On September 23, 2014, the New Jersey Supreme Court held in Atalese v. U.S. Legal Services Group that an arbitration clause in a consumer contract is not enforceable unless it clearly indicates that the plaintiff is giving up the right to go to court. Accordingly, any company doing business in New Jersey that uses an arbitration clause in its contracts, consumer or otherwise, must make sure that the clause states in easy to read language: 1) the differences between litigation and arbitration, and 2) that the contracting party is being foreclosed from proceeding to court on any dispute arising from the contract.
The Atalese Decision
The plaintiff in Atalese contracted with U.S. Legal Services Group (USLSG) for debt adjustment services. The plaintiff filed suit in state court, alleging that USLSG violated two State consumer protection statutes, the New Jersey Consumer Fraud Act (CFA) and the Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA) by misrepresenting the scope of the services it would provide and its status as a licensed debt adjuster in New Jersey.
USLSG moved to compel arbitration, based on an arbitration clause in the parties’ agreement, which provided:
“Arbitration: In the event of any claim or dispute between Client and the 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 upon the service of that request on the other party. The parties shall agree on a single arbitrator to resolve the dispute. . . . Any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction.”
The trial court granted USLSG’s motion to compel Plaintiff to arbitrate her dispute. Plaintiff appealed the trial court’s decision, arguing that the arbitration clause was unenforceable because it did not adequately notify plaintiff of her right to have her consumer claims tried before a jury. The New Jersey Appellate Decision affirmed the trial court’s decision, but in a unanimous decision the New Jersey Supreme Court reversed, and held that the arbitration clause was unenforceable because it “did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue her statutory claims in court.”
The Court reasoned that arbitration is essentially a waiver of rights which, to be effective, “requires a party to have full knowledge of his legal rights and intent to surrender those rights.” The Court criticized the arbitration clause at issue for not “explain[ing] what arbitration is,” how it “is different from a proceeding in a court of law,” and for not being “written in plain language that would be clear and understandable to the average consumer.” The Court also recognized a countervailing State legislature policy implicit in the enactment of the CFA and TCCWNA that favored consumers seeking relief though courts of law.
In reaching this decision, the Court rejected the argument that consumers are sophisticated enough to understand that agreeing to resolve disputes in binding arbitration means they are forgoing their right to have disputes resolved in court.
The Court stressed that there was no “magic language” required in order to make an arbitration clause enforceable. Rather, the clause must use “clear and unambiguous” language, which in a “general and sufficiently broad way, must explain that the plaintiff is giving up her right to bring her claims in court or have a jury resolve the dispute”. However, it did provide the following broad guidance for the enforceability of consumer arbitration clauses, generally, an enforceable consumer arbitration clause must: (1) state what arbitration is, (2) explain how arbitration differs from a court proceeding, and (3) do so in language that is plain and understandable to the average consumer. The Court went on to cite the following arbitration provisions that New Jersey’s courts have previously upheld as enforceable:
- The parties agree “to waive [the] right to a jury trial” and that “all disputes relating to [the plaintiff’s] employment . . . shall be decided by an arbitrator.”
- “By agreeing to arbitration, the parties understand and agree that they are waiving their rights to maintain other available resolution processes, such as a court action or administrative proceeding, to settle their disputes.”
- “Instead of suing in court, we each agree to settle disputes (except certain small claims) only by arbitration. The rules in arbitration are different. There’s no judge or jury, and review is limited, but an arbitrator can award the same damages and relief, and must honor the same limitations stated in the agreement as a court would.”
Given the sweeping nature of Atalese, all New Jersey businesses using arbitration clauses in their agreements must rewrite these clauses in order to make sure that the they contain clear and easy to read language that: 1) explains the nature of arbitration proceedings and how they differ from judicial proceedings; and 2) expressly states the rights that are being waived or forfeited as a result of the agreement.
If you have any questions, please feel free to contact Howard A. Matalon, Esq. at 908-964-2424.