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The U.S. Supreme Court’s recent decision in Kindred Nursing Centers v. Clark, 2017 WL 2039160 (May 15, 2017), calls into question the continuing viability of the New Jersey Supreme Court’s decision in Atalese v. U.S. Legal Services Group, 219 N.J. 430 (2014), cert. denied, 135 S.Ct. 2804 (2015), under the Federal Arbitration Act (FAA).

In Atalese, the New Jersey Supreme Court invalidated an arbitration provision that “did not clearly and unambiguously” state that the plaintiff was “surrendering her right [to be] in court.” Since Atalese, New Jersey courts have invalidated arbitration provisions that failed to comply with the Atalese “clear and unambiguous” rule. However, the U.S. Supreme Court’s decision in Kindred Nursing suggests that any state rule requiring such a “clear and unambiguous” waiver of a court and jury trial may be inherently hostile to arbitration and, therefore, preempted.

Section 2 of the FAA, 9 U.S.C. §2, provides that “[a] written provision in [a] contract … to settle by arbitration a controversy thereafter arising out of such contract or transaction … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Supreme Court has held that “the ‘principal purpose’ of the FAA is to ‘ensur[e] that private arbitration agreements are enforced according to their terms’” and that the FAA establishes a “liberal federal policy favoring arbitration, notwithstanding any state substantive or procedural policies to the contrary.” AT&T Mobility v. Concepcion, 563 U.S. 333, 345, 346 (2011). Thus, the FAA preempts any state law or judicial-made rule that directly or indirectly discriminates against, is hostile to, or biased against arbitration.

For example, in Concepcion, the Supreme Court struck down a California judicial-made rule that invalidated class action waivers in consumer contract arbitration clauses as unenforceable under general state law principles invalidating unconscionable contracts of adhesion. The Supreme Court held that the California rule discriminated against arbitration agreements and, therefore, was preempted by the FAA. Although the California rule was claimed to apply general principles of unconscionability to arbitration clauses, the Supreme Court held that “the inquiry becomes more complex when a doctrine normally thought to be generally applicable [is] applied in a fashion that disfavors arbitration.” Id. at 341. The court held that “the FAA’s preemptive effect might extend even to grounds traditionally thought to exist ‘at law or in equity for the revocation of any contract’”; that the FAA’s “saving clause permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses …’ but not by defenses thatderive their meaning from the fact that an agreement to arbitrate is at issue“; that the FAA’s “saving clause ‘cannot in reason be construed as [allowing] a common law right” that would be “inconsistent with the provisions of the act”; and that any such state law rules “stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress [under the FAA].” Id. at 339, 341, 351 (emphasis added).

With this background, in 2014 the New Jersey Supreme Court decided Atalese v. U.S. Legal Services Group, which invalidated an arbitration clause in a consumer contract that “did not clearly and unambiguously” state that the plaintiff was “surrendering her right [to be] in court” or to a jury trial. Id. at 448. Although Section 2 of the FAA requires only a written agreement to settle disputes “by arbitration” (id., emphasis added), the court in Atalese refused to enforce a written provision requiring “arbitration” because it did not clearly state that “plaintiff is waiving her right to seek relief in court”; “explain what arbitration is”; or “indicate how arbitration is different from a proceeding in a court of law.” Id.at 446-447. The court noted that, “because arbitration involves a waiver of the right to pursue a case in a judicial forum, ‘courts take particular care in assuring the knowing assent of both parties to arbitrate, and a clear mutual understanding of the ramifications of that assent.’” (id. at 442-43) (emphasis added)—thereby suggesting a heightened scrutiny for arbitration agreements.

Nevertheless, the Atalese court rejected a claim of preemption on the ground that its “clarity” requirement in contractual language was not a requirement “specific to arbitration provisions”because New Jersey contract law required, generally, that any waiver-of-rights “‘be clearly and unmistakably established.’” Id. at 445-446. In so holding, the New Jersey Supreme Court relied on a number of cases unconnected with arbitration to demonstrate that then-existing New Jersey law required that an effective waiver of rights, in whatever context, be plainly expressed. The court therefore noted that its decision imposed “no greater burden on an arbitration agreement than any other agreement waiving constitutional or statutory rights.” Id. The U.S. Supreme Court declined to review the Atalese decision.Since then, the New Jersey Supreme Court has reaffirmed its rule in Atalese and,in a wide array of cases, the New Jersey courts have invalidated arbitration provisions that failed to comply with the Atalese “clear and unambiguous” rule. The Third Circuit has not addressed whether Atalese is viable under the FAA and has specifically side-stepped the issue noting that it presents an important and challenging question.

On May 15, Justice Kagan delivered the Supreme Court’s 7-1 decision (Thomas, J., dissenting on other grounds) in Kindred Nursing Centers v. Clark which, under the preemptive scope of the FAA, struck down a Kentucky Supreme Court decision refusing to enforce a nursing home’s form contract that required any claims to be resolved through “binding arbitration.” The Kentucky Supreme Court refused to enforce the contract because it was signed by a personal representative whose power of attorney did not clearly and expressly “waive his principal’s fundamental constitutional rights to access the courts [and] to a trial by jury.” Id. at *2. The Kentucky Supreme Court noted that the right to access to the courts and to a trial by jury was a “fundamental constitutional right” which could not be waived unless the power of attorney “expressly so provide[d]“—which the Kentucky court referred to as the “clear-statement rule.” Id at *2 and *5. Under this “clear-statement rule,” the Kentucky court held that “an agent’s authority to waive his principal’s constitutional right to access the courts and to trial by jury must be clearly expressed” and that this “required an explicit statement before [anyone] could relinquish that right.” Id. at *5. The Kentucky court held that this “clear-statement rule” was not hostile to arbitration agreements because the rule would also apply to waivers of other fundamental constitutional rights. Id.

The Supreme Court reversed, holding that the Kentucky “clear-statement rule” violates the FAA “[b]ecause the rule singles out arbitration agreements for disfavored treatment.” Id. at *2. The court noted that the FAA “preempts any state rule discriminating on its face against arbitration [and] also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.” Id. at *4 (emphasis added). The court noted that “[t]he Kentucky Supreme Court’s clear-statement rule, in just that way, fails to put arbitration agreements on an equal plane with other contracts” because the rule “serves to safeguard a person’s ‘right to access the courts and to trial by jury.’” Id. at *5. Noting that the right to access the courts and to trial by jury “just happens to be correlated to the right to arbitrate’” (id.), the Supreme Court held: “Such a rule is too tailor-made to arbitration agreements – subjecting them, by virtue of their defining trait, to uncommon barriers – to survive the FAA’s edict against singling out those contracts for disfavored treatment.” (Id.) (emphasis added).

The court’s decision can be read as holding that, because arbitration agreements by their very nature—”by virtue of their defining trait“—waive a court proceeding and jury trial, any rule that requires that such rights be specifically waived, as a condition to enforcement of an “arbitration” clause, “makes clear the arbitration-specific character of the rule” and, thus, demonstrates “the kind of ‘hostility to arbitration’ that led Congress to enact the FAA.” Id.

Can the New Jersey Supreme Court’s Atalese rule continue to survive under Concepcion and, now, Kindred Nursing? Section 2 of the FAA requires only a written agreement to settle claims “by arbitration.” Under the court’s decision in Kindred Nursing, the Atalese “clear and unambiguous” rule (like the Kentucky court’s “clear-statement rule”) may be “too tailor-made to arbitration agreements—subjecting them, by virtue of their defining trait to uncommon barriers—to survive the FAA’s edict against singling out those contracts for disfavored treatment.” Id.

The counter argument is that the court in Atalese applied a general contract rule to any waiver-of-rights provision and that was not inherently hostile to arbitration. This did not, however, save the Kentucky “clear-statement rule”—which the Kentucky court said would also apply to waivers of any other fundamental rights, but which the Supreme Court held was too-convenient a rationale to strike down arbitration provisions which, by definition, are inherently a waiver of a court proceeding and jury trial. Indeed, the Supreme Court made it clear that it thought the Kentucky Court’s “clear-statement rule” was little more than a disingenuous, thinly-disguised effort to discriminate against arbitration clauses. It could be argued that the Atalese rule is not subject to the same attack albeit the Atalese court did note that “‘courts [must] take particular care in assuring the knowing assent of both parties to arbitrate’”—thereby suggesting a heightened scrutiny for arbitration clauses.

Finally, the Kentucky “clear-statement rule” appeared to be a newly-minted rule in the very case that invalidated an arbitration clause (thereby suggesting hostility toward arbitration), whereas the New Jersey Supreme Court stated that the rule in Atalese was simply the application of a long-standing New Jersey rule for any waiver-of-rights provision. But, under Kindred Nursing—holding that the need for a clear and express waiver of a court and jury trial is inherently hostile to arbitration given its “defining trait”—is that a distinction without a difference?•

Next Week…

Constitutional Law