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Another Wrong Arbitration Decision in New Jersey

Business Conflict Blog by Peter Phillips

It’s not often that an excellent court simply misconstrues — or worse ignores — relevant state statutes and superseding federal law.  But the Superior Court Appellate Division of New Jersey seems to have done so.  We assume that it was trying to protect employees claiming age discrimination.  In fact, it accomplished the opposite and poorly served the utility of arbitration law in the State of New Jersey.

Plaintiff Marilyn Flanzman filed a complaint in New Jersey Superior Court alleging that her termination from her job constituted age discrimination, harassment and discriminatory discharge in violation of the New Jersey Law Against Discrimination.  Defendant employer, relying on an arbitration agreement executed by plaintiff, moved to compel arbitration.  Plaintiff resisted, claiming that the arbitration agreement was unenforceable as a matter of law because it do not set forth “the process for generally selecting an arbitration forum.”  The appellate court noted that plaintiff argued “that without that information communicated somehow in the agreement — whether it be by designating AAA, JAMS, or some other mechanism intended to replace her right to a jury trial — there exists no mutual assent.”

The Superior Court found for the employer.  The Appellate Division reversed, reasoning:

Selecting an arbitral institution informs the parties, at a minimum, about that institution’s arbitration rules and procedures.  Without knowing this basic information, parties to an arbitration agreement will be unfamiliar with the rights that replaced judicial adjudication.  That is, the parties will not reach a “meeting of the minds.”

Thus, in New Jersey, the parties to arbitration agreements (but no other types of agreements) must reflect, in drafting the agreement itself, “a clear mutual understanding of the ramifications” of agreement.  The agreement must identify “what rights replaced their rights to judicial adjudication.”  The court did not require that AAA be engaged, and held that simply setting forth an agreed method for appointing a panel of arbitrators might satisfy this requirement.  The point is that “the parties must mutually understand what rights replace those that they gave up.”

The court rendered this opinion without hindrance from — and indeed only a single citation to — the New Jersey Arbitration Act.  Former Presiding Judge of the Appellate Division William Dreier notes in his volume, New Jersey Arbitration Handbook,  that N.J.S.A. 2A:23B-6 makes enforceable any agreement “to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement” without that agreement’s reciting its consequences.  N.J.S.A.  2A:23B-4(b) provides that such agreements may not, with respect to subsequent controversies, purport to restrict such rights as notice of the initiation of arbitration or representation by a lawyer, but nothing in the statute requires that arbitration agreements must include consent of who should act as arbitrator, or what rules will be used.  Indeed, N.J.S.A. 2A:23B-11(a) provides that “if the parties to an agreement to arbitrate agree on a method for appointing an arbitrator, that method shall be followed, … [and] if the parties have not agreed on a method.. the court shall appoint the arbitrator,” thereby contemplating that an enforceable arbitration agreement may not include a provision for naming an arbitrator.  As for the process by which the proceeding shall be conducted, N.J.S.A. 2A:23B-15(a) provides that “an arbitrator may conduct an arbitration in such manner as the arbitrator considers appropriate for a fair and expeditious disposition of the proceeding.”  It this contemplates that the method of the arbitration shall be determined by the arbitrator in the course of the proceeding, not by the parties in the course of the arbitration agreement.

By rendering invalid arbitration agreements that do not contain “the ramifications” of the selection of arbitration, the Appellate Division not only amended the New Jersey Arbitration Act by judicial fiat.  It also required that arbitration contracts contain provisions unique to them and not required by any other contracts — thus treating arbitration contracts differently from others, in violation not only of N.J.S.A. 2A:23B-6, but the Federal Arbitration Act and all judicial decisions interpreting it, which constrain state courts through the Supremacy Clause.  Could a party to any other type of contract in New Jersey contest its validity on the ground that the party did not understand the consequences of certain of its provisions?

How this came about, I am at a loss to speculate.  But this blog has previously noted instances where New Jersey courts have taken upon themselves what they seem to believe is a responsibility to protect consumers and employees from the perceived unfairness of agreements to arbitrate disputes.  The validity of such agreements, however regrettable they may be as a matter of policy, is well established — in the United States, if not in New Jersey.  In order to be enforceable in New Jersey, arbitration agreements now must feature certain provisions that arbitration agreements in neighboring states need not.   Were plaintiff Flanzman to have lived in neighboring Pennsylvania or New York, would her agreement to arbitrate have been rendered invalid on these grounds?

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F. Peter Phillips

F. Peter Phillips is a commercial arbitrator and mediator with substantial experience providing consultation on the management of business disputes to companies around the globe. A cum laude graduate of Dartmouth College and a magna cum laude graduate of New York Law School, Mr. Phillips served for nearly ten years… MORE >

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