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Consumer Arbitration: Is This Enforceable?


The New Jersey courts have long struggled with defendant’s arbitration agreements (proper terminology should be "privatized justice agreements") in conjunction with consumers’ and employees' access to the court system. For all levels of courts, from the Trial Courts to the Court of Appeals, judges have addressed this issue in numerous contexts and under separate sets of fact. See Delta Funding v. Harris,

The most fundamental principle of federal and state law regarding arbitration is that arbitration is a contractual right governed by ordinary principles of state contract law. The purpose of the federation arbitration act is to place arbitration agreement on equal footing with other contracts. Kaymer v. Management Recruiters International Inc. 169 F.3d 501, 504 (8th Cir 1999). Where there is a contractual agreement to arbitrate, the FAA provides for enforcement save upon such grounds as exist at law or inequity for the revocation of any contract. 9 U.S.C. section 2. This was recently affirmed by the Third Circuit Court of Appeals in Homa v. American Express Co., 558 F.3d 225 USCA, 3d (2009). (plaintiff's brief) ( defendant's brief).

The precondition to judicial enforcement of any proclaimed right to arbitrate is the formation of a valid arbitration agreement under state contract law and the party’s ongoing compliance with the terms of such agreement. 9 U.S.C. section 4. The Court should look to, and do look to whether State Law (New Jersey in this case) permits a matter to be arbitrated.

New Jersey courts have determined that arbitration provisions should be examined on a case-by-case basis and may only be enforced if they contain the appropriate attributes. See Rockel v. Cherry Hill Dodge See Rockel v. Cherry Hill Dodge 368 N.J.Super. 577 (App.Div 2004). See also Grass v. Associates First Capital Court 346 N.J. Super. 42, 52 (App. Div 2001).

The following are examples where courts analyzing state law contact issues refused to enforce an arbitration agreement.

  • Garfinkel v. Morristown Obstetrics & Gynecology Assocs., 168 N.J. 124, 127, (App.Div. 2001)

In Garfinkel, the Court held that basic contract principles warranted the denial of the defendant’s motion to enforce the arbitration clause. The Court specifically held that an employment agreement’s arbitration clause was insufficient to constitute a waiver of the plaintiff’s remedies under the law against discrimination.

The arbitration agreement at issue stated:

Any controversy or claim arising out of, or relating to, this Agreement or the breach thereof, shall be settled by arbitration in Morristown, New Jersey, in accordance with the rules then obtaining of the American Arbitration Association, and judgment [sic] upon any reward [sic] rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. Id. at 128.

The Supreme Court in Garfinkel specifically held that “as we have stressed in another context, a party’s waiver of statutory rights must be clearly and unmistakably established and contractual language alleged to constitute a waiver will be read expansively. Id. at 132. The Court’s interpretation of the agreement was that since the arbitration was not properly worded so as to apprise the signor of the waiver, the clause was unenforceable.

  • Rockel v. Cherry Hill Dodge, 368 N.J.Super. 577 (App.Div 2004)

In Rockel the Court held, interpreting the drafter’s intent that the arbitration provisions were unenforceable because multiple arbitration agreements and the placement of the clauses mandated that the parties did not intend to rely upon arbitration. In Rockel the Court analyzed the conflicting arbitration clauses and determined that the placement of the arbitration clause combined with the conflicting provisions warranted a denial of the motion because it was not clear that the party drafting the agreements, the dealership, intended to use the arbitration clause. In the present had the defendant intended to rely upon the arbitration agreement there would have been one placed in the final agreement of the retail order, which was the last agreement signed between the parties.

  • Muhammud v. County Bank of Rehoboth Beach 189 N.J. 1 (2006)

The New Jersey Supreme Court held that the arbitration clause was unconscionable in the context of a consumer fraud claim and severed the class claims from the individual claims. The Court held that the public policy considerations underlying the enforcement of class actions outweighed the defendants’ right to arbitration. The deciding factor was that the claim amount was less than $600.00.

It is relatively clear that the New Jersey Supreme Court does not favor the use of privatized justice clauses when defendants attempt to ban class action access to the court system. The most recent case which reaffirmed the appropriate analysis and the proper conclusions by the state courts was set forth in Homa v. American Express Co., 558 F.3d 225 USCA, 3d (2009). In Homa, a cardholder plaintiff individually, and on behalf of others, brought a class action against American Express, alleging violation of the New Jersey Consumer Fraud Act regarding their “cash back rewards program”. The District Court granted the defendant’s motion to compel arbitration and the Court of Appeals held that:

  • Federal Arbitration Act did not preempt consideration of unconscionability of class action arbitration;
  • Class arbitration waiver within party’s credit agreement was unconscionable.

The Court of Appeals reversed and remanded to the District Court. The Third Circuit’s decision in Homa flatly rejected both of the defendant’s arguments. First, the Court made clear that New Jersey state unconscionability law and specifically the Muhammad’s decision rule against exculpatory action bans is not preempted by the Federal Arbitration Act. The Court noted that Muhammad did not strike down arbitration clauses, but rather established a general contract defense, one that applies to all waivers of class-wide actions, not simply those that also compel arbitration. The Court noted that the U.S. Supreme Court has specifically held that arbitration clauses are subject to generally applicable state law defenses such as unconscionability.

The Court recognized that the Federal Arbitration preemption language did not apply to New Jersey law. Even more importantly, Homa makes clear that there is no division amount the federal circuit courts of appeal as to whether the FAA preempts state law that would limit class action bans. The court predicted that the New Jersey Supreme Court would hold that New Jersey has greater interest in the rights of consumers under the consumer protection laws in the context of barring class action claims against American Express and in the context of an arbitration clause. The Muhammud court held the following:

In addition to their impact on individual litigants, class-action waivers can functionally exculpate wrongful conduct by reducing the possibility of attracting competent counsel to advance the cause of action. Class-action waivers prevent an aggregate recovery that can serve as a source of contingency fees for potential attorneys. Although defendants have no obligation to provide counsel to plaintiff, they cannot take action that impedes ordinary citizens' access to representation to vindicate their rights. Defendants emphasize the availability of attorney's fees under the CFA. Muhammud at 21.