December 10, 2015

Florida sunshine in New Jersey for the holidays

By Mark Miller Senior Attorney

The PLF Atlantic Center does not slow down for the holidays. In just the last few weeks, we have filed briefs in the North Carolina Supreme Court, a Florida appellate court, argued a case before the New Jersey Supreme Court, and won an administrative case against the Florida Fish & Wildlife Commission. You can click the links to read about those cases, but I thought I would share a little insight into the case now pending before the NJ Supreme Court, a case I argued last week.

Before I talk about the present case, let me share a little history regarding arbitration and New Jersey’s high court. Just last year, as PLF Principal Attorney and Special Assistant to the Director of Litigation Deborah J. La Fetra previously explained on the blog, the NJ Supreme Court heard an arbitration case that led to a decision contrary to Supreme Court of the United States case law. From Deborah’s blog post:

Patricia Atalese signed a contract with a financial services firm, in which she agreed that “any claim or dispute” between herself and the firm, related to the services provided, “shall be submitted to binding arbitration upon the request of either party” and “[a]ny decision of the arbitrator shall be final and may be entered into judgment in any court of competent jurisdiction.”  This standard language is easily understood to mean that disputes will be resolved in arbitration.  But Ms. Atalese argued to the New Jersey Supreme Court, in Atalese v. U.S. Legal Services Group, that because the contract does not say that she “waived” her right to go to court, the language is ambiguous and she therefore should be allowed to sue.

This week, the New Jersey high court agreed, rendering the contract useless.  Pacific Legal Foundation had filed an amicus brief, specifically addressing the role of “magic words” in the law.  Rights can be waived in many contexts, without using the word “waiver.”  The court’s decision specifically called out PLF’s brief, and agreed, in theory, that no specific language is required.  However, the court then turned right around and ruled that, although it would not dictate the particular words contracting parties must use, the contract must include language specifically stating that the parties understand that “arbitration” is a different dispute resolution forum than state or federal courts.

The court has a rather dim view of the state’s consumers, as it explains that they cannot be expected to understand the meaning and import of the words “binding” or “arbitration,” but that the contractual language must include legal advice as to the benefits and trade-offs in choosing to resolve disputes in arbitration instead of in court.  The court’s view of an ignorant public is unjustified given that anyone who has purchased a car, applied for a credit card or a job, has a cell phone, or rented an apartment has seen those black-boxed bolded arbitration provisions highlighted in their contracts.  Everyone has the right and ability to investigate and consider the terms of their agreements – and they should do so.  By demanding that arbitration contracts, and only arbitration contracts, must contain these advisory provisions, intended to discourage consumers from agreeing to contracts that call for arbitration if a dispute should arise, the New Jersey Supreme Court runs afoul of the Federal Arbitration Act and the federal substantive common law of arbitration contracts, time and again upheld by the United States Supreme Court.

Notwithstanding the conflict between the NJ high court’s decision in Atalese and federal law, the Supreme Court declined to take up the case when it was presented to them earlier this year.  As a result, fans of Atalese might argue that the Court tacitly approved Atalese, or at least gave the NJ justices reason to read the denial as such. Anyone who practices constitutional law knows that readers should not construe a denial of certiorari in this way, but try telling that to the seven justices of the NJ Supreme Court.

In any event, oral argument last week in the Morgan v. Sanford Brown Institute case gave fans of Atalese reason to hope that the NJ justices indeed read the Atalese denial of certiorari review as implicit approval of the holding of Atalese. I described the Morgan case several months ago on the blog, a blog post I encourage you to read if you’re a fan of Bruce Springsteen. But in a nutshell, here are the facts of Morgan as set out in our amicus brief (sans citations):

Plaintiffs Annemarie Morgan and Tiffany Dever, residents of New Jersey, enrolled at Defendant Sanford Brown Institute’s Trevose, Pennsylvania, location in November 2009. Sanford Brown, a division of Defendant Career Education Corp., Inc. (CEC), provides career training programs in healthcare, business, legal administration, and computer-related fields at thirty campuses nationwide. Both plaintiffs signed the same Enrollment Agreement.

This agreement contained a section entitled “Agreement to Arbitrate,” providing that the parties would resolve any disputes arising out of or relating to their relationship through arbitration, including the question of whether they had agreed to arbitrate any particular claim. Despite these provisions, Morgan and Dever sued Sanford Brown in court when they became dissatisfied with the education they received from the school. Sanford Brown moved to compel arbitration. The trial court denied the motion; the lower appellate court reversed.

The New Jersey Supreme Court accepted the case for review to decide whether the terms of the arbitration agreement compelled the plaintiffs to arbitrate all claims related to their enrollment agreements, including state statutory claims. The answer to that question is a resounding “yes,” based on a 2010 Supreme Court of the United States decision known as Rent-A-Center v. Jackson.

Justice Antonin Scalia

In Rent-A-Center, Justice Scalia explained why courts must enforce agreements to arbitrate pursuant to the Federal Arbitration Act:

An agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other. The additional agreement is valid under § 2 [of the Federal Arbitration Act] “save upon such grounds as exist at law or in equity for the revocation of any contract,” and courts can enforce the agreement by staying . . . litigation under § 3 and compelling arbitration under § 4.

Here, the “written provision . . . to settle by arbitration a controversy,” 9 U.S.C. § 2, that Sanford Brown asked the trial court to enforce includes the delegation provision that gave the arbitrator full authority to resolve “all issues relating to the enforcement of the Arbitration Agreement and the arbitrability of claims between the parties.” Accordingly, just like in Rent-A-Center, the trial court should have treated the delegation provision as valid under § 2, and should have enforced it under §§ 3 and 4, leaving any challenges about the arbitrability of certain claims to the arbitrator. The intermediate appellate court in New Jersey correctly reached that conclusion, explaining that “[w]hen an arbitration agreement contains a delegation clause, unless a party challenges ‘the delegation provision specifically,’ the court must ‘treat it as valid . . . and . . . leav[e] any challenge to the validity of the Agreement as a whole for the arbitrator.” Since the plaintiffs did not challenge the delegation provision specifically, the lower appellate court got it right and the NJ Supreme Court need not even have taken the case.

That they took the case suggested they did not like the result, even if the result followed from Rent-A-Center. And in fact, the oral argument in the case demonstrated that the justices do not appear comfortable with following the holding of Rent-A-Center, and would rather look for a way to avoid that case’s plain holding. That they don’t like Rent-A-Center is understandable, in that Rent-A-Center eviscerates the NJ high court’s decision in Atalese where parties have agreed to assign the gateway question of arbitrability to an arbitrator, as if often seen in contracts including arbitration clauses.

Nevertheless, if my New Jersey high school civics class taught me anything, it’s that the Supreme Court of the United States is the highest court in the land. The New Jersey Supreme Court must defer to its decisions, even when the state court justices do not like the outcome that U.S. Supreme Court precedent demands.

What to read next