Arbitration Provision Bounced Again, Even After Kindred Nursing Decision.

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

Arbitration (pd)As readers of this blog know, arbitration provisions in consumer contracts are difficult to enforce in New Jersey. (Click here or here for a refresher.) There was some belief that the U.S. Supreme Court's recent decision in Kindred Nursing Centers Ltd. P'ship v. Clark might change this, but it does not appear, at least not yet, that it has. In a recent case, Defina v. Go Ahead and Jump 1, LLC d/b/a Sky Zone Indoor Trampoline Park, the Appellate Division was asked to revisit, in light of Kindred Nursing, its prior decision refusing to enforce an arbitration provision in a contract between a trampoline park and one of its customers. The Appellate Division did so, but affirmed its prior decision, holding that Kindred Nursing did not require New Jersey courts to change the manner in which they approach arbitration provisions.

I wrote about Defina in its first go-around with the Appellate Division — Bounce Around The (Court)Room: Trampoline Park's Arbitration Provision Deemed Unenforceable. The underlying facts of the case are unfortunate. A child fractured his ankle while playing "Ultimate Dodgeball" at a trampoline park. Before entering the facility, the child's father signed a document entitled, "Participation Agreement, Release and Assumption of Risk." The document contained an arbitration provision, which provided: 

If there are any disputes regarding this agreement, I on behalf of myself and/or my child(ren) hereby waive any right I and/or my child(ren) may have to a trial and agree that such dispute shall be brought within one year of the date of this Agreement and will be determined by binding arbitration before one arbitrator to be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures. I further agree that the arbitration will take place solely in the state of Texas and that the substantive law of Texas shall apply.

Notwithstanding this provision, the child's parents sued the trampoline park in state court, alleging tort claims for simple negligence and gross negligence, and statutory claims for alleged violations of the Consumer Fraud Act and the Truth in Consumer Contract, Warranty and Notice Act. 

The trampoline park moved to compel arbitration. The trial court granted the motion, but the Appellate Division reversed, holding that the provision violated the New Jersey Supreme Court's decision in Atalese v. U.S. Legal Servs. Group, L.P., which held that an arbitration provision is unenforceable if it does not clearly and unambiguously explain that plaintiffs are waiving the right to seek relief in court and have their claims decided by a jury. In Defina, the Appellate Division held that the arbitration provision was unenforceable because, although it mentioned that plaintiff was waiving any right to trial, "there [was] no reference in the clause to a court or a jury," and the provision did not "explain how arbitration differs from a proceeding in a court of law." Therefore, the Appellate Division held that the provision did not "unambiguously inform" plaintiff that he was "giving up his right to bring [his] claims in court and have a jury resolve the dispute."

After the case was remanded to the trial court, two important things happened: (1) plaintiff amended its complaint to add the trampoline park's franchisor; and (2) the Supreme Court issued its Kindred Nursing decision. In that decision, the Supreme Court held that arbitration provisions governed by the Federal Arbitration Act ("FAA") must be placed "on equal footing with all other contracts." In other words, states could not set a higher bar for enforcing arbitration provisions than they set for any other contractual provisions. After this decision was released, the franchisor moved to compel arbitration, arguing that the Appellate Division's decision was no longer valid because, under Kindred Nursing, New Jersey courts could no longer rely on Atalese to invalidate arbitration provisions. The trial court denied the motion and the franchisor appealed.

The Appellate Division affirmed the trial court's decision. It began by reviewing Kindred Nursing, which involved an arbitration provision in a contract entered into between an entity that operated nursing homes, on the one hand, and a wife and daughter acting under powers of attorney they obtained from family members, on the other. The contract was governed by Kentucky law, which prevented a party holding a power of attorney from agreeing to an arbitration provision on behalf of the person who granted the power of attorney without specific authority from that person to do so. This added layer of approval apparently applied only to arbitration provisions. The Supreme Court held that this arbitration-specific requirement "flouted the FAA's mandate to place arbitration agreements on an equal footing with all other contracts."

In Defina, the franchisor argued that the same rationale should apply to Atalese, which it argued established the same type of arbitration-specific barrier that the Supreme Court rejected in Kindred Nursing. The Appellate Division disagreed. In Atalese, the New Jersey Supreme Court "explicitly recognized that the FAA require[d] courts to place arbitration agreements on an equal footing with other contracts and enforce them according to their terms." And the Appellate Division held that, under Atalese, arbitration provisions are treated just like any other contractual waiver-of-rights provision, all of which require a "clear and unmistakable" waiver of the underlying right to be enforceable. Therefore, it held that "Kindred Nursing [did] not abrogate Atalese," and that the arbitration provision in Defina remained unenforceable because it did not "clearly and unmistakably inform the party singing it that he or she [was] agreeing to waiver their right be heard in court or their constitutional right to a trial by jury."

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