson accepted the
employment offer by signing the Offer Letter on March 1,
2017. See Offer Letter at 2. Patterson did not begin
work at Nine Energy until March 20, 2017. See
Supplemental Declaration of Sharon Warren ¶ 7, at 2
(dated January 3, 2018), filed January 3, 2018 (Doc. 14-1).
March 1, 2017 -- the same day that Patterson signed the Offer
Letter -- he also signed the Confidentiality and Dispute
Resolution Agreement at 6, filed December 6, 2017 (Doc.
5-2)(“Arbitration Agreement”). The Arbitration
Agreement states that “the Company and the Employee
agree to submit exclusively to final and binding arbitration
any and all Disputes as defined herein in accordance with the
following understanding and terms.” Arbitration
Agreement at 3. The Arbitration Agreement defines the word
all legal and equitable claims, demands, disputes,
controversies, issues, and disagreements, of whatever nature
or kind, whether in contract, tort, under statute or
regulation, or any other law or source of legal obligation,
including but not limited to those relating to, concerning,
or arising out of this Agreement; the interpretation or
subject matter of this Agreement or program . . . wages or
other compensation received by or owed to any Employee,
including minimum wage and overtime pay.
Agreement at 2. The Arbitration Agreement continues:
Each Dispute shall be arbitrated on an individual basis. The
parties forego and waive any right to join or consolidate
their Disputes or claims with those of any other employee . .
. or to assert any Disputes or claims in arbitration as a
representative or as a member of a class. . . . Neither the
Company nor any employee or applicant for employment may
pursue any Dispute or claim on a class action, collective
action, or consolidated basis or in a representative capacity
on behalf of other individuals, or participate as a class or
collective action member in such a proceeding. . . . The
Parties waive any right to a jury trial and to pursue or
participate in class or collective actions with respect to
Disputes that are subject of this Agreement and for which a
jury trial, class action, and collective action would
otherwise be available.
Agreement at 3. The Arbitration Agreement contains several
other important provisions. See Arbitration
Agreement at 3-4. One states that “arbitration shall be
commenced by either Party filing a demand for arbitration
with the AAA  within 60 days after such Dispute
has arisen.” Arbitration Agreement at 3. Another notes:
Notwithstanding the provisions of this Agreement, the Company
may bring an action in any court of competent jurisdiction
for injunctive relief to enforce the Employee's
obligations with respect to the confidentiality and
protection of trade secrets and other non-public information
belonging to the Company, or with respect to any
non-competition, non-solicitation, or any other restrictive
covenant provisions in any separate agreement between the
Company and the Employee.
Agreement at 4. Still another provision states: “The
Parties acknowledge and agree that this Agreement and the
Parties' employment relationship affect and involve
interstate commerce, and that this Agreement is governed by
the Federal Arbitration Act.” Arbitration Agreement at
5. Finally, the Arbitration Agreement contains an integration
No agreements or representations, oral or otherwise express
or implied, with respect to the subject matter hereof have
been made by either Party that are not set forth expressly in
this Agreement. . . . This Agreement sets forth the entire
agreement of the Parties hereto with respect to the subject
matter herein, in particular the Parties' agreement
regarding the protection of Confidential Information and the
procedural mechanism for the final resolution of Disputes and
supersedes all prior understandings, agreements, clauses,
provisions, representations, or promises, whether oral or
written, of the Parties to the extent they relate to or
concern the subject matter herein.
Agreement at 5. Patterson now alleges in this class action
that Nine Energy failed to pay him and other employees
overtime wages in violation of the New Mexico Minimum Wage
Act, N.M. Stat. Ann. § 50-4-22(D). See Amended
Complaint ¶ 3, at 1.
filed his original Complaint on November 8, 2017.
See Original Class Action Complaint, filed November
8, 2017 (Doc. 1)(“Original Complaint”). Patterson
subsequently filed the Amended Complaint on November 13,
2017. See Amended Complaint at 1. Nine Energy filed
the Motion on December 6, 2017. See Motion at 1.
Energy moves the Court to dismiss this case for lack of
subject-matter jurisdiction and to compel arbitration.
See Motion at 1. Nine Energy first contends that
Patterson's claims fall within the Arbitration
Agreement's scope, because the Arbitration
Agreement's provisions “cover all disputes, claims,
or disagreements relating to Plaintiff's
employment.” Motion at 5. Nine Energy then argues that
the Arbitration Agreement contains adequate consideration,
asserting that “the bargained for exchange in this case
was Plaintiff's offer of employment with Nine Energy in
exchange for signing the Confidentiality and Dispute
Resolution Agreement as well as the Parties' mutual
agreement to submit all employment disputes to
arbitration.” Motion at 6. Turning to the class action
allegations, Nine Energy avers that the Arbitration Agreement
expressly states that the parties waive any right to
participate in a class or collective action regarding any
disputes subject to the agreement. See Motion at
7-8. Nine Energy concludes that the Court should grant the
Motion and compel Patterson to arbitrate his claims on an
individual basis. See Motion at 8.
responds. See Response to Defendant's Motion to
Dismiss the First Amended Class Action Complaint and Compel
Arbitration, filed January 2, 2018 (Doc.
13-1)(“Response”). Patterson first asserts that
the Arbitration Agreement is substantively unconscionable.
See Response at 4. According to Patterson, the
Arbitration Agreement section allowing Nine Energy to bring
an action for injunctive relief in court to enforce an
employee's confidentiality obligations, such as the
protection of trade secrets, represents a unilateral
carve-out favoring Nine Energy and is therefore
unconscionable. See Response at 4-5. Second,
Patterson avers that the Arbitration Agreement contains no
consideration and is thus illusory. See Response at
5. According to Patterson “continued at-will employment
cannot serve as consideration for an agreement to arbitrate,
” which Patterson asserts is the Arbitration
Agreement's purported consideration. Response at
Energy replies. See Defendant's Reply in Support
of Motion to Dismiss the First Amended Class Action Complaint
and Compel Arbitration, filed January 3, 2018 (Doc.
14)(“Reply”). Nine Energy first asserts that the
Arbitration Agreement's consideration is Patterson's
initial offer of employment and not continued at-will
employment, because Patterson signed the Arbitration
Agreement on the same day he accepted his employment offer
and did not begin working for Nine Energy until twenty days
later. See Reply at 5. Additionally, Nine Energy
contends that “there was separate, valid consideration
for the Agreement. In exchange for Plaintiff agreeing to
arbitrate his employment-related disputes, Nine Energy
promised not only to hire Plaintiff, but also to provide him
access to its confidential information and trade
secrets.” Reply at 11.
Nine Energy argues that, while part of the Arbitration
Agreement may exempt Nine Energy from arbitration, other
parts of the agreement contain “exclusions for numerous
types of employment-related claims that Plaintiff alone would
be able to pursue.” Reply at 9. Nine Energy continues
that “the exclusion of which Plaintiff complains
relates to one limited form of relief -- injunctive relief --
that only the employer might be able to pursue to protect its
confidential information and trade secrets.” Reply at
9. According to Nine Energy, “[i]t is impossible that
the Plaintiff would be able to bring such a claim, just as it
is impossible that Nine Energy would be able to bring any of
the claims excluded for Plaintiff (i.e. EEOC charges, United
States Magistrate Judge for the United States District Court
for the District of New Mexico, held that the plaintiff
“was hired prior to agreeing to arbitration. Upon
starting her employment she was asked to surrender a valuable
right -- the right to a jury trial -- with no detriment to
[the defendant] and no benefit to her. Thus, the purported
agreement is unenforceable.” Zamprelli v. Am. Golf
Corp., No. CIV 00-0181 BB/RLP, at *4 (Doc. 46) (D.N.M.
2000)(Puglisi, M.J.). In the second case, the Honorable Bruce
Black, United States District Judge, affirmed Magistrate
Judge Puglisi's holding. See Zamprelli v. Am. Golf
Corp., No. CIV 00-0181, 2001 WL 37119362, at *4 (D.N.M.
2001)(Black, J.). NLRB charges, unemployment claims).”
Reply at 9.
Nine Energy contends that, “[e]ven if the Court were to
find this provision unconscionable, the Court can and should
modify or sever the provision rather than invalidating the
entire Agreement.” Reply at 11. According to Nine
Energy, the provision allowing it to bring an action for
injunctive relief to protect confidential information
“is not relevant or intertwined with the agreement to
arbitrate compensation disputes, and severability is in line
with the strong federal policy underlying the FAA favoring
enforcement of arbitration agreements.” Reply at 11-12.
filed a surreply. See Surreply in Opposition to
Defendant's Motion to Dismiss the Class Action Complaint
and Compel Arbitration, filed January 10, 2018 (Doc.
16-1)(“Surreply”). Patterson first asserts
that Nine Energy's employment offer was not contingent on
signing the Arbitration Agreement, so the employment offer is
not consideration for the agreement. See Surreply at
4. According to Patterson, Nine Energy's employment offer
cannot be consideration for Patterson agreeing to
arbitration, because the Offer Letter provides a list of
contingencies, none of which include signing the Arbitration
Agreement. See Surreply at 6. Further, according to
Patterson, the Arbitration Agreement “contains an
explicit merger clause that prevents the Offer Letter -- or
any other oral/written agreement -- from being incorporated
into the Arbitration Agreement or for serving as the
consideration for the Agreement.” Surreply at 6.
Patterson takes issue with Nine Energy's assertion that
it promised to provide confidential information and trade
secrets to Patterson as consideration for him signing the
Arbitration Agreement. See Surreply at 6-7.
According to Patterson, the Arbitration Agreement “does
not require Defendant to disclose any specific confidential
information or trade secrets.” Surreply at 7. Patterson
adds that “no New Mexico court has reached the
conclusion that an agreement to provide confidential
information is adequate consideration for an agreement to
arbitrate.” Surreply at 7.
Patterson argues for the first time that the Arbitration
Agreement is unconscionable, because “the terms of the
agreement prevent Plaintiff from vindicating his statutory
rights under the FLSA.” Surreply at 7.
Specifically, Patterson contends that the Arbitration
Agreement's provision requiring arbitration to commence
within 60 days after a dispute arises is unconscionable,
because “the FLSA's limitations period may not be
shortened by contract.” Surreply at 8. Finally,
Patterson avers that the Court should not sever any allegedly
unconscionable provisions of the Arbitration Agreement,
because the agreement contains no severance clause.
See Surreply at 9-10. Patterson instead concludes
that the Court should refuse to enforce the entire
Arbitration Agreement and deny the Motion. See
Surreply at 10.
Court held a hearing. See Draft Transcript of Motion
Hearing at 1:10-11 (taken June 27,
2018)(Court)(“Tr.”). Nine Energy began by
asserting that “Mr. Patterson in the briefing concedes
that this Court has recognized . . . that an offer of at will
employment is sufficient consideration for an arbitration
agreement. And that's exactly what we have here.”
Tr. at 4:19-24 (Mann). Patterson responded that the
Arbitration Agreement's integration clause precludes any
outside oral or written agreement -- including
Patterson's employment offer -- from being incorporated
into the Arbitration Agreement. See Tr. at 10:1-9
(Siegel). Patterson added that the Offer Letter lists several
contingencies that Patterson had to meet to accept his
employment offer, none of which includes signing the
Arbitration Agreement. See Tr. at 13:2-9 (Siegel).
parties then discussed unconscionability. See Tr. at
17:1-5 (Mann). Nine Energy asserted that Patterson
“latches onto a portion of the agreement . . . that
reserves to Nine the right to seek injunctive relief to
enforce certain aspects of the agreement pertaining to
confidential information. . . . What Mr. Patterson chooses to
ignore [is] that the same paragraph on which he bases this
argument contains multiple carve-outs solely for the . . .
plaintiff here.” Tr. at 17:1-14 (Mann). Nine Energy
thus contended that the carve-outs in the Arbitration
Agreement are bilateral and not unilateral. See Tr.
at 18:3-6 (Mann).
then returned to the podium and asserted that the Arbitration
Agreement is substantively unconscionable for the separate
reason that it “has effectively shortened the statute
of limitations period.” Tr. at 22:15-16 (Siegel).
Specifically, Patterson argued that the Arbitration Agreement
shortens the limitations period from three years to sixty
days. See Tr. at 22:21-24 (Siegel). Nine Energy
responded that “the parties cannot limit statute[s] of
limitations by contract. So even if that language is
contained in the agreement [, were] it be attempted to be
enforced it could not.” Tr. at 25:9-13 (Mann).
Court then asked if Nine Energy contended that, if the Court
were to find any provision unconscionable, it should sever
the provision rather than not enforcing the entire agreement.
See Tr. at 28:25-29:7 (Court, Mann). Nine Energy
responded that, if the Court concluded that a provision is
unconscionable, then Nine Energy would prefer the rest of the
agreement enforced. See Tr. at 29:8-16 (Mann). At
the hearing's conclusion, the Court stated that it was
inclined to grant the Motion. See Tr. at 35:2
REGARDING ARBITRATION AGREEMENTS
arbitration agreement is a contract or a provision in a
contract whereby parties agree to “settle by
arbitration a controversy . . . arising out of such contract
or transaction.” 9 U.S.C. § 2. Both federal and
New Mexico law reflect a public policy in favor of
arbitration agreements. See Metz v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 39 F.3d 1482, 1488-89
(10th Cir. 1994)(“There is a strong federal policy
encouraging the expeditious and inexpensive resolution of
disputes through arbitration.”); United Tech. &
Res., Inc. v. Dar Al Islam, 1993-NMSC-005, ¶ 11,
846 P.2d 307, 309 (“The legislature and the courts of
New Mexico ‘have expressed a strong policy preference
for resolution of disputes by
arbitration.'”)(quoting Dairyland Ins. Co. v.
Rose, 1979-NMSC-021, ¶ 14, 591 P.2d 281, 284). To
be enforceable, an arbitration agreement must be validly
formed pursuant to state contract law principles --
e.g., the arbitration agreement must not be illusory
or unconscionable. See Salazar v. Citadel Communications
Corp., 2004-NMSC-013, ¶ 8, 90 P.3d 466, 469
(“To determine whether the agreement to arbitrate is
valid, courts look to general state contract law . . .
FAA reflects the fundamental principle that arbitration is a
matter of contract.” Rent-A-Center, West, Inc. v.
Jackson, 561 U.S. 63, 67 (2010). “[T]he basic
purpose of the Federal Arbitration Act is to overcome
courts' refusals to enforce agreements to
arbitrate.” Allied-Bruce Terminix Cos., Inc. v.
Dobson, 513 U.S. 265, 270 (1995). “The FAA thereby
places arbitration agreements on an equal footing with other
contracts, and requires courts to enforce them according to
their terms.” Rent-A-Center, West, Inc. v.
Jackson, 561 U.S. at 67-68 (internal citations omitted).
§ 4 of the FAA, a party “aggrieved” by
another party's failure “to arbitrate under a
written agreement for arbitration” may petition a
federal court “for an order directing that such
arbitration proceed in the manner provided for in such
agreement.” 9 U.S.C. § 4. If one party's
refusal to arbitrate under a written agreement aggrieves
another party, the district court, upon petition,
“shall hear the parties, and upon being satisfied that
the making of the agreement for arbitration or the failure to
comply therewith is not in issue, the court shall make an
order directing the parties to proceed to arbitration in
accordance with the terms of the agreement.” 9 U.S.C.
§ 4. Section 2, the “primary substantive provision
of the Act, ” Moses H. Cone Mem'l Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 24 (1983), provides:
“A written provision in . . . a contract evidencing a
transaction involving commerce to settle by arbitration a
controversy thereafter arising out of such contract . . .
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. “If a party
challenges the validity under § 2 of the precise
agreement to arbitrate at issue, the federal court must
consider the challenge before ordering compliance with that
agreement under § 4.” Rent-A-Center, West,
Inc. v. Jackson, 561 U.S. at 64.
finding that a matter is referable to arbitration, the FAA
also indicates that the district court “shall on
application of one of the parties stay the trial of the
action until such arbitration has been had in accordance with
the terms of the agreement.” 9 U.S.C. § 3.
Notwithstanding 9 U.S.C. § 3's terms, however,
several Courts of Appeals have concluded that
“dismissal is a proper remedy when all of the issues
presented in a lawsuit are arbitrable.” Choice
Hotels Int'l, Inc. v. BSR Tropicana Resort, Inc.,
252 F.3d 707, 709-10 (4th Cir. 2001). See Green v.
Ameritech Corp., 200 F.3d 967, 973 (6th Cir.
2000)(“The weight of authority clearly supports
dismissal of the case when all of the issues raised in the
district court must be submitted to arbitration.”);
Bercovitch v. Baldwin Sch., Inc., 133 F.3d 141, 156
n.21 (1st Cir. 1998); Alford v. Dean Witter Reynolds,
Inc., 975 F.2d 1161, 1164 (5th Cir. 1992); Sparling
v. Hoffman Constr. Co., 864 F.2d 635, 638 (9th Cir.
United States Court of Appeals for the Tenth Circuit has
cautioned that, when one of the parties petitions the court
to stay an action pending compulsory arbitration, 9 U.S.C.
§ 3's mandatory language is binding, and it is error
for the court to dismiss the action. See Adair Bus Sales,
Inc. v. Blue Bird Corp., 25 F.3d 953, 955 (10th Cir.
1994). When, however, the party seeking to compel arbitration
requests the court for dismissal, and there is no evidence in
the record of any party requesting a stay, it is not error
for the district court to dismiss the case. See Armijo v.
Prudential Ins. Co. of Am., 72 F.3d 793, 797 (10th Cir.
1995); Cornoyer v. AT&T Mobility Servs., LLC,
No. CIV 15-0474, 2016 WL 6404853, at *7-8 (D.N.M. Oct. 5,
2016)(Browning, J.); Thompson v. THI of New Mexico at
Casa Arena Blanca, LLC, No. CIV 05-1331, 2006 WL
4061187, at *16 (D.N.M. Sept. 12, ...