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Does Atalese Apply to All Contracts? Appellate Courts at Odds.
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.
New Jersey’s War on Independent Contractors: Criminal and Civil Penalties for Independent Contractor Misclassification Signed into Law
Legislation targeting independent contractors has been signed into law by Governor Phil Murphy.
Although sold as legislation addressing “wage theft”- simplefailure to pay agreed-upon lawful wages – the legislation was designed to deter the use of independent contractors. This legislation criminalizes misclassification and other wage and hour violations – 3-5 years in jail – including good faith violations. Businesses also face 6 years’ treble damages and joint and several liability, with the same treble damages, for contractors’ violations – liability for behavior they do not control.
Other states like California are looking to deter the use of independent contractors by adopting a more stringent version of the ABC test – making it more difficult for businesses to prevail in court. New Jersey takes a different approach. The risk of massive financial penalties and even significant jail time mean the ABC analysis is whatever the Department of Labor says it is.
NJCJI continues to work with an array of businesses and other trade associations to address the significant overreach of this legislation. The Wage and Hour Fairness Coalition includes 40 trade associations and other business organizations in the state.
Please contact Alida Kass if you would like to discuss this effort.
The Governor’s Misclassification Task Force Report spells out the administration’s agenda in detail. Notably absent is any recognition of the flexibility that the independent contractor model provides for workers and businesses alike, and the critical role in plays in the economy. Similarly, no concern that the extraordinary penalties contemplated in the report might risk over-deterring a valuable business model.
Wage and Hour Fairness Coalition Letter
This Litigation is Bananas
This Costume is Bananas: Third Circuit Judge Thomas Hardiman wrestles with validity of copyright for full-body banana costumes.
An interlocutory appeal in copyright infringement litigation between Kangaroo Manufacturing and Rasta Imposta raises a question of first impression – whether a banana costume’s “costume’s non-utilitarian, sculptural features” are copyrightable.
Kangaroo Manufacturing sells a banana costume that it concedes is “substantially similar” to the banana costume sold by Rasta Imposta, but “contends the banana is unoriginal because its designers based the design on a natural banana,” arguing that “depictions of natural objects in their natural condition can never be copyrighted.”
The Third Circuit panel agreed that “if copyrighting a design feature would effectively monopolize an underlying idea” then the so-called merger doctrine “exists to deny that protection,” and noted that merger “is most applicable where the idea and the expression are of items found in nature, or are found commonly in everyday life.”
However, the panel concluded that Rasta’s banana costume would not effectively monopolize the underlying idea “because there are many other ways to make a costume resemble a banana.”
Here too, copyrighting the banana costume’s non- utilitarian features in combination would not threaten such monopolization. Kangaroo points to no specific feature that necessarily results from the costume’s subject matter (a banana). Although a banana costume is likely to be yellow, it could be any shade of yellow—or green or brown for that matter. Although a banana costume is likely to be curved, it need not be—let alone in any particular manner. And although a banana costume is likely to have ends that resemble a natural banana’s, those tips need not look like Rasta’s black tips (in color, shape, or size).
Interesting side note: line-drawing in this space is fraught with peril! Also recently in the news: It looks like a duck…but not enough like the other duck.
And finally, note that intellectual property litigation is not just banana costumes and inflatable ducks. Even in such seemingly frivolous context, the line-drawing is a challenging task. Hence, NJCJI’s continued opposition to the “patent troll” legislation, which would add state Consumer Fraud Act remedies to the mix.
Working Hard or Making Work? Plaintiffs’ Attorneys Fees in Securities Fraud Class Actions
Prime beach reading has been posted on SSRN.
The potential for self-dealing for attorneys representing plaintiff classes is a persistent problem. NJCJI has repeatedly pointed out that the class action model is a deeply flawed mechanism for delivering relief to class members, with attorneys more often creating the illusion of relief for class members while delivering significant fees to themselves.
The problem is especially pronounced in securities class action litigation, where the litigation effectively works to return shareholders’ own dollars back to themselves, minus the attorney fees and other transaction costs. Attorneys have much stronger incentive to generate fees than does representative plaintiff to monitor fees, though the Rules of Civil Procedure attempt to address this flawed incentive structure by charging judge to monitor and approve fees.
This recent study examines to what extent attorneys have nevertheless been able to game the judicial scrutiny to secure significant fees without regard to incremental value brought to the litigation. Sadly, the authors conclude that:
plaintiffs’ attorneys are receiving windfall fee awards in mega-settlement cases at shareholders’ expense. Although there typically is strong evidence of corporate wrongdoing in cases leading to the mega-settlements, this evidence often comes to light prior to the involvement of plaintiffs’ attorneys through restatements, SEC and other government investigations, and/or the termination of top officers. … Knowing that a large settlement is likely, plaintiffs’ attorneys may anticipate a need to justify a large fee award—leading them to “make work.”
Proposed Rule Making from the Department of Labor
Recent Hearing at U.S. Senate Judiciary on Arbitration Highlights Benefits of Streamlined Dispute Resolution
Dovetailing with current trends at the state level, Senate Democrats have recently introduced legislation that would reform arbitration. The bill, dubbed the “FAIR” Act, pushed primarily by Senator Richard Blumenthal of Connecticut, would seek to eliminate arbitration clauses in employment and consumer cases.
On April 2nd, the Senate Judiciary Committee, still controlled by Senate Republicans, held testimony from a wide-ranging panel of attorneys expressing divergent views on America’s current arbitration system with a focus on the costs and benefits it presents to businesses and consumers. Some panelists argued that arbitration in employment and consumer contracts is utilized primarily by companies and employers to avoid costly and time-consuming litigation. While Alan Kaplinsky and Victor Schwartz had the opportunity to explain to the committee how arbitration clauses in such contracts helps to contain legal costs for all parties.
Victor Schwartz, who co-chairs the public policy group for Shook, Hardy & Bacon, presented arbitration as an efficient means of resolving disputes. In his testimony, Schwartz explained that a voluntary contract is unfair by reason of it including a “take it or leave it” provision ignores the simple fact that potential employees and consumers can just “leave it”. In addition, the forum setting of arbitration proceedings affords individuals a degree of privacy often not granted by the courts who may otherwise wish to avoid the potential harm a public hearing would have on themselves or their loved ones. After all, confidentiality is not a benefit that only companies can derive a benefit from.
Addressing the myth that the high “win” rate of businesses at arbitration proceedings shows that they are biased against claimants, Mr. Schwartz explained that parties often settle cases for reasons independent of the claim’s actual merits, such as nuisance value, before even reaching the formal arbitration proceedings. And as a result, cases that reach formal arbitration are often relatively low-merit claims. Legislation such as the misleadingly named “FAIR” Act would actually shift increased litigation costs onto all consumers and employees and deprive everyone of a swift method of resolving contractual disputes.
Contributed by: Anthony Zelich – NJCJI Law Clerk
Independent Contractor Links
Orientale vs. Jennnings
Orientale vs. Jennnings
The Supreme Court heard oral argument in Orientale v. Jennings on April 24, 2019 – a case that could lead to new rules regarding remittitur and additur. The New Jersey Civil Justice Institute (as well as several other organizations) submitted an amicus curiae brief addressing specific issues raised by the Court.
One of the Court’s main concerns is the standard the trial court should apply in setting the damages when granting a remittitur or additur – should the damages amount be the highest amount reasonably supported by the record (for remittitur), the lowest amount reasonably supported by the record (for additur); or a reasonable amount supported by the record in both contexts? The parties and the various amici presented differing views on these questions. NJCJI argued that the goal should be to arrive at a fair and reasonable award of damages for both remittitur and additur. It highlighted that the alternative approach of awarding the “highest” or “lowest” amount, purportedly to comport with the intention of the jurors, is flawed; it is anomalous to attribute a rational, permissible motive to a jury’s damages award that, by definition, is “one no rational jury could have returned, . . . so wide of the mark and pervaded by a sense of wrongness that it shocks the judicial conscience.” Cuevas v. Wentworth Group, 226 N.J. 480, 500 (2016). Questioning from some of the Justices indicated they were sensitive to this concern.
Ultimately, the Court appears most concerned with developing standards that will lead to the fairest results for the litigants, while at the same time advancing remittitur/additur’s salutary aims of avoiding the time, expense and uncertainty of retrials in cases where the verdict was patently wrong.
Contributed by David Swerdlow, Partner at Windels Marx Lane & Mittendorf, LLP in New Brunswick, NJ. NJCJI wants to express our thanks for your help on the case.