Hidden Arbitration Clauses Curtailed in NJ

A spate of recent decisions out of New Jersey has cast doubt on the practice made popular over the last decade by large corporations of burying small-font arbitration clauses deep into boilerplate agreements, hiding them from consumers. These arbitration clauses, in addition to requiring that all disputes be settled in arbitration—not in court—prohibit consumers from bringing any type of class action in any venue. Thus, consumers are permitted only to pursue individual claims where the costs often times outweigh the rewards. Relying on the Federal Arbitration Act, the U.S. Supreme Court has, in several recent opinions, upheld such class action waivers in mandatory arbitration provisions, based on the supposed importance of encouraging arbitration as a more efficient means of dispute resolution.

New Jersey courts’ first effort to push back against this practice came in a 2014 New Jersey Supreme Court decision, Atalese v. U.S. Legal Servs. Grp. Finding that the arbitration provision in question was an affront to the principles of mutual assent that are vital to formation of a valid contract under New Jersey state law, the Court refused to enforce an arbitration provision that was buried within a longer agreement because it “did not clearly and unambiguously signal to the plaintiff that she was surrendering her right to pursue her statutory claims in court.”

This decision, framed by the New Jersey Supreme Court as purely a matter of New Jersey contract law, has spawned a progeny of state and federal cases grappling with the issue. The most recent—Noble v. Samsung Electronics America—involved consumers who brought a class action, seeking to hold Samsung to account for its allegedly unreliable Galaxy Gear S smartwatch. In that case, Samsung sought to have the case dismissed from court based on the class action waiver buried in the customer agreement. In ruling on its motion, the question before District Judge Madeline Cox Arleo of the District of New Jersey was whether an arbitration clause appearing on page 97 of a 137-page owner’s manual was sufficiently conspicuous to provide consumers with notice that they were waiving their legal rights and effectively foreclosing any legal remedy. Arleo rejected Samsung’s attempt to enforce the contract, noting that the “shrink-wrap agreement,” found in a product manual bearing no clues that it contained a waiver of legal rights, was insufficient to alert a reasonable consumer as to its implications.

Notwithstanding the U.S. Supreme Court’s apparent willingness to enforce any and every class action waiver in a mandatory arbitration agreement, these recent opinions by the New Jersey courts indicate that the ability of corporations to foist these agreements on unsuspecting consumers appears to be narrowing. Future developments will be posted here.

Trief & Olk is a class action firm representing consumers.