New Jersey Legislature Looking At Changes to Consumer Contract Disputes

The New Jersey Assembly’s Consumer Affairs Committee recently advanced several bills that would increase consumer protections in arbitration disputes. If passed into law, these bills would change the landscape for consumer disputes in the State and require companies to revisit their standard consumer contracts and arbitration practices.

The bills would prohibit companies from inserting language in consumer contracts requiring arbitration outside of New Jersey; bar neutral arbitrators or arbitration companies from ordering a losing party to pay the legal fees of the prevailing party; and bar arbitrators that have a financial interest in either party from presiding over the parties’ arbitration. A separate bill would restrict the use of “payment assurance” devices on vehicles designed to disable the ignition if the owner falls behind on payments, which could significantly impact the car sales industry in New Jersey.

The bills have several steps in the legislative process before being enacted into law and are likely to be amended to address business concerns. However, companies doing business in New Jersey should be aware that lawmakers are scrutinizing consumer contracts and reconsider any such form contracts.

For more information regarding consumer contracts and the arbitration process, please contact Kathleen Barnett Einhorn, Esq., Director of the firm’s Complex Commercial Litigation Group at keinhorn@genovaburns.com, or Jennifer Borek, Esq., a Partner in the Complex Commercial Litigation Group at jborek@genovaburns.com.

Supreme Court Reiterates the FAA’s Preemptive Authority

On Monday, the United States Supreme Court in DIRECTV, Inc. v. Imburgia, 577 U.S. ___, No. 14-462, slip op. at 1 (Dec. 14, 2015), doubled down on its previous holdings that the Federal Arbitration Act (“FAA”) preempts state law judicial interpretations that do not place arbitration contracts “on an equal footing with all other contracts.” Imburgia is the Supreme Court’s latest rebuke of state courts that are hostile to arbitration clauses and class-arbitration waivers, and signals to lower courts that they may not utilize state contract law principles to interpret arbitration provisions so as to end-run the mandates of the FAA.

In 2005, the California Court of Appeal held in Discover Bank v. Superior Court that class-arbitration waivers were unenforceable in “consumer contract[s] of adhesion” that “predictably involve[d] small amount of damages” and met certain other criteria (known as the Discover Bank rule). In 2011, the Supreme Court decided AT&T Mobility LLC v. Concepcion, which held that the FAA preempts state law that bars enforcement of arbitration agreements if such agreements do not permit parties to utilize class-action procedures in arbitration or in court, thus invalidating the Discover Bank rule. The Supreme Court found that the Discover Bank rule stood as an “obstacle to the accomplishment and execution of the full purposes and objectives” of the FAA.

Compounding on its holding in Concepcion, the Supreme Court in Imburgia declared that Section 2 of the FAA preempts state law interpretation of a contract’s arbitration provision based on a rule that the state’s courts had applied only in the arbitration context, concluding that such a ruling “does not rest ‘upon such grounds as exist . . . for the revocation of any contract.’”

In Imburgia, Petitioner DIRECTV, Inc. entered into a service agreement with customers containing an arbitration provision governed by the FAA that provided for a class-arbitration waiver reading: “if the ‘law of your state’ makes the waiver of class arbitration unenforceable, then the entire arbitration provision ‘is unenforceable.’” Following a class action brought by Respondents in California state court, DIRECTV moved to compel arbitration, which was denied by the trial court. The California Court of Appeal affirmed, holding that the “law of your state” language in the arbitration provision meant that that the parties had agreed that California’s Discover Bank rule would govern, notwithstanding the holding of Concepcion.

The Supreme Court, by a 6-3 vote, reversed and remanded, finding that because such an interpretation of the arbitration clause was “unique, restricted to that field,” and because “California courts would not interpret contracts other than arbitration contracts the same way,” the interpretation was impermissible as preempted by the FAA. Going forward, the Supreme Court has made explicit that arbitration agreements, and specifically class-arbitration waivers, should be enforced by state courts—even in the face of a state’s former invalidation of such waivers. Imburgia stands as the latest in a series of pro-arbitration rulings under Chief Justice Roberts, and instructs states that its courts may not use novel interpretations of state contract law to intrude on otherwise valid arbitration agreements.

For more information on the FAA or implications of DIRECTV, Inc. v. Imburgia, please contact Kathleen Barnett Einhorn, Esq., Director of the firm’s Complex Commercial Litigation Group, at keinhorn@genovaburns.com.

A Recent Folly by General Mills Exemplifies the Need to Consider the Business Consequences of All Legal Decisions

Before a legal decision is employed, it must be thoroughly vetted from multiple perspectives (including a determination of whether the decision comports with the company’s business goals).  Otherwise, unintended business consequences could overshadow the intended benefits of a legal decision.  A recent misstep by General Mills exemplifies this concept.  General Mills, like many other American companies, prefers to resolve consumer disputes through cost-effective negotiations and arbitrations – as opposed to engaging in traditional litigation.  Accordingly, General Mills recently rolled out a new policy that required all customers who used its website, subscribed to its email newsletters, downloaded or printed a digital coupon, entered a sweepstakes or contest, and/or redeemed a promotional offer to settle their disputes with General Mills “by informal negotiations or through binding arbitration.”

Although it is uncertain whether such a policy would even be upheld if it were challenged in court, what is clear is that General Mills did not anticipate the negative business consequences brought on by this seemingly innocuous legal policy revision.  Indeed, shortly after the policy change was made public, the New York Times ran an article (entitled “When ‘Liking’ a Brand Online Voids the Right to Sue”, Stephanie Strom, April 16, 2014) questioning the propriety of General Mills’ new policy.  This New York Times article led to a significant consumer backlash against General Mills, which ultimately caused the company to retract its revised policy.  In a blog post entitled “We’ve listened – and we’re changing our legal terms back” General Mills apologized to its customers, stating that: “We’re sorry we even started down this path.  And we do hope you’ll accept our apology.”

Just as General Mills learned, every legal decision must be evaluated from various angles in order to ensure, among other things, that the decision is consistent with your company’s business goals.  It is much better to make this determination at the onset rather than having to backtrack from unexamined decisions that could ultimately cost your company significant money and goodwill down the road.

At Genova Burns, we stand at the intersection of law, government, and business and pride ourselves on always evaluating decisions from numerous perspectives to ensure that our clients receive the highest quality legal advice.  For more information about how Genova Burns can assist your company in achieving its legal, business and political goals, please contact Kathleen Barnett Einhorn, Director of Complex Commercial Litigation.

New AAA Rules Create Greater Flexibility in Appealing Arbitration Awards

In a groundbreaking step, the American Arbitration Association (“AAA”) and the International Centre for Dispute Resolution have newly enacted the Optional Appellate Arbitration Rules (“Appellate Rules”) which allows for a specific and streamlined procedure for parties to obtain further review of arbitral awards. Effective November 1, 2013, these rules put a serious dent in the rigidity that once was the finality of arbitration awards.

Arbitration has traditionally been the gold star standard in the conservation of judicial resources, representing a process intended to be both efficient and final, in that an arbitration award would only be set aside under extreme circumstances. Both the Federal Arbitration Act and the New Jersey Arbitration Act provide that an arbitration award will only be vacated upon a showing of corruption, fraud, partiality or misconduct, or by showing that an arbitrator exceeded his powers. See, 9 U.S.C. § 10, N.J.S.A. 2A:23B-23.

By allowing for a much broader review of arbitration awards by a AAA appellate panel, the Appellate Rules offer a refreshing alternative to the narrow grounds dictated by both the federal and state statutes, but also complicate the overall goal of efficiency and finality. The Appellate Rules are optional, only invoked upon agreement by the parties. Unlike the strict grounds dictated by the state and federal statutes, appellate arbitrators are authorized to review both questions of law and issues of fact, as a party may appeal on the grounds that the arbitral award is based upon an error of law that is material and prejudicial or determinations of fact that are clearly erroneous. See, Appellate Rules, A-10. These new bases for appeal give litigants additional options to consider when entering into a AAA agreement.

The AAA appellate process is truncated, and can be completed in about three months’ time. Oral argument is permitted only if the Appeal Tribunal deems it necessary, and generally appeals will be determined upon the written documents submitted. Id. at A-15. The parties are mandated to cooperate in compiling the record on appeal and may submit as part of the record the relevant excerpts of the transcript of the hearing, any evidence relevant to the appeal that was previously presented at the arbitration hearing and pre- and post-hearing briefs. The Appeal Tribunal’s written decision is due within thirty days of the last appeal brief. The Tribunal has the authority to adopt the underlying award as its own or substitute its own judgment for the underlying award, but is precluded from ordering a new arbitration hearing or remanding the case back to the original arbitrator(s) for corrections or further review. Id. at A-19(a).

It is AAA’s intention that parties engaged in large, complex cases will make use of the Appellate Rules, as evidenced by the type of record required to be maintained for any appeal, and the costs associated with invoking the Appellate Rules. Pursuant to the Administrative Fee Schedule, there is a non-refundable $6,000.00 fee to be paid by the party seeking appellate arbitration and an additional $6,000.00 administrative fee to be borne by any party filing a cross-appeal. These fees do not include the fees and costs associated with the Appeal Tribunal. Such a requirement has the intended outcome of limiting the adoption of the Appellate Rules to large, complex matters, as well as dissuading frivolous appeals.

The ultimate take-away from the introduction of the Appellate Rules is that review of arbitral awards is now much more flexible, as parties may opt into the Appellate Rules and seek an appeal on the grounds that the underlying award is based upon an error of law or fact. Yet these benefits do not come without costs, and the Appellate Rules are obviously tailored for larger, complex cases. With time, we will be sure to see how these newly enacted Appellate Rules will play out and what their effect will be on the arbitration process.