New Jersey Arbitration Act Rushes in and Orders Arbitration Where FAA Fears to Tread
July 21, 2020 | By: Patrick W. McGovern, Esq.
In a July 14, 2020 decision the Supreme Court of New Jersey held that the New Jersey Arbitration Act (NJAA) may apply to arbitration agreements even if the parties are subject to the Federal Arbitration Act (FAA) exemption for transportation workers engaged in interstate commerce. The decision disposed of challenges to mandatory arbitration agreements and appeals from two Appellate Division panels. Both panels -- Colon v. Strategic Delivery Solutions (“SDS”) (decided on June 4, 2019) and Arafa v. Health Express (decided on June 5, 2019) (“Health Express”) -- applied the U.S. Supreme Court’s 2019 decision in New Prime, Inc. v. Oliveira to two different arbitration agreements, each of which referred to the FAA, but reached diametrically opposite conclusions.
The SDS panel determined that even if the FAA does not apply to the arbitration agreements per New Prime, the courts may enforce the arbitration agreements under the NJAA, even though the agreements do not mention the NJAA. The Health Express panel determined that since the FAA did not apply to Mr. Arafa’s arbitration agreement, the arbitration agreement lacked mutual assent and was unenforceable because the agreements referred to the FAA as the governing law.
The Supreme Court resolved the two conflicting appellate decisions by holding unanimously that even though the parties’ arbitration agreements stated that the FAA would apply, their arbitration agreements are not nullified (at least those governed by New Jersey law) by the New Prime decision, because the NJAA provides the statutory mechanism to order arbitration when the FAA does not apply. The Court then analyzed the jury trial waivers in the SDS and the Health Express agreements and found them both to be knowing, voluntary, and sufficiently broad to cover all disputes, including statutory wage disputes. Finally, the Court majority found that enforced the class and collective action waivers that SDS and Health Express included in their service agreements were knowing, voluntary and enforceable.
Section 1 of the FAA, 9 U.S.C. §1 (“Section 1”) provides that the FAA does not “apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” In New Prime, the U.S. Supreme Court held that the FAA Section 1 exemption applies to independent contractors as well as employees who are engaged in interstate commerce. In Arafa the parties agreed that Mr. Arafa was engaged in interstate commerce. In Colon, a class action brought by delivery drivers based in New Jersey, the parties disputed whether the drivers engaged in interstate commerce. In each case the drivers signed individual agreements containing a promise to arbitrate and waivers of the rights to a jury trial and to bring or join a class or collective action.
The Colon plaintiffs argued that the Appellate Division’s holding that the NJAA applied to the arbitration agreement improperly rewrote their arbitration agreement, since the parties never referred to the NJAA. Instead, the arbitration agreement designated the FAA as the sole and exclusive governing law for any disputes arising from the agreement or the driver services. As a result, the Colon claimants contended their arbitration agreements were unenforceable because there was no mutual assent to apply the NJAA to the arbitration agreements. Additionally, the drivers asserted that their wage claims were not within the scope of the arbitration agreement since it did not expressly refer to the wage statutes. In reply SDS argued that remand to the trial court was appropriate to determine whether the drivers were even engaged in interstate commerce and exempt under Section 1. If the FAA did not apply, SDS argued, the parties nonetheless intended to arbitrate any disputes arising out of their relationship on a one-by-one basis, and the governing law, severability and reformation clauses in the parties’ agreements empowered the Court to order arbitration under the NJAA.
In Arafa Health Express argued that the Appellate Division misapplied New Prime, and that even though New Prime rendered the arbitration agreement unenforceable under FAA Section 1, the agreement was enforceable under the NJAA. Health Express maintained that since the parties clearly intended to arbitrate, the FAA choice of law provision should be severed from the agreement and the NJAA should fill the void and thereby implement what the parties intended. In response, Mr. Arafa argued that in the wake of New Prime, his arbitration agreement lacked mutual assent since he intended to be bound to arbitrate under the FAA, which no longer applied to him.
The Supreme Court’s Decision
First, the Court reviewed whether the Colon and the Arafa agreements were covered by the Section 1 exemption. In Arafa, the Court noted there was no dispute that the arbitration agreement was exempt under FAA Section 1: Mr. Arafa made deliveries across state lines. In Colon the court below made no finding whether the drivers were engaged in interstate commerce and as a result the Court had to decide the enforceability of the arbitration agreement under both the FAA and the NJAA.
Turning to the key question, the Court commented that the FAA lacks an express preemptive provision and preempts only those state laws that discriminate against arbitration agreements. The Court reviewed the language and the history of the NJAA and concluded that the NJAA was aligned with the “nearly identical” FAA and clearly did not discriminate against arbitration. In a blistering response to the Arafa and Colon lack of mutual assent claim, the Court “reject[ed] any argument that the absence of an express invocation of the NJAA means that it cannot apply” and held that the NJAA automatically applies as a matter of law to all nonexempt arbitration agreements governed by New Jersey law that were entered into after 2002.
Next, the Court rejected the Colon plaintiffs’ arguments that their wage claims were not covered by the arbitration agreement on the grounds that the agreement made no explicit reference to the wage statutes in question. The Court applied long standing New Jersey precedent in holding that the arbitration agreements were enforceable since the drivers knowingly and voluntarily waived their rights to bring their claims in a judicial forum when they “voluntarily agree[d] to waive any right to a trial by jury in any suit filed hereunder,” and to “adjudicate any dispute pursuant to the arbitration agreement.” The arbitration agreements also documented the parties’ agreement to arbitrate any claim “arising out of or in any way relating to the Agreement or the transportation services provided hereunder.”
Finally, the Supreme Court affirmed the Appellate Division’s determination in the Colon case that the class and collective action waiver in the parties’ driver services agreement was enforceable, notwithstanding the Court’s 2006 decision in Muhammad v. County Bank of Rehoboth Beach that class-action waivers in consumer contracts are unconscionable.
The only point of dissent in this decision is Justice Albin’s singular insistence that if the FAA does not apply to the arbitration agreement because of the FAA Section 1 exemption, then New Jersey law and public policy, as embodied in the Muhammad decision, apply to make the class-waiver unenforceable. This viewpoint received no support from the other Justices.
The Supreme Court’s decision is a major victory for proponents of arbitration as an efficient method of early dispute resolution in the employment and transportation services arenas. This decision resolves in the affirmative the issue whether private arbitration agreements governed by New Jersey law and entered into by transportation workers remain enforceable in the wake of the New Prime decision, and signals that currently effective arbitration agreements with transportation workers engaged in interstate commerce need not be updated to include a reference to the NJAA, since the NJAA applies automatically to agreements created after 2002. The Court also resolved any lingering question as to whether a properly worded class and collective action waiver is enforceable in the employment and contracting contexts.
Should you have any questions regarding the status of your organization’s arbitration agreements in the aftermath of the New Prime decision or the Supreme Court’s decision this week, please contact Patrick W. McGovern via email here or 973-535-7129, or any attorney in our Firm’s Labor Practice.