Is NJ Inhospitable to Arbitration?

Recent SCOTUS decision reinforces strength of FAA and raises the specter of conflict with NJ law

The Supreme Court has emphasized that the Federal Arbitration Act (FAA) “declare[s] a national policy favoring arbitration[.]” Nitro-Lift Techs. v. Howard, 133 S.Ct. 500, 503 (2012) (citation omitted). In its seminal decision in AT&T Mobility v. Concepcion, the court held that the FAA requires that courts “place arbitration agreements on an equal footing with other contracts and enforce them according to their terms[,]” and, thus, the FAA preempts any state rule discriminating on its face against arbitration—for example, a “law prohibit[ing] outright the arbitration of a particular type of claim.” 563 U.S. 333, 339 (2011).

Since then, some state courts, including the New Jersey Supreme Court in Atalese v. U.S. Legal Services Group, 219 N.J. 430 (2014), cert. denied, 135 S.Ct. 2804 (2015), have issued decisions invalidating arbitration provisions that seemingly circumvent the high court’s directives. The Supreme Court’s recent decision in Kindred Nursing Centers P’Ship v. Clark, 137 S.Ct. 1421 (2017), reflects a palpable frustration with efforts to undermine the FAA and discriminate against arbitration. Although Kindred Nursing specifically addressed and invalidated the Kentucky Supreme Court’s “clear statement” rule that an agent’s authority to waive the principal’s constitutional right to a jury must be clearly expressed by the principal, Kindred Nursing has potentially broader implications for jurisdictions, like New Jersey, that have repeatedly tested the scope of the court’s jurisprudence in declining to enforce arbitration agreements. In addition, the decision suggests that pending legislation in New Jersey would run afoul of federal law.

The ‘Kindred Nursing’ Decision

The Kindred Nursing case involved two now-deceased residents of a nursing home and their respective holders of power-of-attorney, one resident’s wife and one resident’s daughter, who brought wrongful death actions against the nursing home. The arbitration agreements “provided that ‘[a]ny and all claims or controversies arising out of or in any way relating to … the Resident’s stay at the Facility’ would be resolved through ‘binding arbitration’ rather than a lawsuit.” Id. at 1425. The Kentucky Supreme Court held that both arbitration agreements were invalid, on the grounds that a general grant of power of attorney does not permit a legal representative to enter into an arbitration agreement for someone else, and that specific authority was required to waive a right to trial by jury. Id. at 1426.

The Supreme Court, in a 7-1 decision, disagreed. Noting that the power of attorney did not need to be so specific in other contexts, the court held that the Kentucky court “adopt[ed] a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial,” which revealed “the kind of ‘hostility to arbitration'” that is prohibited by the FAA and Concepcion. Id. at 1427-28. Kindred Nursing reiterates and expands on Concepcion and holds that “[a] rule selectively finding arbitration contracts invalid because improperly formed fares no better under the FAA than a rule selectively refusing to enforce those agreements once properly made.” Id. at 1428.

NJ Decisions and Pending Legislation

In Atalese, the New Jersey Supreme Court held that “[t]he absence of any language” in an arbitration provision that a consumer is waiving his or her “statutory right to seek relief in a court of law renders the provision unenforceable.” 219 N.J. at 436. The plaintiff contracted with the defendant for debt-adjustment services. When the plaintiff brought consumer fraud claims, the defendant moved to compel arbitration. The arbitration clause in question appeared on the ninth page of the 23-page contract and stated “[i]n the event of any claim or dispute between Client and the [defendant] … the claim or dispute shall be submitted to binding arbitration upon the request of either party upon the service of that request on the other party … .” Id. at 437. The New Jersey Supreme Court reversed the order compelling arbitration, reasoning that “when a contract contains a waiver of rights—whether in an arbitration or other clause—the waiver must be clearly and unmistakably established.” Id. at 444. Thus, the court held that an arbitration clause should be “written in plain language that would be clear and understandable to the average consumer that she is waiving statutory rights.” Id. at 446.

Subsequent decisions from New Jersey courts reflect a continued reluctance to strictly adhere to Concepcion’s pro-arbitration refrain, particularly in the context of consumer contracts. For example, in 2015, the New Jersey Supreme Court confirmed that it is for the court, and not an arbitrator, to determine whether the parties have agreed to arbitrate consumer fraud claims in the absence of a clear delegation clause to the contrary. See Morgan v. Sanford Brown Inst., 225 N.J. 289, 306 (2016) (noting that the agreement to delegate arbitrability to an arbitrator must, as with the other arbitration provisions, have a “clearly identifiable” provision informing the average consumer of the rights he or she is giving up). Similarly, the Appellate Division recently held that a case could proceed in a class action notwithstanding the parties’ agreement to arbitrate all claims and to waive all rights to court action and class arbitration because the arbitration agreement did not sufficiently state that it barred all class actions. See Snap Parking v. Morris Auto Enters., 2017 N.J. Super. Unpub. LEXIS 750, *9-10 (App. Div. Mar. 27, 2017).

The New Jersey judiciary is not the only branch of government exploring the contours of federal arbitration law. Indeed, the legislature has introduced a number of bills this session that appear to be diametrically inconsistent with Concepcion and Kindred Nursing. For example, Assembly Bill No. 759 would prohibit a consumer contract from including a provision “by which the consumer waives or limits … the right to a jury trial, except that a consumer may waive this right upon the advice of counsel, as evidenced by counsel’s signature on the contract.” Similarly, as introduced, Assembly Bill No. 4173 would have amended the Law Against Discrimination by making it unlawful for an employer to “[r]equire an employee or prospective employee to make a waiver of rights … including the right to a jury trial, public adjudication in a court of law, [and] discovery of evidence … a condition of hiring, continued employment or compensation, or a term, condition or privilege of employment.” The hostility to arbitration is further evidenced by Assembly Bill No. 3064, which already has passed the Assembly and would prohibit a state agency from entering into a contract with a business entity that requires any person, as a condition of doing business with that entity, give up any right or remedy provided by the laws of this state. This bill is plainly designed to deter businesses from including arbitration provisions in their agreements, which would appear to run afoul of Kindred Nursing.

Arbitration Agreements in NJ Post-‘Kindred Nursing’

How New Jersey will react to the Kindred Nursing decision remains uncertain. It is tempting to predict that, if Concepcion did not result in a sea change, there is nothing unique to Kindred Nursing that would transform the landscape in New Jersey. The immediate aftermath to the Supreme Court’s decision has sent mixed signals. On the one hand, Assembly Bill No. 4173 was amended on May 18, 2017, to eliminate its anti-arbitration provision (although some members of the Assembly Judiciary Committee who voted the amended bill out of committee signaled they would potentially vote against it if it is subsequently voted on by the full Assembly).

On the other hand, on May 30, 2017, the New Jersey Supreme Court declined to hear a challenge to the Appellate Division’s invalidation of an arbitration agreement between a patient and nursing home in Patterson v. Care One at Moorestown, 2017 N.J. LEXIS 607 (N.J. Jun. 2, 2017). There, the Appellate Division affirmed the trial court’s finding there was no meeting of the minds where the patient signed the agreement and initialed its arbitration provision because: (1) he initialed some but not all of the terms of the agreement; (2) there was no indication that he had been provided with any of the supplemental documents referred to in the agreement; (3) there was no indication that he had been provided with a copy of the American Arbitration Association rules; and (4) there was no indication that he was given the opportunity to rescind the agreement or consult with an attorney. 2017 N.J. Super. Unpub. LEXIS 423, at *10 (App. Div. Feb 21, 2017). The court also noted that the patient was 83 years old and had recently been hospitalized after suffering a stroke. While the court could have concluded that there was no meeting of the minds because the patient lacked the capacity to enter into an agreement, its additional reliance on the other grounds for invalidating the agreement potentially bespeaks a disparate treatment of arbitration agreements viewed skeptically by the U.S. Supreme Court.

In Kindred Nursing, the majority appeared to be sending states a warning affirming that continued animus toward arbitration agreements generally, and rules that create obstacles to arbitration specifically, will not be countenanced. Some New Jersey decisions, as well as legislation under consideration, suggest potential conflicts between New Jersey’s treatment of arbitration agreements and the Supreme Court’s dictates. Assembly Bill No. 1515, which has already passed the Assembly and would require that consumer contracts with New Jersey residents include provisions mandating a New Jersey venue, forum or jurisdiction to resolve disputes, would, if it becomes law, likely increase the number of disputes regarding arbitration agreements in this state. If, going forward, New Jersey court decisions or legislation demonstrate an antipathy toward arbitration, review by the Supreme Court may be inevitable.

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Reprinted with permission from the July 10, 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.