Appellate Division Questions The “Liberal Policy In Favor of Arbitration”

 by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

I have written a few times recently about the enforceability of arbitration agreements. Although usually (always?) a dry topic, it has become somewhat “hot” recently in New Jersey. The Appellate Division’s published decision in Kleine v. Emeritus at Emerson is the most recent example.

In Kleine, plaintiff filed a personal injury claim against the nursing facility in which she was living. The nursing home moved to dismiss or stay the case in favor of arbitration pursuant to an arbitration provision in her admission agreement. The trial court granted the motion and plaintiff appealed. The Appellate Division reversed, and in doing so, took a number of shots at the “liberal policy favoring arbitration,” which was developed in the lower federal courts and the U.S. Supreme Court, and which applies even in the face of contrary state law.


Under New Jersey’s Nursing Home Act, arbitration provisions in nursing home admission agreements are unenforceable. But, in 2012, the U.S. Supreme Court, in Marmet Health Care Ctr., Inc. v. Brown, held that the broad federal policy favoring arbitration, exemplified by the Federal Arbitration Act, overrides all state policies to the contrary, including prohibitions like the one contained in New Jersey’s Nursing Home Act.

In the first of many pointed observations, the Appellate Division noted that it “must comply with Marmet, but [was] not required to agree [with it].”  In a footnote, the Appellate Division explained its disagreement:

Although we willingly embrace the concept of federal supremacy, we find it distressing that  invocation  of the  "liberal  federal  policy  favoring arbitration," in many cases has caused the forfeiture of important rights because consumers and employees lack the bargaining power to object to an arbitration clause's inclusion; citation of the "liberal federal policy favoring arbitration" merely evokes the old  saying,  "a  good  catchphrase can  obscure  fifty  years  of analysis."

The final portion of this footnote echoes Judge Posner’s recent criticism of “verbal formulas” that, though seemingly “common, orthodox, even canonical,” are “inessential and in some respects erroneous.”

However, the Appellate Division noted that, notwithstanding the federal policy favoring arbitration in general, arbitration was still a matter of contract and courts are free to apply state contract law to determine whether an arbitration provision is enforceable – i.e., whether there was a meeting of the minds and whether the parties clearly and unambiguously consented to arbitration. It was on these state law grounds that the Appellate Division based its decision to reverse the trial court.

In Kleine, plaintiff’s brother, acting through a power of attorney, admitted her to the nursing home. He claimed that he was handed a “stack of documents,” and told to sign and initial where appropriate. He was not told about the arbitration provision or advised that he could, or should, speak to an attorney before signing any of the documents. On this last point, the Appellate Division took the “liberal federal policy favoring arbitration” to task in another pointed footnote:

It is difficult to imagine an infirm individual, or his or her family member, is likely to delay admission while taking the time to seek a legal opinion about the contract. Our Legislature likely appreciated  these  realities — to  which  the "liberal  federal  policy  favoring  arbitration"  is  blind — when enacting [the Nursing Home Act].

Nonetheless, the Appellate Division held that the arbitration provision — which required all disputes to be decided by a single arbitrator, applying the commercial arbitration rules of the American Arbitration Association (AAA) — was a clear and unambiguous waiver of the right to trial. But, the Appellate Division held that other “aspects of the clause suggest it may be unconscionable.” Specifically, it appeared to bind only residents, not the nursing home. In other words, it appeared to require residents to arbitrate any claims against the nursing home, while leaving the nursing home free to sue residents in the forum of its choosing. If this were the only issue, then the Appellate Division indicated that it would remand to the trial court for an evidentiary hearing on the substantive and procedural unconscionability of the arbitration provision under state law.

But, as you might expect, this was not the only issue, so the Appellate Division reversed instead of remanding. It did so because the arbitration process contemplated in the arbitration provision was “not available when the parties executed their contract.” In its opposition to the motion to dismiss, plaintiff provided a copy of a statement from the AAA that “unequivocally expressed that, as of January 1, 2003, AAA would ‘no longer accept the administration of cases involving individual patients without a post-dispute agreement to arbitrate.’”  Therefore, the Appellate Division concluded:

[W]hen   the   parties   contracted,   their   exclusive   forum   for arbitration was no longer available; there being no agreement to arbitrate  in  any  other  forum,  arbitration  could  not  be compelled.  In  short, even  assuming  the  clause  was  otherwise enforceable and consented to by plaintiff, there was no meeting of the minds as to an arbitral forum if AAA was not available.

Accordingly, the trial court’s decision to compel arbitration was reversed.

In arriving at this decision, the Appellate Division rejected the nursing home’s arguments (1) that the AAA had changed its mind about arbitrating patients’ claims, and (2) that agreeing to arbitrate pursuant to the AAA’s commercial rules does not mean arbitrating exclusively through the AAA – i.e., a non-AAA arbitrator could apply the AAA’s rules during arbitration.

On the first point, the Appellate Division refused to consider the nursing home’s submission of a “document purporting to represent AAA’s current position, which, if true, would suggest AAA has a new-found willingness to administer such disputes” because the document was undated and was not “appended to a statement swearing to its authenticity.”

On the second point, the Appellate Division went a little further, holding:

It  is  difficult  to  conclude  that  a  reasonable  reader  of  this language — particularly  one  simultaneously contemplating  the placement  of  an  elderly  sister  in  a  nursing  home — would  makethat  fine  distinction even  if  defendant's  interpretation  was plausible.    Moreover, the  forfeiture  of  legal  rights  and  the compelling  of  arbitration  over  objection  is  not  a  three-card monte game. Atalese [v. Legal Servs. Grp., L.P.] requires greater clarity and less ambiguity in  determining  whether  and  how  to  enforce  such  a  clause.  We reject the  notion  that  a  court  must  adopt defendant's  strained interpretation of the clause it alone drafted.

The Appellate Division’s decision in Kleine must be added to the post-Atalese body of case law that is developing in New Jersey, all of which suggests that, to the extent they ever existed, the old days of simply identifying an arbitration provision and invoking the liberal federal policy in favor of arbitration was enough to compel arbitration may be coming to an end.

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