Examining New Jersey’s Arbitration Scrutiny

New Jersey courts’ recent arbitration decisions have opened a floodgate of controversy en route to the establishment of new precedent.

The most recent case, Morgan v. Sanford Brown Institute, 2016 WL 3248016 (N.J. June 14, 2016)(available at http://bit.ly/29mSQkS), demonstrates the discord among courts in reaching a consensus about arbitration enforcement—or, at least, a strong New Jersey trend of scrutinizing the particulars of agreements before compelling ADR processes.

The case stems from a complaint by New Jersey residents Annemarie Morgan and Tiffany Dever, who had enrolled in an ultrasound technician program provided by defendant Sanford Brown Institute, a for-profit educational company that is winding down its operations. The plaintiffs alleged that the defendant violated the Consumer Fraud Act and had committed breach of contract, breach of warranties and negligent misrepresentation. The complaint alleged the institute misrepresented the value of the ultrasound program, the quality of its instructors, and that the school used high-pressure and deceptive business tactics that led the plaintiffs to finance the classes using high-interest loans.

“This New Jersey trend should be taken as a warning for employers to address their notice provisions.”

The trial court followed the ruling in Atalese v. U.S. Legal Servs. Group L.P., 219 N.J. 430, 99 A.3d 306 (2014), cert. denied, 135 S. Ct. 2804 (2015)(available at http://bit.ly/ZtfbW4), invalidating the arbitration clause because it didn’t provide proper notice that court remedies were being waived, and violated the New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -195.

The Appellate Division reversed, ordering arbitration, noting that the ADR clause was sufficiently clear for all parties.

Last month, the New Jersey Supreme Court reversed again, holding that the arbitration provision and delegation clause in the school’s enrollment agreement failed to comply with the requirements of First Options of Chi., Inc. v. Kaplan, 514 U.S. 938 (1995), and Atalese. The arbitration and delegation clauses also failed to satisfy the elements necessary for the formation of a contract.

The defendants had argued that Rent-A-Center West, Inc. v. Jackson, 561 U.S. 63 (2010), required a specific challenge to the delegation clause by the plaintiffs, but the New Jersey Supreme Court found that the lack of the challenge didn’t matter.

“The arbitration provision did not clearly and unmistakably delegate arbitrability to the arbitrator,” wrote Associate Justice Barry T. Albin for a 5-1 court, adding, “Plaintiffs cannot be faulted for not objecting to an inadequately limned delegation clause that, in addition, did not define arbitration as a substitute for a judicial forum.”

Consequently, whether the parties agreed to arbitrate their dispute is an issue for determination by the court.

This decision does not stray far from its recent predecessors—Scamardella, et al. v. Legal Helpers Debt Resolution LLC, No. A-4170-14T3 and L-2402-14 (Middlesex County and Statewide) (April 19, 2016), and Guidotti v. Legal Helpers Debt Resolution, L.L.C., No. 15-1054 (3rd Cir. Feb. 10, 2016)(available at http://bit.ly/1QOkCSm), vacating 866 F. Supp. 2d 315, 332–36 (D.N.J. 2011)–New Jersey cases in, respectively, state and federal courts that also denied motions to compel arbitration.

Atalese, the parent case for the rest, outlined disclosure requirements that the subsequent decisions have used as the reason for invalidating the arbitration provision. The New Jersey Supreme Court found that the arbitration provision in the case did not have “clear and unambiguous” language stating that the plaintiff was waiving her right to sue in court to secure relief.

“Two more unpublished decisions show the significance of the new trend in addressing notice in arbitration provisions.”

The New Jersey Supreme Court stated in Atalese that an enforceable arbitration clause “at least in some general and sufficiently broad way, must explain that the plaintiff is giving up her right to bring her claims in court or have a jury resolve the dispute.”
Furthermore, the waiver must “be written in a simple, clear, understandable and easily readable way.”

Similarly, Scarmadella ruled that the arbitration clause failed to comply with Atalese disclosure requirements.

Guidotti determined that the plaintiff had not received the account agreement containing the arbitration provision. The court did not require or permit discovery on that issue because it concluded that the existing documentary record was sufficient. Further proceedings will be held next month.

There’s other arbitration coming out of New Jersey courts to raise eyebrows. Just before Morgan v. Sanford Brown Institute was released, a published Appellate Division decision, Kleine v. Emeritus at Emerson, Docket A-4452-14T3 (N.J. App. Div. June 9, 2016), struck an arbitration agreement because a forum suggested by the contract’s use of the American Arbitration Association rules was ruled by the court to be unavailable. The personal injury case was against a nursing home; the decision included strong wording about the presumption to arbitrate.

And there’s more. Two more unpublished decisions show the significance of the new trend in addressing notice in arbitration provisions. Shortly after the Atalese decision, in Kelly v. Beverage Works NY Inc., No. A-3851-13T4 (NJ App. Div. Nov. 26, 2014)(unpublished)(available at http://bit.ly/29kJwR6), the New Jersey Appellate Division applied Atalese to decide whether the arbitration provisions in a collective bargaining agreement barred a plaintiff’s lawsuit for wrongful termination.

The appeals court first declined to consider the employer’s argument concerning preemption because that argument was not raised prior to oral argument. The Appellate Division then held that “neither the arbitration provisions nor the employee handbook put plaintiff on notice that he was waiving his right to try his claims in court.”

Therefore, those provisions did not clearly and unambiguously waive plaintiff’s right to seek a remedy in court and, thus, were unenforceable.

Similarly, in Milloul v. Knight Capital (App. Div. N.J. Sept. 1, 2015)(unpublished)(available at http://bit.ly/1INt69V), the Appellate Division held that an arbitration agreement between a plaintiff and his employer was unenforceable because it did not “even mention a waiver of plaintiff’s right to a trial.” Therefore, the contract did not meet the minimal requirement of stating “in some express fashion that the employee is sacrificing his or her right to a trial.”

This New Jersey trend should be taken as a warning for employers to address their notice provisions. Employers should carefully review every arbitration agreement to ensure that every employee understands that they are waiving their right to bring claims in court, and agreeing to arbitrate all claims that may arise out of the contractual relationship.

This report will be expanded and updated in September’s Alternatives. For more recent background, see Daniela Albert & Russ Bleemer, “New Jersey Court Again Refuses To Compel, Demanding Better Arbitration Notices,” 34 Alternatives 66 (May 2016)(available at http://bit.ly/29lwZeG).

______________________________________

CPR would like to thank interns Daniela Albert (working towards her LLM at Northeastern) and Elizabeth Heifetz (Brooklyn Law School), supervised by Alternatives editor Russ Bleemer, for their research and writing contributions to this post. A longer version of this post, with comments from the attorneys involved, will run in the September issue of Alternatives.

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