Achey v. Cellco Partnership, 475 N.J. Super. 446 (App. Div. 2023). New Jersey and federal law favor arbitration, and courts will often enforce arbitration clauses contained in consumer contracts. But today, in an opinion by Judge Mitterhoff, the Appellate Division refused to enforce an arbitration clause in a consumer class action against Verizon. The panel found that clause “unenforceable in its entirety as it is permeated by provisions which are unconscionable and violative of New Jersey public policy.” The Law Division had struck a limitation on damages that the arbitration clause contained, but granted Verizon’s motion to compel arbitration. The Appellate Division affirmed the ruling that struck the damages limitation, but reversed the decision to compel arbitration.
A group of 28 plaintiffs had filed this putative class action, complaining that Verizon had violated the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 et seq. (“CFA”), and other statutes by failing to disclose an “administrative charge” of $1.95 per month. Verizon moved to compel arbitration, resulting in the Law Division decision summarized above. Plaintiffs appealed, and the Appellate Division, applying de novo review, gave them a complete victory.
Judge Mitterhoff focused on the following aspects of the arbitration clause. First, putative plaintiffs were required “to notify defendants of claims within 180 days of receiving the bill; otherwise, the customer would waive the right to bring a claim.” Second, “the agreement limited damages to direct damages and prohibited treble damages,” as well as forbidding plaintiffs to use any evidence in arbitration beyond the contract itself. Third, the agreement included a “bellwether provision” that provided that if more than 25 plaintiffs brought “similar claims,” and if defense counsel were “the same or coordinated” for all those cases, the matters could be filed only in groups of ten at a time unless an until the parties decided to settle all remaining claims. The agreement not only barred class arbitration, as such contracts often do, but expressly forbade “mass filing of arbitration demands.”
Though “[i]t is well-established that New Jersey courts favor arbitration, as do the federal courts,” Judge Mitterhoff observed that our Supreme Court “has “refused to enforce contracts that violate the public policy of the State or are inconsistent with the public interest or detrimental to the common good.” She also noted that the contract at issue was one of adhesion, so that a special examination of unconscionability was required.
Plaintiffs urged the Appellate Division to follow the opinion in MacClelland v. Cellco P’ship, 609 F. Supp. 3d 1024 (N.D. Cal. 2022), given that it examined the exact same arbitration clause at issue” in today’s case. That decision rejected the arbitration clause. The Appellate Division found that court’s “reasoning sound and the result equitable,” and therefore chose to follow that ruling.
The backdrop for the panel’s discussion of the bellwether provision was that “[a]ccording to [the American Arbitration Association], the average consumer arbitration requires 6.9 months to complete.” Plaintiffs’ counsel in this case had another 2,537 clients who had already filed this same claim against defendants. Given those figures, plaintiffs here would had to wait 145 years to have their case heard, Judge Mitterhoff said, using a calculation by plaintiffs’ counsel. Defendants’ agreement “gives all decision-making power to defendants as to how long the ‘batching process’ would continue and leaves plaintiffs without any protection to ensure that their claims would be heard in a timely manner.” There was “no time limit for how long the bellwether process could continue” and no tolling of the statute of limitations while the bellwether process dragged on and plaintiffs waited for their claims to be able to be filed, let alone heard. All that made the bellwether provision unconscionable.
The “exculpatory clause,” which barred treble damages and restricted the evidence that plaintiffs could adduce, was also unconscionable. That provision, “barring any consumer claims which arise from statements not memorialized in the contract itself and barring customers from using any evidence in arbitration other than the contract itself, violates statutory rights granted by the CFA. Specifically, N.J.S.A. 56:8-2 protects consumers from deceptive commercial practices in connection with the sale or advertisement of merchandise, including statements by employees, invoices, and other documents, but the customer agreement purports to limit plaintiffs’ claims to those contained within the four corners of the agreement.”
Finally, “the provision requiring customers to give defendants notice of a claim within 180 days of receiving a bill violates public policy,” Judge MItterhoff said. “Even though New Jersey permits shortening the statute of limitations for a CFA claim, we find that the provision at issue violates public policy by effectively abrogating plaintiffs’ CFA claims should they fail to notify defendants within 180 days of the charge on their bill. As such, we agree with the MacClelland court that there is at least some degree of substantive unconscionability in the 180-day notification clause because of the CFA’s significant emphasis on routing out consumer fraud.”
This perceptive, pragmatic opinion concluded by noting that the “cumulative effect” of these several unconscionable provisions rendered the arbitration agreement “unenforceable for lack of mutual assent.” The case was remanded for further proceedings in court.
There is a back story that is not reflected in today’s opinion. Ever since the ill-conceived decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), permitted cellphone companies and others to insert into their contracts arbitration clauses that also disallow classwide arbitration, consumers and companies have adopted tactics and counter-tactics to deal with that. Companies included arbitration clauses that, as in Concepcion, forced arbitration but placed on the company the entire cost of the arbitration, a fig leaf to make arbitration look more reasonable to courts, including the Supreme Court in Concepcion. Some plaintiffs’ lawyers countered by gathering together hundreds or thousands of plaintiffs and filing arbitration demands for all of them separately, which required the company to pay the fee for arbitration for all of those persons, a large expense.
To avoid that expense, companies took measures such as that rejected in today’s case, benignly labeled “bellwether” provisions, which forbid mass filings of arbitration demands that trigger filing fee expense that companies brought on themselves. (Before that, companies demanded that courts not enforce the filing fee provisions that defendants had imposed on consumers, but courts rebuffed those cynical efforts). Cases like MacClelland and today’s opinion by our Appellate Division properly reject companies’ attempts to disable claimants from having their cases heard.