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. 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. 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.”
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. 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.”
- “Arbitration clauses — and other
contractual clauses — will pass muster when phrased in plain language that
is understandable to the reasonable consumer.”
- “The [arbitration] provision … [is not]
written in plain language that would be clear and understandable to the
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.” 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.”
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.’” Other unreported opinions from the Appellate
Division and District Court reached the same conclusion.
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. In an unreported decision, the Court explained:
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.
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
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.” 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].
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.” 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).
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.
 Atalese v. U.S. Legal Services Group, L.P.,
219 N.J. 430, 99 A.3d 306 (2014).
 Kernahan v. Home Warranty Adm’r of Fla., Inc.,
236 N.J. 301, 316-317, 199 A.3d 766, 775 (2019).
 Kernahan, 236 N.J. at 320, 199 A.3d at 777
 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).
219 N.J. at 436, 99 A.3d at
219 N.J. at 444, 99A.3d at
219 N.J. at 446, 99 A.3d
 Morgan v. Sanford Brown Inst., 225 N.J.
289, 294, 137 A.3d 1168, 1171 (2016).
 Kernahan, 236 N.J. at 319-320, 199 A.3d at 777.
 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).
 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
… 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
 Itzhakov v. Segal, No. A‑2619‑17T4, 2019
N.J. Super. Unpub. LEXIS 1829 (N.J. Super. Ct. App. Div. Aug. 28, 2019).
 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
 Remicade, supra
(citations and quotations omitted).
 Remicade, supra
 Remicade, supra, at n.9.