New Jersey Courts Continue Trend Favoring Employees In Disputes Involving Enforcement of Arbitration Agreements
As previously covered by HR Legalist, arbitration agreements can be important tools for employers to avoid costly and public employment disputes in open court. However, there are limitations to enforceability of these agreements, and pitfalls for employers to consider in the drafting process. A recent case out of New Jersey’s state appellate court demonstrates one such area of caution.
In Flanzman v. Jenny Craig, Inc., decided on November 13, 2018, the New Jersey Superior Court, Appellate Division invalidated an employer’s arbitration agreement because it did not establish a “meeting of the minds” as to the forum for the arbitration and the procedural rules that would apply. The employer in Flanzman sought to compel a former employee to arbitrate her claims of age discrimination and harassment under the New Jersey Law Against Discrimination (“NJLAD”). The employee had signed an arbitration agreement which contained a general agreement to settle all claims arising out of her employment “by final and binding arbitration.” However, the agreement failed to specifically identify a particular institution where the arbitration would be conducted, such as the American Arbitration Association (“AAA”). Although the trial court enforced the agreement, the Appellate Division reversed. The Appellate Division held that because the agreement failed to identify a particular forum for the arbitration, the agreement failed to set forth the consequences for agreeing to arbitrate, and, as a result, there was no meeting of the minds between the employer and employee.
The Appellate Division further stated that, in order to pass muster, an arbitration agreement must “either designate [an arbitration] forum or communicate the general method for selecting a different arbitration setting.” The court suggested that the outcome may also have been different had the agreement indicated that the arbitration would be conducted by an organization that administers arbitration proceedings with established due process safeguards under their rules of arbitration, such as AAA or JAMS. The Court justified its holding by explaining that parties must understand “the substantive and procedural setting for the entire arbitration process” in order for the arbitration agreement to survive judicial scrutiny.
The court held that an arbitration agreement does not need to identify a specific arbitrator or selection process, since existing laws allow a court to appoint an arbitrator. The court also cited to several other cases where arbitration agreements were not enforced because the chosen forum was not available to hear the dispute, but pointed to a relatively simple solution: include a process for the parties to select an alternative forum.
The court’s justification was based on New Jersey’s strong adherence to the Federal Arbitration Act, and the New Jersey Arbitration Act, which both favor arbitration as a matter of public policy. However, over the years, New Jersey courts have increasingly balanced the preference for arbitration against the general exception to enforcement contained in the New Jersey Arbitration Act:
“[a]n agreement . . . to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable and irrevocable except upon ground that exists at law or in equity for the revocation of a contract.”
N.J.S.A. 2A:23B-6(a) (emphasis added).
The Flanzman decision clearly reflects the New Jersey court’s steady trend in favor of employee protections, to the detriment of employers who have expended valuable time and resources attempting to draft enforceable arbitration agreements. See Garfinkel v. Morristown Obstetrics & Gynecology Assocs., P.A., 168 N.J. 124 (2001) (holding that an arbitration agreement drafted to generally resolve any controversy did not cover NJLAD claims); Leodori v. CIGNA Corp., 175 N.J. 293 (2003) (consent to arbitrate cannot be implied by continued voluntary employment, and must be clearly and unambiguously agreed to).
Following Flanzman, New Jersey employers should review and revise their arbitration agreements to ensure that a forum for the arbitration is specified, and that there is a process for selecting an alternative forum if that forum becomes unavailable. In the alternative, the agreement should clearly articulate the process for selecting an arbitrator or a panel of arbitrators. The employment attorneys of Obermayer Rebmann Maxwell & Hippel LLP can review existing arbitration agreements to ensure compliance, draft new ones, and help implement them across the workforce.
The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.