Another Road Bump for Consumer Arbitration Clauses in New Jersey
On June 14, 2016, the New Jersey Supreme Court issued yet another consumer friendly decision that further impedes the ability to enforce an arbitration agreement under New Jersey law. In a 5-1 decision, the Court in Dever v. Sanford Brown Institute held that an agreement to delegate issues of arbitrability to an arbitrator must, like the arbitration agreement itself, satisfy the elements necessary for the formation of a contract under state law.
The majority relied on the well-settled principle in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), that issues of arbitrability should apply "ordinary state-law principles that govern the formation of contracts," to utilize the standard enumerated by the Court in Atalese v. U.S. Legal Services Group, 219 N.J. 430 (2014), cert. denied, 135 S. Ct. 2804 (2015). In Atalese, the Court held that, as with any contractual provision in New Jersey waiving a constitutional or statutory right, a waiver of rights provision in an arbitration agreement "must be clearly and unmistakably established." Accordingly, because the arbitration provision at issue in Dever did not "clearly and unmistakably delegate arbitrability to the arbitrator," it was unenforceable.
The lone dissenter took issue with the majority's refusal to consider binding federal precedent, and, most notably, Rent-A-Center, Inc. v. Jackson, 561 U.S. 63 (2010). For the dissent, Rent-A-Center held that if a party does not specifically challenge a provision in an arbitration agreement that assigns the question of arbitrability to an arbitrator at the trial level, the challenge is waived and the arbitration agreement is enforceable under the FAA. Because the plaintiffs in Dever did not challenge the contract language on the question of arbitrability to the trial court, the dissent asserted that the plaintiffs waived this challenge and the question of arbitrability must be determined by an arbitrator applying principles of New Jersey contract law to reach a determination.
The Court's decision in Dever highlights a growing tension between New Jersey courts and federal precedent on the proper interpretation and enforceability of arbitration agreements. Until the Court's decision on Monday, there was little doubt that Rent-A-Center held that a challenge to the enforceability of an arbitration agreement as a whole would be left to the arbitrator. Dever now ignores federal precedent to permit the opposite result.
Although Atalese escaped review by the U.S. Supreme Court, the questions created by the Dever decision may not. This is especially true because since the U.S. Supreme Court denied certiorari in Atalese, it has decided DirecTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015) (interestingly not addressed in Dever), which reiterated that arbitration agreements in contracts are enforceable and state-law principles of contract should not undermine them. In the interim, businesses should review their arbitration agreements and confer with counsel to ensure enforceability in light of Dever.
For questions regarding consumer arbitration clauses, contact Jonathan Klein at (215) 640-8535 | email@example.com or another member of Clark Hill's Litigation Practice Group.