NJ Appeals Court Deems Class Action Waiver Unenforceable Without Arbitration Deal 

Class action waivers are unenforceable without a mandatory arbitration agreement in place, according to a recent Appellate Division decision…

Class action waivers are unenforceable without a mandatory arbitration agreement in place, according to a recent Appellate Division decision. Businesses should review their lease agreements, customer contracts, website terms of agreement, and other legal documents and make any necessary changes in light of the new bright-line rule.

New Jersey Condo Dispute Over Lease Agreement

The dispute in William Pace and Robert Walters v. Hamilton Cove et al. centers on lease contracts entered by the tenants of defendant Hamilton Cove Apartments (collectively with other related entities, the “Defendants”), a luxury apartment complex in Weehawken. Representative plaintiffs William Pace and Robert Walters (Plaintiffs) contend that in its advertisements, brochures, and oral statements to prospective tenants, Hamilton Cove Apartments promised the apartment complex would have “elevated, 24/7 security.” During an April 2020 tour of the apartment complex, Defendant’s representative advised Pace that security personnel would be stationed 24/7 at a podium near each building’s entrance.

Upon moving into the apartments, Plaintiffs learned that the apartment complex’s security cameras did not function. In addition, a front desk greeter/mailroom attendant in building A was only stationed at the front of the building for part of the day. In a subsequent lawsuit asserting claims of common law fraud and violations of the Consumer Fraud Act (CFA) against their landlord, Plaintiffs allege Defendants engaged in an unconscionable business practice in violation of the CFA, and that tenants overpaid for the apartments because they did not receive the full value promised, constituting an ascertainable loss.

Plaintiffs sought class action status, with their putative class including all the tenants of Hamilton Cove Apartments. Defendants moved to dismiss Plaintiffs’ complaint for failure to state a claim upon which relief can be granted, or, in the alternative, to strike Plaintiffs’ class action allegations. In support, Defendants argued that the leases were not contracts of adhesion, the class action waivers contained in the lease agreements were valid and enforceable, and a class action was not necessary to vindicate Plaintiffs’ interests. The trial court refused to dismiss the suit, concluding that Plaintiffs pleaded their fraud claims with the requisite specificity and had satisfied the requirements of a class action.

Appellate Division Rules Class Action Waiver Is Unenforceable

The Appellate Division affirmed. It held that a waiver of the right to maintain a class action is unenforceable absent a mandatory arbitration agreement.

In response to Defendants’ argument that class action waivers are enforceable so long as they are clear and unambiguous, the appeals court noted that in all of the cases cited by Defendants, the class action waiver was coupled with an arbitration agreement. As Judge Richard J. Geiger explained:

Here, in contrast, there was no agreement to arbitrate contractual disputes. Plaintiffs and the other tenants were free to litigate their contractual and fraud claims in court. Therefore, the policies favoring arbitration and encouraging enforcement of arbitration agreements, as expressed in section 2 of the [Federal Arbitration Act], do not apply and what the Supreme Court of the United States has said about class action waivers – because it was all intended to enhance the FAA’s arbitration policies – is irrelevant outside that context.

After determining that case law emanating from the FAA was inapplicable, the Appellate Division determined that New Jersey’s policy favoring class actions prevailed. “Considering our longstanding, fundamental public policy favoring class actions, we hold there is no societal interest in enforcing a class action waiver in a contract that does not contain a mandatory arbitration provision and conclude that the class action waivers in this case are unenforceable as a matter of law and public policy,” Judge Geiger wrote. “By adopting this bright-line rule, we advance the recognized benefits of class actions for both litigants and the courts.”

In this case, the Appellate Division found that assuming the facts alleged by Plaintiffs are true, a class action was “clearly favored” in the case. “Hundreds of tenants at Hamilton Cove are similarly affected by the lack of promised security,” Judge Geiger wrote. “Economic efficiency and judicial economy would be enhanced by the utilization of class action litigation, and inconsistent results would be avoided.”

Key Takeaway

The Appellate Division’s precedential decision create a new bright-line rule for class-action waivers under which they are unlikely to be enforced outside the arbitration context. To help ensure that your class action waivers will survive a legal challenge, it is essential that they be paired with a mandatory arbitration agreement.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100 or contact us using the contact us form above.