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November 11, 2015 Articles

Young Lawyers: Recent Trends Impacting Enforcement of Arbitration Agreements

By P. Jean Baker

In Atalese v. U.S. Legal Services Group, L.P., 99 A.3d 306 (N.J. 2014), cert. denied, 135 S. Ct. 2804 (2015), the plaintiff, Patricia Atalese, entered into a contract with U.S. Legal Services Group (USLSG) to provide debt-adjustment services. Atalese paid USLSG approximately $5,000. She sued under the New Jersey Consumer Fraud Act and Truth-in-Consumer Contract, Warranty and Notice Act, alleging that USLSG misrepresented that the monies were spent on numerous attorneys negotiating with her creditors. She maintained that the only work performed was preparation by one attorney of a single one-page answer for a collection action in which she represented herself. Further she alleged that USLSG settled a single debt, knowingly omitted that USLSG was not a licensed debt adjuster in New Jersey, and violated New Jersey's usury law.

USLSG moved to compel arbitration based on an arbitration provision in the 23-page service agreement. The arbitration provision provided for arbitration before a single arbitrator in accordance with the rules of either the Judicial Arbitration and Mediation Services (JAMS) or the American Arbitration Association (AAA), as mutually agreed upon by the parties or selected by the party filing the claim. The cost of arbitration, excluding legal fees, was to be split equally or born by the losing party.

New Jersey Supreme Court Rules Arbitration Agreement Involving Statutory Claims Unenforceable
The New Jersey Superior Court Law Division and Appellate Division both ruled that arbitration was required. On further appeal, applying the de novo standard of review to the interpretation of the contract, the New Jersey Supreme Court reversed in a unanimous decision. The court reasoned that agreements to arbitrate, like any other contract, must be the product of mutual assent. In addition, an effective waiver of the right to bring suit in a judicial forum requires a party to have full knowledge of his or her legal rights and intent to surrender those rights. This is so not only of agreements to arbitrate, but of any clause in which a party gives up constitutional or statutory rights. Because the arbitration provision in question did not clearly explain that the plaintiff was waiving her right to seek relief in court of her statutory rights, the arbitration agreement was unenforceable.

Anticipating a preemption challenge, the court noted that this decision does not improperly discriminate against arbitration clauses, a problem against which the U.S. Supreme Court warned in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). As expected, USLSG filed a petition for a writ of certiorari on January 21, 2015, asking the U.S. Supreme Court to determine whether the Federal Arbitration Act preempts a state law rule holding that an arbitration agreement is unenforceable unless it affirmatively explains that the contracting party is waiving the right to sue in court. Following briefing, on June 8, 2015, the petition was denied.

New Jersey Appellate Court Extends Atalese Ruling to Include Common Law Claims
In Dispenziere v. Kushner Cos., 101 A.3d 1126 (N.J. Super. Ct. App. Div. 2014), the plaintiffs were buyers of units in a condominium development. They alleged the developer represented that their units would be part of a large waterfront community, which was to include diverse amenities, including a community center, a health club, a waterfront esplanade, parks, and other recreational improvements. Following purchase, the developer changed the nature of the development, eliminating nearly all of the proposed amenities. The plaintiffs sued the developer alleging consumer fraud and numerous common law fraud, negligence, contract, and warranty theories.

The 17-page purchase agreement contained an arbitration provision on page 10 stating, "Any disputes arising in connection with this Agreement . . . shall be heard and determined by arbitration before a single arbitrator of the American Arbitration Association . . . . The decision of the arbitrator shall be final and binding." In the public offering statement, there was a stand-alone page with a distinctive font calling attention to the arbitration agreement provision within the purchase agreement.

The defendants moved to compel arbitration. The trial court compelled arbitration, and the plaintiffs appealed. The central issue before the appellate court was whether the plaintiffs actually agreed to arbitrate their claims—particularly whether the consumer signatories were reasonably aware that choosing to arbitrate constituted a waiver of their rights to sue in court rather than arbitrate. Relying on Atalese, the court ruled that an arbitration clause that does not contain "clear and unambiguous language that the plaintiff is waiving her right to sue or go to court to secure relief" is not enforceable.

In reaching its decision, the court found that Atalese did not restrict its holding to statutory claims. And the fact that some buyers had been represented by counsel did not permit the defendants to avoid Atalese. Of particular note, the court did not limit its decision to consumer arbitration agreements either.

Unpublished New Jersey Appellate Decision Extends Atalese to Employee Arbitration Agreements
In Milloul v. Knight Capital Group, No. A-1953-13T2, 2015 N.J. Super. Unpub. LEXIS 2115 (App. Div. Sept. 1, 2015), the plaintiff was provided a new hire packet containing a number of forms. One of the forms was a one-paragraph employee arbitration agreement called a "Dispute Resolution Agreement" (DRA). The DRA provided that employment disputes would be submitted to final binding arbitration pursuant to the rules of the AAA. According to the plaintiff, he was not given an opportunity to read the forms and he was not told that one of the forms waived his right to sue Knight. The plaintiff filed suit alleging religious discrimination and retaliation. The employer moved to compel arbitration. The trial court compelled arbitration and the plaintiff appealed.

Finding no real distinction between an employee arbitration agreement and a consumer arbitration agreement, the appellate court found the arbitration agreement unenforceable because it did not "state in some express fashion that the employee is sacrificing his or her right to a trial." Citing Atalese the court explained that "an average member of the public may not know—without some explanatory comment—that arbitration is a substitution for the right to have one's claim adjudicated in a court of law."

Kentucky Supreme Court Refuses to Enforce Nursing Home Arbitration Agreements
Kentucky's Supreme Court found that three nursing home arbitration agreements were never validly formed because the signing parties did not have authority to give up the decedent's constitutional right to a jury trial. Extendicare Homes, Inc. v. Whisman, Nos. 2013-SC-000426, -000430, -000431, 2015 WL 5634309 (Ky. Sept. 24, 2015). The decision involved three separate matters that were consolidated by the court. All involved nursing homes attempting to compel arbitration of wrongful death and personal injury claims by estates of deceased residents. In each case, a relative with power of attorney signed an admission document that included an arbitration provision.

A 2012 decision of the Kentucky Supreme Court held that decedents cannot affect the rights of their beneficiaries with respect to wrongful death claims. Ping v. Beverly Enters., Inc., 376 S.W.3d 581 (Ky. 2012). So the remaining issue before the court was whether other personal injury claims had to be arbitrated.

Comparing entering into an arbitration agreement with putting a child up for adoption, aborting a pregnancy, and entering into personal servitude, the court explained that a general grant of authority in a power of attorney does not extend to serious waivers of constitutional rights, such as the right to a jury trial. Thus, the court found the statements of authority in the three different powers of attorney to be insufficient to allow the attorney-in-fact to bind the resident to arbitration. To be enforceable, a power of attorney would have to expressly provide for "authority to waive the fundamental right to an adjudication by judge or jury."

Three of the justices dissented on the basis the decision conflicts with the U.S. Supreme Court's interpretations of the Federal Arbitration Act because it singles out arbitration agreements for disfavored treatment. Furthermore, agreeing to arbitrate is fundamentally different from giving up parental rights or personal liberty because "arbitration agreements . . . involve no substantive waiver. The principal's substantive rights remain intact, only the forum for addressing those rights is affected."

In response to the three dissenters, the majority reasoned that its holding does not conflict with the decisions by the U.S. Supreme Court in Marmet Health Care Center, Inc. v. Brown, 132 S. Ct. 1201 (2012),or Concepcion because it is not a "blanket prohibition" against arbitration agreements and is instead "a long-standing and well-established policy disfavoring the unknowing and involuntary relinquishment of fundamental constitutional rights regardless of the context in which they arise."

Congressional Antagonism to Predispute Arbitration Agreements in Long-Term Care Facilities
On September 23, 2015, Senator Al Franken joined 33 other senators in urging the Center for Medicare and Medicaid Services (CMS) to "outlaw the use of unfair pre-dispute arbitration clauses in contracts with long-term care facilities like nursing homes." CMS is already considering imposing restrictions on long-term care facilities participating in Medicare and Medicaid programs. The new protections if adopted would include the following:

1. Admission to the facility could not be contingent on signing an arbitration agreement.

2. The facility must fully explain in a form understandable by the residents or their representatives that by agreeing to binding arbitration they are waiving their right to file suit in court.

3. The arbitration agreement must be separate from other agreements or paperwork presented to the residents or their representatives for signature.

4. Agreeing to binding arbitration would not prohibit the residents or their representatives from contacting federal, state, or local healthcare officials.

Statutory, regulatory, and common laws governing enforcement of arbitration agreements are subject to change. Before offering an opinion regarding execution of an arbitration agreement or the filing of a demand for arbitration, counsel should always ascertain whether there have been recent changes regarding enforcement in a jurisdiction where a legal challenge might be raised. In addition, lawyers representing business clients need to remain abreast of such changes to ensure arbitration agreements comply with new enforcement requirements.

Keywords: litigation, ADR, arbitration, arbitration agreement, enforcement, waiver

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