Proving the maxim that hard cases make bad law, Atalese has, once again, burned a business client by barring it from adjudicating a shareholder dispute in a confidential arbitration.
In Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430 (2014), the New Jersey Supreme Court considered whether or not to enforce a standard-form arbitration agreement against a consumer bringing claims under consumer-protection statutes.
In reversing lower court orders compelling arbitration, the Atalese Court found that commonly used arbitration clauses are unenforceable unless they specifically explain that the parties are relinquishing the right to pursue claims, including statutory claims, before a jury in court. Although the Court denied that any “prescribed set of words must be included in an arbitration clause,” it nonetheless ruled that arbitration clauses, to be enforceable, must be “clear and unambiguous” in stating that the parties are “choosing to arbitrate disputes rather than have them resolved in a court of law” and further that, by doing so, they are “surrendering [the] right to pursue statutory claims in court.” Id. at 447.
As a practical matter, this is problematic because, presumably, a great many arbitration agreements currently in force in New Jersey lack this specific language, which was not in widespread use pre-Atalese. Of course, sophisticated entities will have since amended their agreements to invoke the new mantra – and thus will continue to be able to enforce adhesion contracts against unwitting consumers to the same extent as before Atalese – but I have no doubt that a great many contracts currently governing business relationships remain unchanged. Businesses don’t typically hire lawyers to revisit their contracts after execution. When those agreements are pulled out of dusty file cabinets after a dispute arises, trial courts may be loathe to risk reversal by enforcing contested arbitration clauses that do not explain the ramifications of agreeing to arbitration. And unfortunately, those trial-court rulings will probably be conclusive, because few business owners are willing to endure the expense and delay of appealing procedural matters.
As a matter of principle, the Atalese doctrine is problematic under both state and federal law.
The ordinary rules governing contracts in New Jersey, as elsewhere, provide that “[a] party who enters into a contract in writing, without any fraud or imposition being practiced upon him, is conclusively presumed to understand and assent to its terms and legal effect.” Rudbart v. N. Jersey Dist. Water Supply Comm’n, 605 A.2d 681, 685 (N.J. 1992). Although the Atalese Court insisted that its holding was supported by other cases requiring clear language waiving rights in various contexts, the argument is thin. There is no reason even to mention the term “arbitration” in a contract except to foreclose the option of proceeding in court.
To the extent the ruling engenders an environment that is hostile to arbitration, it may also ultimately draw scrutiny from the United States Supreme Court, even though that Court initially denied certiorari to Atalese itself.
Congress enacted the Federal Arbitration Act back in 1925 to “reverse the longstanding judicial hostility to arbitration agreements,” “to place [these] agreements upon the same footing as other contracts,” and to “manifest a liberal federal policy favoring arbitration agreements.” EEOC v. Waffle House, Inc., 534 U.S. 279, 289 (2002).
The FAA thus requires state courts to “place arbitration agreements on an equal footing with other contracts and enforce them according to their terms.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). Thus, “a state cannot subject an arbitration agreement to more burdensome requirements than” other contractual provisions. Leodori v. CIGNA Corp., 175 N.J. 293, 302 (2003).
The Atalese Court’s insistence that the implications of arbitration clauses be spelled out in minute detail thus threatens the pro-arbitration policy that motivated the FAA, and may also run afoul of precedent in the U.S. Supreme Court. In Doctors’ Associates, Inc. v. Casarotto, 517 U.S. 681 (1996), for example, that Court held that a Montana statute requiring arbitration clauses to be flagged by underlined capital letters on the first page of the contract constituted a “special notice requirement.” Id. at 687. As such, the Court struck down the statute on the grounds that the FAA preempts any rule of state law that imposes distinct notice requirements on arbitration clauses. From there, it is not much of a stretch to find that requiring sophomoric explanations of the meaning of arbitration clauses (but not the meaning of countless other complex provisions impacting other important rights) is similarly hostile to arbitration, and thus runs afoul of the FAA.
The Supreme Court of New Jersey, and of the United States, should keep a close eye on this issue. If what I have observed is widespread, it may well prove desirable to either limit the doctrine to the consumer context that spawned it, or to overturn it outright as hostile to arbitration. Otherwise, Atalese will continue to encourage lower courts in New Jersey to throw out the baby – confidential arbitrations involving sophisticated business parties – with the bathwater.