New Jersey Appellate Division Adopts Bright-Line Rule: Class Action Waivers Unenforceable Absent Mandatory Arbitration Agreement
This month, in Pace, et al. v. Hamilton Cove, et al., the New Jersey Appellate Division held that a class action waiver clause in a residential lease was unenforceable because it failed to also include a mandatory arbitration agreement.
The Appellate Division affirmed the trial court’s decision in a putative class action, which residential tenants brought against their landlord, a luxury apartment complex, alleging claims of common law fraud and violations of the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 to -20. The panel rejected Defendants’ argument that Plaintiffs had waived their right to file a class action.
Plaintiffs alleged that Defendants’ advertisements, brochures and statements to prospective tenants promoted “elevated, 24/7 security” at the apartment complex. Upon moving into the apartment complex, however, Plaintiffs allegedly found the complex’s security cameras were not functioning and the front desk was only staffed for limited hours.
Defendants moved to dismiss Plaintiffs’ complaint for failure to state a claim or, in the alternative, to strike Plaintiffs’ class allegations. Plaintiffs asserted that, as tenants negotiating with a sophisticated landlord, they lacked bargaining power and, therefore, inclusion of the class action waiver demonstrated the lease was an unconscionable contract of adhesion. Defendants argued the leasing agreements were not, as Plaintiffs claimed, contracts of adhesion, the class action waivers were valid and enforceable, and a class action was not necessary to vindicate plaintiffs’ interests.
The trial court denied Defendants’ motion in its entirety, finding Plaintiffs had pled their common-law and statutory fraud claims with the requisite specificity required by Rule 4:5-8, Plaintiffs sufficiently supported their contracts of adhesion claims to survive a motion to dismiss, and Plaintiffs had met one of the three alternative requirements under Rule 4:32-1(a) for maintaining a class action.
On appeal, the panel recognized the right to pursue a class action may be waived in an arbitration agreement because the slow, costly aspects of class-based dispute resolution were incompatible with the basic, efficiency characteristics of resolution through arbitration. The panel reasoned, however, that these benefits do not exist when an arbitration clause is not included in the agreement. The panel’s reasoning relied heavily on New Jersey’s public policy favoring class actions and explicitly rejected Defendants’ position that the lease was not an adhesion contract, and the class action waiver was not unconscionable, because the lease was subject to a clear and unambiguous three-day attorney review period.
Although the trial court had not yet ruled on class certification, the panel provided some guidance on the issue. It noted, under New Jersey public policy, that a class action is clearly the favorable vehicle to address the particular facts of this case—without deciding the issue. The panel also declined to address the issue of Plaintiffs’ alleged ascertainable loss or damages. The appellate panel made it clear that its opinion was addressing a narrow issue: establishing a new bright-line rule that “there is no societal interest in enforcing a class action waiver in a contract that does not contain a mandatory arbitration provision" and concluding that "the class action waivers in this case are unenforceable as a matter of law and public policy.”
Based on this new bright-line rule, businesses that operate in New Jersey that have included class action waivers in their terms and conditions or individual contracts with their consumers should revisit those documents. In addition to reemphasizing the State’s public policy favoring class actions, the panel’s decision appears to be directing New Jersey providers and sellers to give clear instruction as to what forms of procedural relief are available to consumers. Buchanan’s class action defense lawyers are able to assist clients with reviewing their contracts’ terms and conditions and providing this necessary clarity in order to avoid unnecessary litigation and develop an efficient consumer dispute resolution process.