Express Waiver Rule for Arbitration Agreements and the Issue of FAA Preemption

New Jersey courts require a party moving to compel the arbitration of statutory claims to which the right to a jury trial would otherwise attach, to demonstrate that the arbitration agreement clearly and unambiguously puts the claimant on notice that he or she is agreeing to arbitration and waiving the right to a judicial determination of the claim and to a jury trial.

The courts have often applied this requirement to arbitration agreements entered into between employers and employees. Recently, a federal judge raised (but did not decide) the issue of whether New Jersey’s requirement of express waiver language might be preempted by the Federal Arbitration Act, 9 U.S.C. §1 et seq. (FAA) in light of the United States Supreme Court’s decision earlier this year in Kindred Nursing Centers v. Clark, 137 S. Ct. 1421 (2017). See Bacon v. Avis Budget Grp., Civ. No. 16-5939 (D.N.J. June 9, 2017) (McNulty, J.). This article will trace the development of New Jersey’s express waiver requirement and discuss the potential impact given the Kindred Nursing decision.

The New Jersey Supreme Court first held an arbitration agreement insufficient to compel the arbitration of statutory claims in Garfinkel v. Morristown Obstetrics and Gynecology Associates, 168 N.J. 124 (2001). There, the plaintiff alleged he was unlawfully terminated because of his gender in violation of the Law Against Discrimination, N.J.S.A. § 10:5-1 et seq. (LAD). His employer moved to compel arbitration based on an arbitration clause in plaintiff’s employment agreement purporting to require the arbitration of “any controversy or claim arising out of, or relating to, this Agreement or the breach thereof.” Id. at 127-28. Emphasizing that the LAD’s express judicial remedy, with its right to a jury trial, was an integral part of the LAD’s goal of abolishing discrimination in the workplace, the Supreme Court ruled it would

not assume that employees intend to waive those rights unless their agreements so provide in unambiguous terms …. To pass muster … a waiver of rights provision should at least provide that the employee agrees to arbitrate all statutory claims arising out of the employment relationship or its termination. It should also reflect the employee’s general understanding of the type of claims included in the waiver, e.g., workplace discrimination claims.

Id. at 131, 135.

Although the Garfinkel court underscored the important role of the availability of a judicial remedy to vindicate the rights afforded by the LAD, the New Jersey courts have applied Garfinkel’s express-waiver-of-rights requirement for arbitration provisions asserted in response to claims brought under other statutes often asserted by employees and to claims outside the employment context. See, e.g., Hernandez v. Fancy Heat Corp. (N.J. App. Div. Aug. 1, 2016), certif. denied, 228 N.J. 420, N.J. (2016) (reversing order compelling arbitration of employee’s claims under the Conscientious Employee Protection Act, N.J.S.A. §34:19-1 et seq.); Atalese v. U.S. Legal Servs. Grp., 219 N.J. 430 (2014) (reversing order compelling arbitration of plaintiff’s claims under the Consumer Fraud Act, N.J.S.A. §56:8-1 et seq.).

It should also be noted that subsequent to Garfinkel, the New Jersey courts have not required specific language that will satisfy the express-waiver requirement. In Atalese, 219 N.J. at 314, the Supreme Court, provided examples of disparate but satisfactory arbitration provisions litigated in other cases, and acknowledged that “[n]o particular form of words is necessary to accomplish a clear and unambiguous waiver of rights.”

Enter the FAA, which applies to arbitration agreements in contracts having only a “slight nexus” to or affects “even tangentially” interstate commerce. Crawford v. W. Jersey Health Sys., 847 F. Supp. 1232, 1240 (D.N.J. 1994). The New Jersey courts have long recognized that the FAA preempts state laws that are inconsistent with it. For example, in Waskevich v. Herold Law, 431 N.J. Super. 293, 299 (App. Div. 2013), although holding that plaintiff had not clearly and unambiguously waived his right to a judicial determination of his LAD claim, the court denied his application to have his otherwise arbitral common law claims and his LAD claim decided in a single judicial proceeding. Garfinkel had held that such a joinder of claims was the appropriate course. 168 N.J. at 137. The Appellate Division, however, held that the FAA required the arbitration of the common law claims, and, as the arbitration agreement before it was governed by the FAA, it was obligated to follow federal law, not Garfinkel. (Apparently, the arbitration agreement at issue in Garfinkel was not governed by the FAA.)

The issue of FAA preemption of New Jersey’s “clear and unambiguous waiver” requirement has not been directly addressed in the case law. As noted above, however, in Bacon v. Avis Budget Grp., a federal court opined that the U.S. Supreme Court’s decision in Kindred Nursing “seems to signal a more aggressive approach to FAA preemption that considers the effect of state laws governing arbitration agreements” and queried whether New Jersey’s waiver requirements might be grounds for FAA preemption. 2017 WL 2525009 at *6 & n.6.

In Kindred Nursing, a daughter enrolled her mother in a nursing home using a power of attorney from her mother to sign a contract with the home. The contract contained an arbitration clause. After her mother’s death, the daughter sued the nursing home in Kentucky state court for improper care. The Kentucky Supreme Court affirmed the rulings of the lower state courts denying the nursing home’s motion to compel arbitration even though the court found the language of the power of attorney to be an “extremely broad, universal delegation of authority,” such that “it would be impossible to say that entering into [an] arbitration agreement was not covered.” 137 S. Ct. at 1425-26. The court ruled, however, that under Kentucky law a power of attorney could not entitle a representative to enter into an arbitration agreement without specifically saying so, because the Kentucky Constitution protects the rights of access to the courts and trial by jury. Thus the court held an agent could deprive her principal of an “adjudication by judge or jury” only if the power of attorney expressly clearly so stated. Id. at 1426.

The United States Supreme Court reversed, holding that Kentucky’s “clear-statement rule” was preempted by the FAA. The court noted that the FAA prohibits a court from invalidating an arbitration agreement based on legal rules that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” According to the court, Kentucky’s “clear-statement rule” violated that prohibition because it “hing[ed] on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial.” Id. at 1426-27. Moreover, the court found that Kentucky did not apply its “clear-statement rule” to the waiver of other rights under the Kentucky Constitution, e.g., the rights to acquire property and to freely communicate. Thus Kentucky law disfavored arbitration agreements by placing them on an unequal footing with other contracts, a circumstance prohibited by the FAA.

There seems to be little difference between the Kentucky and New Jersey rules requiring the express waiver of rights in the context of motions to compel arbitration agreements. Therefore, the preemption issue turns on whether the New Jersey express waiver rule creates a disfavored status for arbitration agreements vis-á-vis other types of agreements In Atalese, the New Jersey Supreme Court, although not addressing the preemption issue directly, perhaps was anticipating a future preemption argument by noting that it has required waivers of rights to be clearly expressed outside the arbitration context, implying that its express waiver rule does not disfavor arbitration agreements. 219 N.J. at 444. Thus, it can be predicted that the New Jersey courts will not look favorably on a preemption argument. Whether the federal courts entertaining motions to compel arbitration will share that view remains to be seen. Even prior to Kindred Nursing, a panel of the Third Circuit Court of Appeals had noted the issue. In Guidotti v. Legal Helpers Debt Resolution, 639 Fed. Appx. 824, 827 (3d Cir. 2016), the district court held an arbitration clause unenforceable under Atalese and New Jersey’s doctrine of unconscionability. The Third Circuit decided the appeal on other grounds but noted: “Whether these state law grounds remain viable as not preempted by the Federal Arbitration Act … presents an important and challenging question.”

Regardless of whether or when that challenging question is answered, it is imperative for attorneys drafting arbitration agreements to remain cognizant of the “clear and unambiguous waiver” requirement mandated by the courts of New Jersey. Despite the substantial body of case law dealing with the issue, courts continue to deny motions to compel arbitration because of a drafter’s lack of awareness of the requirement. See, e.g., Kernahan v. Home Warranty Administrator of Florida (N.J. App. Div. June 23, 2017). In order to avoid arguments over the enforceability of the arbitration agreement, it is important for attorneys drafting arbitration agreements to include language clear to the average person that all employment-related claims or claims related to the termination of employment, including statutory claims, must be submitted to arbitration, cannot be brought in court, and that the employee is giving up the right to a jury trial.

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Reprinted with permission from the September 4, 2017 issue of the New Jersey Law Journal. © 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. For information, contact 877-257-3382 or reprints@alm.com or visit www.almreprints.com.