New Jersey: Arbitration Clauses Unenforceable Without Express Waiver of Right to Sue
Memorandum: Atalese v. U.S. Legal Servs. Group
December 4, 2014: In Atalese v. U.S. Legal Servs. Group, the Supreme Court of New Jersey recently held an arbitration clause unenforceable where the provision did not contain an express waiver of the consumer’s right to sue in court. The Court found that, in order for an arbitration provision to be enforceable, it must clearly and unambiguously notify the consumer that they are waiving their right to seek relief in a court of law. Firms that contemplate electing (or have elected) to arbitrate with consumers in New Jersey are advised to utilize arbitration clauses that contain an express waiver of the right to sue in court. Further, because other courts may subsequently adopt the Atalese Court’s rationale, we recommend that Clients consider including such disclosure language in their arbitration clauses.
The Atalese Arbitration Clause
The arbitration clause at issue in Atalese provided:
Arbitration: In the event of any claim or dispute between Client and the [Company] 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. The matter may be arbitrated either by the Judicial Arbitration Mediation Service or American Arbitration Association, as mutually agreed upon by the parties or selected by the party filing the claim. The arbitration shall be conducted in either the county in which Client resides, or the closest metropolitan county. Any decision of the arbitrator shall be final and may be entered into any judgment in any court of competent jurisdiction. The conduct of the arbitration shall be subject to the then current rules of the arbitration service. The costs of arbitration, excluding legal fees, will be split equally or be born (sic) by the losing party, as determined by the arbitrator. The parties shall bear their own legal fees.
The Atalese Court held this Arbitration Clause Unenforceable Because it Did Not Contain an Express, Clear and Unambiguous Waiver of the Right to Sue in Court
The Court in Atalese refused to enforce the above arbitration clause concluding it did not “clearly and unmistakably” establish that the parties understood and agreed that, “in electing arbitration as the exclusive remedy, they are waiving their time-honored right to sue.” The Court noted that, while arbitration, by its very nature, involves a waiver of the right to litigate, “an average member of the public may not know – without some explanatory comments – that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” Although the Atalese Court recognized that there are no “magic words” required to make an arbitration clause enforceable, “the clause, at least in some general sufficiently broad way, must explain that the plaintiff is giving up her right to bring claims in court or have a jury resolve the dispute.” Indeed, whatever specific words are used, the clause must be “clear and unambiguous that a consumer is choosing to arbitrate disputes rather than have them resolved in a court of law.”
In providing future guidance, the Court noted disclosure language utilized in other arbitration provisions that had been tested and upheld in the lower courts, including:
- An arbitration clause explaining that the plaintiff had agreed “to waive [her] right to a jury trial” and that “all disputes related to [her] employment shall be decided by an arbitrator”;
- A clause expressing that, “by agreeing to arbitration, the parties understand and agree that they are waiving their right to maintain other available resolution processes, such as a court action or administrative proceeding, to settle their disputes”; and
- Language stating that, “instead of suing in court, we each agreed to settle disputes (except certain small claims) only by arbitration. The rules in arbitration are different. There is 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.”
The common thread of these provisions is the clear, plain language informing the consumer that they are waiving their right to sue in court and to a trial by jury. In light of the Atalese holding, we recommend that firms review and re-evaluate their arbitration provisions to ensure they clearly, unambiguously, and expressly disclose that the customer is waiving their right to commence a court action and/or waiving their right to a jury trial.
The information in this memorandum is for general, educational purposes only and should not be taken as specific legal advice.
About the authors
In the securities and corporate area, Mr. Ross advises companies, mainly small to mid-cap public companies, with their 1934 Act reporting requirements as well as their NASDAQ, AMEX and NYSE and other exchange listing and compliance matters. He also assists companies wanting to go public, whether through a reverse merger, initial public offering, or company offering, and advises clients on a wide range of investment and capital raising transactions, including private investments in public equity transactions (PIPEs), initial public offerings (IPOs), registered direct offerings (RDs), and shelf offerings.
