N.J. Supreme Court Finds Material Breach by Company That Knowingly Refused to Cooperate with Arbitration Demands Filed in Compliance with the Arbitration Agreement

The New Jersey Supreme Court has ruled that a company’s refusal to cooperate with plaintiffs’ arbitration demands was a material breach of their arbitration agreement, which barred the company from later compelling arbitration. Tahisha Roach v. BM Motoring, LLC 

The plaintiffs had purchased cars from BM Motoring, LLC and Federal Auto Brokers, Inc. d/b/a BM Motor Cars (BM).  As part of the transaction, each plaintiff signed an arbitration agreement requiring resolution of disputes through arbitration in accordance with the rules of the American Arbitration Association (AAA).  The plaintiffs had filed demands for arbitration against BM with AAA.  In one case, despite repeated requests by AAA, BM refused to advance the filing fees that the arbitration agreement obligated BM to pay, resulting in dismissal of the arbitration for nonpayment of fees. In another case, a plaintiff’s claims were dismissed based on BM’s failure to comply with AAA’s rules and procedures.  The plaintiffs then jointly filed the present action against BM, who moved to dismiss the complaint in favor of arbitration.

Ruling in the plaintiffs’ favor, the Court noted that arbitration agreements are governed by general principles of contract law.  BM’s arbitration agreement required arbitration in accordance with AAA’s rules and therefore permitted arbitration before the AAA.  The Court held that BM’s failure to pay the AAA fees or to respond to plaintiffs’ arbitration demands violated BM’s duty of good faith and fair dealing that New Jersey law implies in all contracts.  Specifically, BM’s actions destroyed the benefit plaintiffs expected in signing the arbitration agreement, namely, the ability to arbitrate claims.  Accordingly, BM was barred from later compelling arbitration.

The New Jersey Supreme Court refused to enact a bright-line rule on the issue, emphasizing the fact-sensitive nature of its determination.  Nonetheless, businesses that include standard arbitration clauses in their agreements, should be aware that a failure to cooperate in bringing the case before an arbitrator may result in a waiver of the arbitration agreement.

For more information, please contact Kathleen Barnett Einhorn, Esq., Chair of the Firm’s Complex Commercial Litigation Group, at keinhorn@genovaburns.com or Jennifer Borek, Esq., Partner in the Complex Commercial Litigation Group, at jborek@genovaburns.com.

Third Circuit Rejects Class Certification for Widener Law Grads

A panel of the Third Circuit Court of Appeals refused to allow class certification for a group of Widener University School of Law Graduates who allege that the law school inflated postgraduate employment rate statistics in Harnish v. Widener Univ. Sch. of Law, No. 15-3888 (3d Cir. Aug. 16, 2016). The law graduates claimed that, between 2005 and 2011, Widener advertised that up to 97% of students obtained employment after graduation, when, in fact, only 50-70% of graduates obtained full-time legal employment. This misrepresentation, the plaintiffs argued, violated New Jersey and Delaware consumer fraud statutes.

The circuit court rejected the plaintiffs’ theory of damages, predicated on the report of their expert economist, Dr. Donald Martin. Dr. Martin attempted to show a statistically significant relationship between employment rates and tuition prices across 64 private law schools. The analysis, though compelling, was flawed, the Court held. Because the plaintiffs did not present a theory of class-wide damages, they failed to establish that common questions of fact with respect to damages “predominate” over individual questions or that the named plaintiffs’ claims were “typical” of the class—both requirements for class certification under Federal Rule of Civil Procedure 23.

Specifically, the plaintiff’s theory was that Widener’s misrepresentations empowered the school to charge higher tuition across the market. This type of “price inflation” theory is similar (though not identical) to the “fraud on the market” concept that has been accepted in federal securities class actions. Although the Court found that Mr. Martin’s expert approach held some merit since law schools operate in a largely fixed-price market, both the New Jersey and Delaware Supreme Courts have rejected this type of theory of proof outside of the securities context. Because this theory was the only one presented to establish damages on a class-wide basis for the plaintiffs’ state-law consumer fraud claims, the Court found that class certification was inappropriate.

Harnish highlights the importance of expert evidence at the class certification phase. Although plaintiffs are not required to prove their case, they must present a coherent theory showing damages on a class-wide basis, and one that is cognizable under substantive law.

For more information on class certification or consumer fraud claims or the Court’s decision in Harnish v. Widener University School of Law, please contact Kathleen Barnett Einhorn, Esq., Chair 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.