Another Day, Another Arbitration Clause Problem

The cases reflecting distrust of arbitration — at least in a person versus corporation dispute — continue from the New Jersey courts.

Just a couple of days ago, I noted a recent New Jersey case which found the parties had not reached a “meeting of the minds” on arbitration, leading the appellate court to reverse a trial court order compelling arbitration. Because the arbitration clause did not specify an administrator or a way to choose an arbitrator if the parties could not agree on one, reasoned the court, the clause was fatally defective. Flanzman v. Jenny Craig, Inc., No. A-2580-17T1 (N.J. App. Oct 17, 2018). This was so even though the FAA and the New Jersey Arbitration Act contemplate the court appointing an arbitrator if the parties cannot agree, although the court didn’t mention those provisions of the statutes.

Even though the case appears to be an outlier, it does provide another reason to name an administrator in your arbitration clause, which is already a good idea anyway.

Still don’t trust arbitration

Let’s now consider another case finding an arbitration clause didn’t work, Trout v. Winner Ford, No. A-3529-17T4 (N.J. App. Dec. 18, 2018) (unpublished).

A fairly common form of arbitration clause that provides either party the option of arbitrating. Here is the clause Winner Ford used:

Either you or Lessor/Finance Company/Holder (“us” or “we”) (each, a “Party”) may choose at any time, including after a lawsuit is filed, to have any Claim related to this contract decided by arbitration. Neither party waives the right to arbitrate by first filing suit in a court of law. . . .

The clause also stated that, if either party opted to arbitrate, the parties would no longer have a right to a jury or court trial, the right to broad discovery and other rights available in a lawsuit.

The New Jersey Appellate Division found the clause to be defective. Use of the word “may” in the clause did not constitute “a clear and unambiguous statement informing the reader that arbitration is the exclusive remedy. This language leaves open the possibility a party may also proceed with a cause of action in court, which is intimated by language stating arbitration would not be waived if a party filed suit in court.”

This decision was driven by a concern for what a normal consumer would understand. The court found that plaintiff as “an average member of the public may not know — without some explanatory comment — that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” [Citation omitted.]

That either party could require arbitration seems clear enough, though, from the clause in context.  The clause specifically notes that if either party decides to arbitrate, the parties give up a right to trial in court.  The clause is at least as clear as many contractual provisions that are routinely upheld. The court seems to require that arbitration clauses be particularly clear, despite earlier stating that a court “cannot subject an arbitration agreement to more burdensome requirements than other contractual provisions.”

By contrast, other courts have held that even if there is some ambiguity in use of the term, “may,” the presumption in favor of arbitration prevails. E.g., Se Ceres Marine Terminals, Inc. v. Int’l Longshoremen’s Ass’n, 683 F.2d 242, 248 (7th Cir. 1982).

What about commercial disputes?

Is this case likely to be followed by other courts for arbitration clauses in commercial cases? Probably not. Most commercial disputes are governed by the Federal Arbitration Act because they involve interstate commerce. So, a New Jersey appellate decision will not control, nor is it likely to be found persuasive in light of the body of law going the other way. And the concern about what a normal consumer would understand shouldn’t apply in a dispute between two corporations.

Why take a chance?


Still, why take a chance? As I mention in my book, Arbitrating Patent Disputes, A Practical Guide*(ABA 2017), you are likely best off starting with a form arbitration clause from an administrator like AAA, then tailoring it concerning the number of arbitrators, arbitration location, and other matters. These clauses have been reliably moving cases to arbitration for years.

But you also need to consider the law in your jurisdiction to avoid other pitfalls. The clause in Trout had a clear statement that arbitration meant the parties were giving up a jury or court and other rights. This was likely because other cases that required such an explanation to consumers and employees.

Similarly, in an earlier article we noted cases that required lawyers to provide extra explanation in their fee agreements with clients as to the rights clients were giving up by failing to arbitrate or even a warning to consult with a lawyer before agreeing to such a clause.

Again, this is all less likely to come up in a dispute between corporations. Yet given the pushback some courts seem to be making against the proliferation of arbitration clauses, you can’t be too careful.

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* While the book focuses on patent disputes, a particular form of commercial dispute, most of the discussion is equally applicable to other commercial disputes.