New Jersey Court Invalidates Arbitration Agreement that Fails to Designate an Arbitration Forum
The New Jersey courts have consistently held that the mutual assent necessary to support a binding arbitration agreement is not present where the agreement does not sufficiently put the parties on notice that, by agreeing to arbitrate, they are giving up the right to have their dispute resolved in a judicial forum and are waiving whatever rights they might have to a jury trial. In Flanzman v. Jenny Craig, Inc., the New Jersey Appellate Division has now held that the mutual assent necessary to support a binding arbitration agreement will also be found lacking when the agreement does not designate the forum in which the arbitration will take place and otherwise fails to define the arbitration process.
The plaintiff, Marilyn Flanzman, after being terminated from her position as a weight loss counselor for the defendant, a weight loss and nutrition company, brought suit in Superior Court, Law Division under the New Jersey Law Against Discrimination, alleging age discrimination and harassment. The defendant moved to compel arbitration based on an arbitration agreement into which the parties had entered during the plaintiff’s employment, which, in relevant part, stated:
Any and all claims or controversies arising out of or relating to [plaintiff’s] employment, the termination thereof, or otherwise arising between [plaintiff] and [defendant] shall, in lieu of a jury or other civil trial, be settled by final and binding arbitration. This agreement to arbitrate includes all claims whether arising in tort or contract and whether arising under statute or common law including, but not limited to, any claim of breach of contract, discrimination or harassment of any kind. . . .
The Law Division judge granted the motion to compel arbitration and, because the agreement said nothing about the forum in which the arbitration would take place, suggested the plaintiff should select the arbitral body to conduct the arbitration.
The Appellate Division’s Decision
The Appellate Division recognized that the parties’ arbitration agreement adequately advised the plaintiff that she was giving up her right to a jury trial. The issue for the court was whether, at the time the parties entered into the agreement, there was a “meeting of the minds” to arbitrate in light of the agreement’s silence as to the arbitration process that would replace the right to a jury trial. The court answered that question in the negative. In the court’s view, the selection of the arbitral forum is important because the “arbitral forum generally establishes the substantive and procedural setting for the entire arbitration process.” In this regard, the court noted that institutions such as the American Arbitration Association (AAA) and Judicial Arbitration and Mediation Services (JAMS) each has its own rules governing procedures for the arbitration of employment disputes. By way of example, the court cited to the AAA rules, which address “notification requirements, the initiation of the proceedings, management conferences, discovery, the location of the hearing(s), the number of arbitrators, communications with the arbitrator(s), attendance at the hearings, dispositive motions, evidence, modification of awards, applications to court, fees, expenses, and costs.” The court concluded that, without knowing basic information about the arbitration process, “parties to an arbitration agreement will be unfamiliar with the rights that replaced judicial adjudication. That is, the parties will not reach a ‘meeting of the minds.’”
The Appellate Division was persuaded that its conclusion was supported by Atalese v. United States Legal Services Group, where the New Jersey Supreme Court held that an arbitration agreement must reflect a “clear mutual understanding of the ramifications” of the parties’ mutual assent to waive adjudication by a court of law. The court also found support in its prior decision in Kleine v. Emeritus at Emerson. There, the arbitration agreement designated the AAA to conduct the arbitration, but the AAA turned out not to be an available forum. The court ruled that the plaintiff could not be compelled to arbitrate, as the agreement reflected no meeting of the minds as to an arbitral forum in lieu of the AAA.
The Appellate Division also reasoned that its decision was consistent with Section 2 of the Federal Arbitration Act (FAA), which permits a court to invalidate an arbitration agreement “upon such grounds as exist at law or in equity for the revocation of any contract.” The court recognized that, recently, in Kindred Nursing Ctrs. v. Clark, the United States Supreme Court made clear that courts must place arbitration agreements “on equal footing with all other contracts,” but the court maintained that its decision not to enforce the arbitration agreement before it was consistent with this directive, given that the court was not requiring the use of “magic words” or special language that must be employed in an arbitration agreement to identify the arbitration process, as long as the agreement “in some fashion” communicates that process.
Nor did the court require that parties to arbitration agreements select an institutional forum, such as the AAA or JAMS, to conduct the arbitration. In this regard, the court explained that “an arbitration agreement might generally reflect a desire for the participation of a neutral arbitrator, who would participate with a panel of arbitrators selected by the parties to the arbitration. In such an instance, the arbitration agreement might permit each party to pick an arbitrator and then those arbitrators would select the neutral arbitrator. Or the parties might agree to some other process, so long as they express in some fashion what that process is. To have a ‘meeting of the minds,’ the parties must mutually understand what rights replace those that they gave up.”
The Flanzman court’s attempt to harmonize its requirements for arbitration agreements with Kindred Nursing may be challenged in the future, on the grounds that those requirements violate the FAA because they place arbitration agreements on unequal footing with other contracts. Nevertheless, employers in New Jersey cannot ignore the decision. It is important for New Jersey employers to review their arbitration agreements to ensure they designate the rules of a specific arbitral forum (e.g., AAA, JAMS), set forth a process for selecting an arbitral forum, or otherwise set forth the details of the arbitration process. Employers should also become familiar with the rules of the arbitration institutions they are considering for their arbitration forum so that they will feel comfortable with the institution they select.
For answers to any questions regarding this blog or with regard to arbitration agreements generally, please feel free to contact an attorney in the Gibbons Employment & Labor Law Department.