The New Jersey Supreme Court has cast doubt on the enforceability of arbitration clauses in consumer agreements that lack clear language specifying that consumers have waived their rights to litigate claims in a court. Atalese v. U.S. Legal Services Group, L.P., 2014 WL 4689318 (N.J. Sept. 23, 2014). Any company doing business in New Jersey that uses an arbitration clause in its contracts—consumer or otherwise—should immediately review the clause to ensure it passes muster under Atalese.

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 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 arbitration, and the Appellate Division affirmed. 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 acknowledged that the Federal Arbitration Act (FAA) “requires courts to place arbitration agreements on an equal footing with other contracts and enforce them according to their terms.” But the court insisted it was not singling out arbitration agreements for more burdensome treatment, reasoning that under New Jersey state law any contractual waiver of rights “must be clearly and unmistakably established.”      

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.” Indeed, 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 “no prescribed set of words” are required. And it does not appear the court created a particularly high bar. Rather, it concluded that “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” will suffice. But the practical impact of the decision is that consumer arbitration clauses must contain some unspecified “magic words” in order to be enforceable.

In the short term, consumer class action filings in New Jersey state court will increase, as the plaintiffs’ class action lawyers will likely attempt to exploit Atalese and negate existing consumer arbitration provisions that typically require claims to be pursued on an individual basis, rather than as part of a class action. If such actions are removed to federal court, the defendants can attempt to collaterally attack Atalese by arguing that the ruling is irreconcilable with the FAA and recent U.S. Supreme Court precedent, such as AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), because it has a disproportionately negative impact on arbitration agreements as opposed to other contracts.

In the long term, Atalese will remain binding law in New Jersey state court absent review and reversal by the U.S. Supreme Court. It is foreseeable that the plaintiffs’ bar will attempt to extend Atalese to other types of arbitration agreements, such as those in commercial contracts or employment agreements. As a result, any company doing business in New Jersey that uses an arbitration clause in any type of agreement should carefully review the clause to ensure it unambiguously explains the difference between litigation and arbitration, and makes clear that litigants are foreclosed from having disputes resolved in court.