Waiving Right to Court and Jury by Sophisticated Commercial Parties

Although lawyers, MBA’s, and business executives likely understand the nature of arbitration and that the process is a less formal alternative to resolving disputes in court before a judge or jury, most folks—especially consumers, employees, and small businesses—do not. Thus, the general contract-formation requirement of “mutual assent” to arbitration cannot be presumed when an unrepresented party is presented with a contract for goods or services that contains an arbitration clause. As courts expanded arbitration outside the commercial context—and generally permitted class action waivers—courts also faced more arguments that “forced” arbitration was unfair or, even, unconstitutional.

The New Jersey Supreme Court resolved the issue, in part, in Atalese v. U.S. Legal Services Group, LP, 219 N.J. 430 (2014). The court made explicit what other courts had implied: an arbitration clause in a consumer contract will not be enforced unless it contains an express, “clear and unambiguous” waiver of the right to resolution of the indicated disputes by a court and/or jury. The court did not prescribe any particular waiver language, but pointed to earlier examples that were, or were not, sufficient.

Atalese involved alleged violations of the New Jersey Consumer Fraud Act, but its waiver requirement has been adopted by New Jersey courts for employment cases, attorney retainer agreements, and other instances of adhesive contracts, even (in unpublished opinions) in the context of commercial transactions and contracts between lawyers. The justification for the expanding Atalese to these circumstances is that parties cannot have expressed “mutual assent” (or, sometimes, have a “meeting of the minds”) to arbitrate unless the nature and processes of arbitration are explained. Some cases have relied on Atalese to require that the rules of the American Arbitration Association or other forum be provided to all parties physically or by a web-page link. 

Pointing out the general sophistication of the parties, the U.S. Court of Appeals for the Third Circuit has predicted that the Atalese requirement would not be extended by the New Jersey Supreme Court to commercial contracts. In re Remicade Antitrust Litigation., 938 F.3d 515 (3d Cir. 2019). Other, unpublished decisions in state and federal courts have said the same. But the application of Atalese to commercial contracts and agreements among sophisticated parties or parties with counsel has been inconsistent.

On February 8, 2023, the New Jersey Appellate Division in County of Passaic v. Horizon Healthcare Services, Inc., 474 N.J. Super. 498, 2023 N.J. Super. LEXIS 10 (App. Div. Feb. 8, 2023), went a long way towards clarifying the Atalese rule:

because the parties [were] sophisticated and possess relatively equal bargaining power [] Atalese's requirement of an express waiver of the parties' right to seek relief in a court of law is inapplicable and the arbitration agreement is enforceable.

The court also noted that the plaintiff is a large county government, the defendant is a well-known corporate entity, and both were represented by counsel during contract negotiations.

Because the Passaic opinion is published and therefore precedential, it eliminates one defense to motions to compel arbitration involving sophisticated parties—a development that will make commercial arbitration more predictable, more expeditious, and less expensive. Passaic also will help to narrow a potential difference between litigating in federal or state court.

Whether contracts of adhesion between sophisticated commercial parties, such as terms and conditions that are not subject to negotiation, will fall within the Passaic exception to Atalese may still be litigated, as will situations where counsel were not directly involved in the contracting process. Moreover, as of early March, Passaic is still subject to appeal to the New Jersey Supreme Court, which (if review is accepted) may provide further (and final) guidance.