NJ Supreme Court: Consumer Contract Arbitration Clauses are Unenforceable Unless Consumers Are Clearly Notified that Court Redress is Waived

By Edward J. Sholinsky

Arbitration clauses in consumer contracts are unenforceable in New Jersey unless they specifically state that a consumer is waiving the right to pursue statutory and constitutional remedies in court, the New Jersey Supreme Court held. The court in Atalese v. U.S. Legal Services Group, L.P., reversed decisions by the trial and intermediate appellate courts that an arbitration clause calling for binding arbitration, but not specifically waiving the right to bring an action in court, was enforceable.

The plaintiff in Atalese entered into a contract with the defendant for debt-adjustment services.  The contract contained an arbitration clause that stated that any dispute between the parties would be submitted to binding arbitration, that the parties had to agree to the arbitrator, and that the judgment would be enforceable in court.  The plaintiff brought an action in state court alleging violations of New Jersey’s Consumer Fraud Act and Truth-in-Consumer Contract, Warranty, and Notice Act.  The defendant moved to compel arbitration, and the trial court granted the motion.  The Appellate Division, in an unpublished opinion, affirmed.

The defendant argued that consumers “universally understood” that arbitration is different than litigation.  It also invoked the Federal Arbitration Act’s (FAA) policy in favor of arbitration to support its argument that the contract required arbitration. The court rejected those arguments. Relying on Section 2 of the FAA, the court reasoned that arbitration agreements could “be invalidated by generally applicable contract defenses.”

Starting with the principal that contracts require mutual assent, the court reasoned that both parties to an arbitration clause had to understand the terms to which they were agreeing. Additionally, before a party can waive a legal right by contract, under New Jersey law, she must have “full knowledge” of the right and intend to give up that right.  Also, under New Jersey law, the terms of a consumer contract must be clear to the average consumer.

Rejecting the defendant’s argument, the court stated that the “average member of the public may not know – without some explanatory comment – that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law.” Thus, the defendant’s failure to include clear and unambiguous language that the consumer was waiving her right to pursue her claims in court by agreeing to arbitrate rendered the arbitration clause unenforceable.

The court stressed that there was no “magic language” required in an arbitration clause. Rather, the clause must contain “clear and unambiguous” language that alerts the parties to the distinction between resorting to arbitration and bringing a claim in court.  The court did not require that an agreement specify which statutory or constitutional rights consumers were agreeing to arbitrate. In the contract at issue, the defendant did not use plain language that was “clear and understandable to the average consumer” that she was waiving her right to bring a claim in court, even though the contract referred to binding arbitration.

The Atalese decision should prompt companies doing business in New Jersey and using arbitration clauses in consumer contracts to review those contracts.  Businesses wishing to invoke arbitration must make sure that any arbitration clause contains clear, layman’s terms that a consumer is giving up the right to bring an action in court and agreeing to arbitration, which is an alternative to a lawsuit in court.  The clause must put the consumer on notice that by agreeing to the contract that she is giving up a legal right to a jury (or bench) trial on any dispute arising between the parties.

The Third Circuit Limits the “Benign Language” Exception to the FDCPA Without Endorsing It

By Stephen A. Fogdall

Among other things, the Fair Debt Collection Practices Act prohibits a debt collector from using “any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of the mails.” (The debt collector may include, in addition to its address, its business name if the name does not indicate that it is in the business of collecting debts.) Some courts, such as the Fifth and Eighth Circuits, have read into this provision an exception for so-called “benign language,” and have allowed debt collectors to include additional phrases on envelopes such as “priority letter,” “personal and confidential,” or “immediate reply requested.”

In a recent Third Circuit case, Douglas v. Convergent Outsourcing, the debtor’s account number, while not printed on the envelope, was visible on the letter inside through a window. The court had to decide: (1) whether the account number was “on” the envelope when it was merely visible through the window, and (2) whether the account number was “any language or symbol, other than the debt collector’s address,” and thus prohibited by the FDCPA. The Third Circuit answered both questions “yes.”

As to the first question, the Third Circuit reasoned that “[l]ike language printed on the envelope itself, language appearing through a windowed envelope can be seen by anyone handling the mail.” Thus, such language “appears on the face” of the envelope and is therefore “on” it for purposes of the FDCPA.

As to the second question, the Third Circuit rejected the debt collector’s suggestion that the debtor’s account number was “benign language.” The Third Circuit “express[ed] no opinion” on whether the FDCPA in fact allows for such an exception, but held that even if it does, the account number was not “benign.” Rather, the court found, an account number is “a core piece of information pertaining to [the debtor’s] status as a debtor and [the debt collector’s] collection effort.” Because the account number “implicates core privacy concerns, it cannot be deemed benign.” The Third Circuit distinguished the types of language held to be benign by the Fifth and Eighth Circuits on the basis that the language in those cases was not “capable of identifying [the debtor] as a debtor.”

The U.S. Supreme Court has yet to offer guidance in this area. Until it does so, the best practice for debt collectors in the wake of this Third Circuit decision may be to assume that any language that might identify a letter’s recipient as a debtor, and which is in any way visible to a person handling the mail, violates the FDCPA and should be avoided.

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