New Jersey Supreme Court’s Decision in Kernahan v. Home Warranty Administrator of Florida, Inc. May Be Another Step Towards the Evolution Away From the Courts and State Law Remedies

New Jersey recently acknowledged the diminished judicial role in contract disputes presented by arbitration clauses and federal preemption. 

            In Kernahan v. Home Warranty Administrator of Florida, Inc., A-15-17 (079680), decided on January 10, 2019, the New Jersey Supreme Court “sidestepped” an opportunity to confront whether its treatment of the validity of arbitration clauses collides with federal preemption under the United States Supreme Court decision in Kindred Nursing Ctrs, L.P. v. Clark, 137 S. Ct. 1421 (2017) and the Federal Arbitration Act, (“FAA”) 9 U.S.C. §§1-16. 

            New Jersey’s approach is embodied in Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430 (2014).   There, the New Jersey Supreme Court refused to enforce an arbitration provision in a consumer contract for debt adjustment services.  Applying contract law, the Court concluded that the arbitration agreement lacked mutuality of assent because it failed to adequately explain to a reasonable consumer that they waived their right to sue.

            Atalese can be viewed as the New Jersey Supreme Court’s effort to flex its jurisdictional muscle to control the review over contract disputes in response to the proliferation of arbitration clauses, especially in consumer contracts. Atalese can also be viewed as the Court’s effort to protect state law remedies against limits imposed in arbitration clauses.

            As a result, Kindred raises the question of whether New Jersey’s approach in Atalese has been overruled.

Unfortunately, Kernahan is not helpful in answering this question because the arbitration clause there had contradictory and confusing language that could not pass muster under ordinary contract principles.  The Kernahan arbitration provision was buried in a section entitled “Mediation” despite a basic difference between the two concepts. The section also contained smaller font size than that required by New Jersey’s Plain Language Act.  N.J.S.A. 56:12-1 to 13.  In recognition of these failures, the proponent of arbitration withdrew its challenge that Atalese was overruled by Kindred.  The result was that the New Jersey Supreme Court was able to invalidate the agreement in the context of that consumer contract because the parties lacked mutual assent to waive access to the courts and limit state law remedies.

            While Kernahan suggests that Atalese has survived for the time being, the tension between federal hostility toward invalidation of arbitration agreements and the states’ protectiveness over its consumers is palpable. 

            The FAA favors arbitration agreements, and Kindred prohibits states from targeting arbitration agreements and subjecting them to separate treatment and greater scrutiny. Federal law can require arbitration even on the question of whether the parties agreed to arbitrate.  Henry Schein, Inc v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).

 This resulting tension will require courts, including New Jersey’s, to dance around Kindred when exercising jurisdiction over contract disputes. 

            Given the proliferation of arbitration agreements, a direct challenge to New Jersey’s ability to determine these disputes pursuant to Atalese is inevitable. 

Kindred and the FAA have likely already led to a significant reduction in state court litigation. Kindred and Kernahan provide instruction on how to structure arbitration agreements to withstand challenges to their validity. 

Kindred also compels a review of current legal restrictions that have singled out arbitration clauses.  

            For instance, a question of validity may exist for the New Jersey Supreme Court’s discouragement of arbitration clauses in attorney engagement agreements. It could be argued that restrictions on such agreements unfairly single out arbitration provisions in violation of the holding in Kindred.  Another example is whether the limited scope of the attorney fee arbitration rules discriminates against the use of more expanded arbitration agreements between attorneys and clients and therefore violates the holding in Kindred.

            This tension in the law will fuel an eventual collision between government protections and the private sector’s desire to avoid courts and legal remedies.

This most likely will occur where a consumer wants to reject an arbitration provision, but is required to do so by the services or goods provider.  Ordinarily, a consumer is presented with only two choices when purchasing a service or product. One is “I agree.” The other is “I do not agree” to the seller’s terms. By checking “I do not agree,” the consumer is ordinarily denied the benefit of what is offered.  Absent is a selection for “amendment” and any ability to negotiate any of the terms.  Kindred offers nothing to suggest a different approach to enforcement would be permitted in such “take it or leave it” circumstances.

            As certain companies control an ever bigger piece of what we use and do, such clauses will enable them to limit consumer rights and entitlements and redirect the resolution of disputes away from the courts to a system they control. 

            The basic question to all of this is whether Kindred is another step in the evolutionary process away from courts entirely and whether Kernahan is New Jersey’s recognition of its limited ability to redirect that evolutionary process. 

            This is a story to be continued……