October 06, 2014 Practice Points

Arbitration Clause Held Unenforceable Under New Jersey’s Arbitration Act

By Christopher S. Moore

In Atalese v. U.S. Legal Services Group, L.P., 2014 WL 4689318 (N.J. 2014), the New Jersey Supreme Court held that an arbitration clause that “waives” the right to sue in court is unenforceable unless it states “its purpose clearly and unambiguously.”

The plaintiff had contracted with U.S. Legal Services Group, L.P. (USLSG) for debt-adjustment services. The plaintiff sued in state court alleging that USLSG had violated New Jersey’s Consumer Fraud Act and Truth-in-Consumer Contract, Warranty and Notice Act by failing to deliver its services as promised, misrepresenting that various attorneys had been working on her case, knowingly omitting that it was not a licensed debt adjuster and violating New Jersey’s usury law.

The contract between the plaintiff and USLSG contained an arbitration clause (the “Arbitration Clause”). It provided that

[i]n the event of any claim or dispute between [the plaintiff] and [] USLSG related to this Agreement or related to any performance of any services related to this Agreement, the claim or dispute shall be submitted to binding arbitration upon the request of either party . . . . Any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction.

USLSG moved to compel arbitration based on the Arbitration Clause. The trial court granted the motion and dismissed the plaintiff’s complaint without prejudice. It found that the Arbitration Clause was “sufficiently clear, unambiguously worded, satisfactorily distinguished from the other [a]greement terms, and . . . provide[d] a consumer with reasonable notice of the requirement to arbitrate.’” (citation omitted). The plaintiff appealed, but the appellate court affirmed the ruling. The plaintiff then sought an appeal to the New Jersey Supreme Court, but the court took the appeal and reversed it.

Applying the New Jersey Arbitration Act, which it claimed was “nearly identical” to the Federal Arbitration Act, the court noted that New Jersey’s Act favors arbitration and places arbitration agreements on an “equal footing” with other contracts. However, the court stated that “[a]rbitration’s favored status does not mean that every arbitration clause, however phrased, will be enforceable.” Instead, according to the court, an arbitration agreement, “like any other contract, ‘must be the product of mutual assent,’” which “requires that the parties have an understanding of the terms to which they have agreed.” It also stated that an “average member of the public may not know—without some explanatory comment—that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” Further, the court noted, New Jersey law requires that “waiver of rights” provisions be sufficiently clear to place a consumer on notice that she is waiving constitutional or statutory rights, and that every consumer contract must be “‘written in a simple, clear, understandable and easily readable way.’”

Applying those principles, the court held that the Arbitration Clause was unenforceable. It stated that “[n]owhere in the [A]rbitration [C]lause [was] there any explanation that [the] plaintiff is waiving her right to seek relief in court . . . .” According to the court, the clause did “not explain what an arbitration is, nor [did] it indicate how arbitration is different from a proceeding in a court of law.” It held that the clause was not written in “plain language” that an “average consumer” would understand as waiving the right to sue in court, and distinguished the Arbitration Clause from other, enforceable clauses that “at least in some general and sufficiently broad way” had explained to consumers that they were giving up the right to bring their claims in court.

It is questionable that the same result would have been reached under the Federal Arbitration Act. Further, and in all events, it is questionable that the Atalese decision will have significant consequences. For one thing, New Jersey consumer contracts almost certainly will be revised in light of Altalese to include language the court thought was missing from the Arbitration Clause, namely, language that advises consumers that they are agreeing to arbitrate their disputes and giving up the right to seek relief in a court of law. For another, Atalese appears limited to New Jersey consumer contracts, and it is doubtful that consumers would refuse to sign such contracts even if revised in a manner Atalese requires.

Keywords: litigation, alternative dispute resolution, arbitration clause, consumer contracts, enforceability, waiver

Christopher S. Moore is with Novack and Macey LLP in Chicago, Illinois.

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