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Recent U.S. Supreme Court decision may invalidate New Jersey Supreme Court’s decision on enforceability of arbitration agreements

By Michael C. Donio, Esq. and Ryan S. Hoffman, Esq.

Arbitration clauses are hidden in almost every consumer contract. Apple, Amazon, Netflix, and Comcast are among the countless number of companies that place an arbitration provision within their lengthy consumer contracts and terms of service agreements. Arbitration refers to an agreement between disputing parties to let an outside party resolve the dispute instead of using the court system. In some cases, these arbitration provisions are automatically binding. These agreements, often unknown to those who do not read the fine print, have become more and more prevalent. Over the past decade consumers in New Jersey, and throughout the country, have attempted to challenge their validity. However, thanks to a number of recent Supreme Court decisions, arbitration agreements are more enforceable than ever.

Congress enacted the Federal Arbitration Act (“FAA”) which makes arbitration agreements valid and enforceable except upon such grounds as exist at law or in equity for the revocation of any contract. In other words, the FAA requires that arbitration agreements are treated no differently from any other contract. Any state law or rule that discriminates against arbitration agreements is invalid and preempted by FAA. Since its enactment, Federal Courts have broadened and strengthened the FAA.

Even though the FAA does not contain a preemption provision, the Supreme Court has held that state laws which discriminate against arbitration agreements are prohibited under the FAA. This line of cases begins with AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), wherein customers sued AT&T for charging fees and tax for what were advertised as “free” cellphones. AT&T sought to enforce the arbitration provision contained in their consumer contracts. The Ninth Circuit declined to enforce the arbitration provision holding that it was unconscionable under California Law. The case eventually reached the United States Supreme Court where Justice Scalia wrote the majority opinion (5-4) holding that the FAA preempted California law and that the arbitration provision was enforceable.

In Marmet Health Care Ctr., Inc. v. Brown, 565 U.S. 530 (2012), the Plaintiffs sued a nursing home for the wrongful death of their family members. The nursing home admittance agreements contained an arbitration clause. The Supreme Court of Appeals of West Virginia held that the arbitration agreements were void because any agreement to give up the right to sue for wrongful death or personal injury violated public policy. The U.S. Supreme Court reversed the West Virginia Court, citing Concepcion, and held that the “West Virginia court's interpretation of the FAA was both incorrect and inconsistent with clear instruction in the precedents of this Court.” See also, American Express Co v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013)

The New Jersey Supreme Court attempted to carve out an exception in Atalese v. U.S. Legal Sec'ys Grp., L.P., 219 N.J. 430 (2014). There, the New Jersey Supreme Court, while acknowledging the Concepcion line of cases, declined to enforce an arbitration agreement against the consumer because the arbitration provision failed to clearly state that the consumer was giving up their right to a trial by jury. The Court was concerned that agreements such as that found here, led consumers to waive away a fundamental right without full knowledge of their rights and the repercussions of the agreement. The Court did not limit this decision to the fundamental right of a trial by jury, but to all fundamental rights. This decision has carried tremendous weight, having been cited and followed in 33 written decisions in just 2 ½ years, and has led to courts throughout the state to decline to enforce numerous arbitration agreements in that time.

However, on May 15, 2017, the Supreme Court rendered a decision that further strengthened enforceability of arbitration agreements and may very well have overruled the New Jersey Court’s decision in Atalese. In Kindred Nursing Centers L. P. v. Clark, No. 16-32, 2017 U.S. LEXIS 2948 (May 15, 2017), the plaintiffs, respective relatives of two residents in a Kentucky nursing home, each held a broad power of attorney (“POA”) affording them authority to manage their respective loved one’s affairs. When arranging for the admittance of their loved ones to the facility, each signed an agreement that “any and all claims” arising from the relative’s stay would be resolved through binding arbitration. When their loved ones died the next year, each brought a case against the facility alleging inadequate care in Kentucky state court. The nursing home attempted to dismiss the cases on the basis of the arbitration agreements signed by the plaintiffs. However, the trial court, and eventually the Kentucky Supreme Court, held that a POA could not entitle an attorney-in-fact to enter into any arbitration agreement unless it included specific language granting such authority. The Kentucky Supreme Court explained that this “clear-statement” rule was required to protect “the rights of access to the courts and trial by jury” a right which the Kentucky Constitution held “sacred” and inviolate”. The Kentucky Court went further to state that this rule specifically did not violate Concepion and its progeny. According to the Kentucky Court, the power of attorney did not specifically authorize the attorney in fact to enter into arbitration agreements and therefore it violated the clear-statement rule. They further stated that their decision, and the “clear-statement” rule, did not violate the FAA because it applied equally to any contract implicating a fundamental constitutional right.

The Supreme Court held that Kentucky’s clear-statement rule clearly violated the FAA. Justice Kagan, writing for a unanimous Court1, explained that the FAA not only preempts any state rule that discriminates against arbitration on its face but also “displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the features of arbitration agreements.” In other words, any State rule that purports to safeguard a person’s right to have their claim heard in a court would likely be preempted by the FAA.

The New Jersey Supreme Court’s reasoning in Atalese is seemingly based in the same principles that the Kentucky Supreme Court cited in Kindred, and which the Supreme Court has now rejected. Similar to the Kentucky Court, the New Jersey Court claims that the requirement that a waiver of rights is made explicit does not discriminate against arbitration agreements because it applies to all fundamental rights. New Jersey’s rule, while not discriminatory against arbitration agreements on its face, will have the affect of disfavoring arbitration agreements. Significantly, the New Jersey Supreme Court assumes that consumers will not understand that agreeing to arbitrate a dispute means they are relinquishing the right to bring their case before the Courts. This assumption will necessarily have the effect of singling out and invalidating arbitration agreements. This is the exact type of rule – neutral on its face but discriminatory against agreements to arbitrate in practice – that, as Justice Kagan describes it – “oh so coincidentally” disfavors agreements to arbitrate.

As of this writing, no case has been reported challenging Atalese on this basis, but if/when that happens, the rights of nearly all New Jersey citizens will be at stake. Check back with Hoffman DiMuzio for updates on this matter, as well as to stay up to date on legal matters that affect you.

Mr. Donio is an associate attorney at the Law Offices of Hoffman DiMuzio, with practice focusing in commercial litigation. Mr. Hoffman is an associate attorney at the Law Offices of Hoffman DiMuzio, with practice focusing in personal injury and commercial litigation.

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