Contributed by: Shalom D. Stone, Managing Partner at Stone Conroy LLC in Florham Park. Please email Shalom Stone or Alida Kass if you would like more information.

Five years ago this week, the Supreme Court of New Jersey held in Atalese that arbitration agreements ­— or at least some arbitration agreements — are unenforceable unless they explain the difference between arbitration and litigation.[1]  But does Atalese apply to all arbitration agreements or only those in consumer contracts?  In the past month, appellate courts have given two different answers, one in state court and one in federal court.  So for now, at least, the answer depends on your venue.

In order to curb a perceived judicial hostility to arbitration agreements, the Federal Arbitration Act (FAA) requires that arbitration agreements be placed on equal footing with all other contracts.[2]  In Atalese, the Supreme Court declined to enforce the arbitration provision, finding that “mutual assent had not been achieved because the provision did not, in some fashion, explain that it was intended to be a waiver of the right to sue in court.”[3]

Does Atalese apply to all arbitration agreements?  Until recently, the answer from the state courts was somewhat one-sided.  In the years preceding Atalese, as its principles were being developed, the New Jersey Supreme Court applied those principles only in the context of employment and consumer contracts.[4]  And Atalese itself suggests repeatedly that it applies only to consumer contracts.  In the Court’s own words:

  • “An arbitration provision … must be sufficiently clear to a reasonable consumer.”[5] 
  • “Arbitration clauses — and other contractual clauses — will pass muster when phrased in plain language that is understandable to the reasonable consumer.”[6]
  • “The [arbitration] provision … [is not] written in plain language that would be clear and understandable to the average consumer….”[7]

Indeed, the Atalese opinion used the word “consumer” some 24 times.

The Supreme Court’s after-the-fact descriptions of Atalese refer repeatedly to its origins in consumer protection.  In 2016’s Morgan decision, the Supreme Court said: “Last term, we held [in Atalese] that an arbitration provision in a consumer contract that fails to explain in some minimal way that arbitration is a substitute for a consumer’s right to pursue relief in a court of law is unenforceable.”[8]  And in 2019, the Supreme Court’s Kernahan decision emphasized that “the consumer context of the contract [in Atalese] mattered,” and that the “twin concerns” animating its application of the Atalese rule there were that (1) “a consumer is not necessarily versed in the meaning of law-imbued terminology about procedures tucked into form contracts” (as opposed to “individually negotiated” ones), and that (2) “plain language explanations of consequences had been required in contract cases in numerous other settings where a person would not be presumed to understand that what was being agreed to constituted a waiver of a constitutional or statutory right.”[9]

Post-Atalese decisions from the Appellate Division are to the same effect.  In 2018, for example, the Appellate Division held (in an unreported decision) that Atalese “d[oes] not extend . . . to commercial contracts,” i.e., contracts that resulted “from a lengthy negotiation process” and where “plaintiffs were not ‘average member[s] of the public.’”[10]  Other unreported opinions from the Appellate Division and District Court reached the same conclusion.[11] 

In sum, the state and federal courts seemed to be of the view that Atalese applied only to arbitration clauses in consumer and employment agreements.  Late last month, however, the Appellate Division zagged, explicitly holding in Itzhakov v. Segal that Atalese is not limited to consumer and employment contracts.[12]  In an unreported decision, the Court explained: 

Segal contends that the rule of Atalese applies only to consumer and employment contracts. We are unpersuaded. No doubt, the Court in Atalese focused on consumers. But the principle that a person must knowingly waive the right to sue in court applies to any contracting party, whatever the contract’s purpose. The “average member of the public” to whom the Court [in Atalese] refers may enter into a contract on behalf of his or her business, or to secure a consumer product or service.  In either case, the person must understand that arbitration precludes the right to sue.

A party’s sophistication may certainly bear on whether he or she knowingly and voluntarily agreed to a contract’s terms…. However, even a sophisticated party, or one represented by counsel, will not be deemed to waive his or her rights — whether constitutional, statutory, or common-law — without clear and unambiguous language.

Itzhakov, supra, at *10-11 (citations omitted).

Two weeks later, the Third Circuit reached the opposite conclusion — in a reported opinion — holding in Remicade that Atalese does not apply to a commercial contract where both parties are “highly sophisticated.”[13]  The Third Circuit explained:

While the New Jersey Supreme Court has not definitively resolved the scope of the rule, it has applied it thus far only in the context of employment and consumer contracts….  Even before Kernahan’s strong intimation that the rule applies only where the parties have unequal bargaining power and levels of sophistication—as in the employment and consumer contexts—the New Jersey Appellate Division has held on several occasions that the rule does not extend … to commercial contracts….

Here, there is no dispute that the Agreement is a commercial contract or that both [parties] are highly sophisticated participant[s] in the pharmaceutical market, as opposed to average member[s] of the public…. Taking into account the illustrative statements in Kernahan, and affording “due regard” to the decisions of the intermediate appellate courts declining to extend the rule to commercial contracts, we conclude that the rule does not apply to the Agreement between [the parties].[14]

Because of that holding (that Atalese did not apply to that arbitration agreement), the Third Circuit in Remicade did not reach the broader question of whether Atalese is preempted by the FAA “either because it is too tailor-made to arbitration agreements to survive the FAA’s edict against singling out those contracts for disfavored treatment, or because it interferes with fundamental attributes of arbitration.”[15]  In a footnote, however, the Court illustrated the arguments against preemption:

[S]ee also Kernahan, 199 A.3d at 786 (Albin, J., concurring) (explaining that New Jersey requires “that an arbitration clause must simply explain to the average consumer what it forecloses . . . [and] do[es] not discriminate against an arbitration agreement by requiring it to [explain its purpose]”); Atalese, 99 A.3d at 313-14 (giving examples of the New Jersey “clear and unmistakable” requirement being applied in various non-arbitration contexts).[16]

The Third Circuit’s decision in Remicade provides a long‑awaited answer to this aspect of the Atalese puzzle.  But the Appellate Division’s decision in Itzhakov means that, in New Jersey’s state courts, that answer remains elusive.

[1] Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430, 99 A.3d 306 (2014).

[2] Kernahan v. Home Warranty Adm’r of Fla., Inc., 236 N.J. 301, 316-317, 199 A.3d 766, 775 (2019).

[3] Kernahan, 236 N.J. at 320, 199 A.3d at 777 (describing Atalese).

[4] Martindale v. Sandvik, Inc., 173 N.J. 76, 96-97, 800 A.2d 872, 883-884 (2002) (enforcing arbitration agreement in employment application where “Plaintiff was an educated businesswoman”); Garfinkel v. Morristown Obstetrics & Gynecology Assocs., 168 N.J. 124, 773 A.2d 665 (2001) (employment).  See also EPIX Holdings Corp. v. Marsh & McLennan Cos., Inc., 410 N.J. Super. 453, 476-479, 982 A.2d 1194, 1207‑1209 (App. Div. 2009) (discussing, pre‑Atalese, the unique nature of arbitration clauses in employment disputes), overruled in part on other grounds by Hirsch v. Amper Fin. Servs., 215 N.J. 174, 71 A.3d 849 (2013).

[5] Atalese, 219 N.J. at 436, 99 A.3d at 309.

[6] Atalese, 219 N.J. at 444, 99A.3d at 314.

[7] Atalese, 219 N.J. at 446, 99 A.3d at 315.

[8] Morgan v. Sanford Brown Inst., 225 N.J. 289, 294, 137 A.3d 1168, 1171 (2016).

[9] Kernahan, 236 N.J. at 319-320, 199 A.3d at 777.

[10]  Victory Entm’t, Inc. v. Schibell, No. A-3388-16T2, 2018 N.J. Super. Unpub. LEXIS 1467, at *22-23 (N.J. Super. Ct. App. Div. June 21, 2018) (citing to and quoting from Atalese).

[11] Myska v. New Jersey Mfrs. Ins. Co., 440 N.J. Super. 458, 488, 114 A.3d 761, 778 (App. Div. 2015) (“The Court in Atalese has clarified the scope of this requirement in the context of arbitration clauses contained in consumer contracts.”); Columbus Circle N.J., LLC v. Island Constr. Co., No. A-1907-15T1, 2017 N.J. Super. Unpub. LEXIS 606, at *7 (N.J. Super. Ct. App. Div. Mar. 13, 2017) (rejecting application of Atalese to the contract at issue, which was not “a consumer contract of adhesion where

[one party]

… possessed superior bargaining power and was the more sophisticated party”) (citation omitted); Gastelu v. Martin, No. A-0049-14T2, 2015 N.J. Super. Unpub. LEXIS 1639, at *16 n.4 (N.J. Super. Ct. App. Div. July 9, 2015) (“Parties to a commercial contract can express their intention to arbitrate their disputes rather than litigate them in court, without employing any special language…. In the present case … we are dealing with commercial business transaction [sic] and, therefore, the standard is not as stringent [as the one put forward in Atalese].”); Emcon Assocs. v. Zale Corp., No. 16-1985 (FLW), 2016 U.S. Dist. LEXIS 172721, at *15 (D.N.J. Dec. 14, 2016) (“New Jersey state courts and courts in this district have all limited the holdings in Atalese and Garfinkel to the consumer and employment contexts in which those cases were decided.”); Tedeschi v. D.N. Desimone Construction, Inc., No. 15-8484 (NLH/JS), 2017 U.S. Dist. LEXIS 69695, at *10 (D.N.J. May 8, 2017) (distinguishing Atalese because Tedeschi plaintiffs were a medical doctor and successful business owners; “This situation is not one where an unsophisticated consumer unwittingly agrees to binding arbitration and is uninformed that arbitration waives her right to go to court.”).

[12] Itzhakov v. Segal, No. A‑2619‑17T4, 2019 N.J. Super. Unpub. LEXIS 1829 (N.J. Super. Ct. App. Div. Aug. 28, 2019).

[13] In re Remicade (Direct Purchaser) Antitrust Litigation, ___ F.3d ___, No. 18-3567, 2019 U.S. App. LEXIS 27669, at *20-21 (3d Cir. Sep. 13, 2019).  On September 20, 2019, the appellee filed a motion for an extension of time to file a motion for reconsideration.

[14] Remicade, supra (citations and quotations omitted).

[15] Remicade, supra (quotations omitted).

[16] Remicade, supra, at n.9.