A Class Action Waiver is Unenforceable Absent a Mandatory Arbitration Provision

Pace v. Hamilton Cove, 475 N.J. Super. 568 (App. Div. 2023). Class action waivers have infested numerous areas of our commercial lives, including cellphone contracts, banking agreements, and other documents. This opinion by Judge Geiger involved a class action waiver that appeared in residential leases at a luxury three-building apartment complex in Weehawken that comprised hundreds of apartments. The leases also included a three-day attorney review provision that allowed tenants to opt out of the leases during that time. Absent withdrawal from a lease within three days, the leases provided that they were then “legally binding as written.” Unlike many class action waivers, however, this one was not accompanied by a provision requiring that any dispute between the parties proceed only in arbitration.

The tenants in this case brought a putative class action based on the fact that defendant’s advertising and oral statements to potential tenants represented that the buildings would have “elevated, 24/7 security.” That was important because “Weehawken has a higher-than-average property crime rate.” In fact, plaintiffs alleged, the buildings did not have anything like 24/7 security. Security cameras did not function, and the hours for front desk greeters/mailroom attendants fell far short of 24/7, in addition to which those personnel were sometimes away from the desk due to other duties.

Plaintiffs sued under the Consumer Fraud Act, N.J.S.A. 56:8-1 et seq. (“CFA”),and on a theory of common law fraud. Defendant moved to dismiss the case for failure to state a claim, citing a number of cases in which class action waivers, accompanied by mandatory arbitration provisions, were upheld. The Law Division denied the motion. Defendant successfully moved for leave to appeal, but the Appellate Division affirmed, applying de novo review and accepting as true the allegations of the complaint.

Judge Geiger observed that in New Jersey, “”class actions are a favored means of adjudicating numerous claims involving a common nucleus of facts for which individual recovery will be small.” He also noted that “the right to pursue a class action may be waived in an arbitration agreement.” Judge Geiger discussed the fact that in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Supreme Court of the United States “found that several aspects of class-based dispute resolution, such as increased formality, slower and more costly processes, and increased risks to defendants in the event of an unfavorable outcome, were incompatible with the basic characteristics of arbitration,” such that “classwide arbitration interferes with fundamental attributes of
arbitration and thus creates a scheme inconsistent with the FAA [Federal Arbitration Act].”

But those policies of the FAA and New Jersey’s own Arbitration Act, N.J.S.A. 2A:23B-1 et seq., did not apply here, where there was no mandatory arbitration provision. Instead, New Jersey’s “public policy favoring class actions” applied with full force and Judge Geiger found that class action waivers unaccompanied by arbitration clauses “are clearly contrary to the public policy of this State.” He made clear that ” [w]hen unaffected by the case law emanating from the FAA, contractual provisions that dismantle or disable important procedures and due process rights provided in our Part IV rules should not be enforced.”

Noting that “[c]lass action waivers have been declared unenforceable outside of the arbitration context in some jurisdictions,” Judge Geiger summed up by saying that “[c]onsidering 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. By adopting this bright-line rule, we advance “the recognized benefits of class actions for both litigants and the courts. The public policy favoring class actions ‘furthers numerous practical purposes, including judicial economy, cost-effectiveness, convenience, consistent treatment of class members, protection of defendants from inconsistent obligations, and allocation of litigation costs among numerous, similarly situated litigants.’ Dugan v. TGI Fridays, Inc., 231 N.J. 24, 46-47 (2017) (footnote and further citation omitted).

Class action waivers are indeed noxious to the judicial system, remitting (in this case) hundreds of alleged victims to individual litigation that would clog the courts if brought and would leave the wrongs to those persons unredressed if separate individual cases were not filed, as is often the case in matters involving relatively small damages. Indeed, one of the key goals of the class action rule, Rule 4:32, is to enable cases where numerous persons suffer damages too small to justify individual litigation to bring those cases and, if successful, to require wrongdoers to disgorge their ill-gotten gains. Our Supreme Court has long recognized the important public policies advanced by class actions, going back at least as far as Riley v. New Rapids Carpet Center, 61 N.J. 218 (1972), and reiterated in numerous decisions thereafter.

A class action waiver does not even benefit defendants, since the alternative is numerous individual cases addressing the same alleged wrongdoing. In that scenario, defendants would incur fees for their own attorneys in each such matter, plus the fees of the plaintiffs’ counsel in each successful case, as mandated by the CFA, instead of paying for attorneys (on both sides) only once.

Judge Geiger’s opinion is an emphatic embrace of the strong public policy in favor of class actions, especially in the consumer context, that our Supreme Court has made a bedrock of New Jersey law. Even after this ruling, though, defendants who wish to stay out of class actions in court may do so by requiring arbitration.

Arbitration, of course, has its own expenses, which are generally required to be shared by the parties. As discussed here, plaintiffs’ counsel have begun to file mass arbitrations (given the normal unavailability of class arbitrations after Concepcion, Stolt-Nielsen, S.A. v. Animal Feeds Int’l Corp., 559 U.S. 662 (2010), and Lamps Plus, Inc. v. Varela, 139 S.Ct. 407 (2019)) in circumstances where defendants have imposed mandatory arbitration provisions and class action waivers. The expenses of mass arbitration sometimes displease defendants, and some companies have for that reason dropped mandatory arbitration clauses.

Perhaps no procedural scenario is ideal for all parties and the judicial system in all circumstances. But Judge Geiger’s strong opinion makes clear that class action waivers in relatively small damage cases where the dictates of arbitration are absent are not a scenario that our system accepts.