Party That Drafted Arbitration Provision Moves To Have Provision Deemed Unenforceable. It Lost.

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

Most cases involving commercial contracts and arbitration provisions follow a similar pattern. They generally involve consumers arguing that they cannot be bound by arbitration clauses found in the fine print of boilerplate contracts that they had no ability to negotiate. But Shah v. T & J Builders, LLC turns this scenario on its head. In Shah, plaintiffs, the consumers, drafted the contract that contained the arbitration clause but later argued that it was unenforceable. To make matters worse (or at least more unusual), plaintiffs took this position after participating in an arbitration proceeding with defendant for two years. Not surprisingly, plaintiffs efforts to have their own arbitration clause deemed unenforceable were unsuccessful.

In Shah, plaintiffs hired defendant to build an extension on their home. The contract, which was "heavily negotiated between the parties," albeit without counsel, was drafted by plaintiffs. It contained an arbitration clause that required the parties to arbitrate "any dispute [ ] relative to the performance of [the] contract that [they could not] satisfactorily resolve." After one such dispute arose, plaintiffs terminated the contract and defendant filed an arbitration demand. Plaintiffs answered the demand and filed a counterclaim, alleging breach of contract and violations of New Jersey Consumer Fraud Act. Nowhere in their answer or counterclaim did plaintiffs address, much less challenge, the arbitration clause.

The parties, through counsel, then pursued their claims in arbitration for almost two years, exchanging discovery and expert reports, participating in a site inspection, and participating in several conferences with the arbitrator. Two weeks before the scheduled arbitration date, the parties submitted their pre-arbitration briefs. This is where the fun began.

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NJ Supreme Court Narrowly Defines “Aggrieved Consumer.” End Of The Road For One Type Of “No Injury” Class Action?

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

I have written a number of times about New Jersey's Truth in Consumer Contract, Warranty and Notice Act (TCCWNA). (Here, here, and here for example.) This statute, which was largely ignored after it was enacted in 1981, became increasingly popular in recent years as part of so-called no injury class actions. (So-called mostly by defense counsel, not plaintiff's counsel.) Its popularity may now have come to an end, however, because the New Jersey Supreme Court recently issued its opinion in the highly-anticipated case, Spade v. Select Comfort Corp., which answered two questions certified to it by the U.S. Circuit Court of Appeals for the Third Circuit, one of which appears to hamper, at the very least, the ability of plaintiffs to sue for alleged violations of the act.

By way of brief background, the TCCWNA was enacted to prevent deceptive practices in consumer contracts by prohibiting the use of illegal terms or warranties. It provides:

No seller . . . shall in the course of his business offer to any consumer or prospective consumer or enter into any written consumer contract . . . or display any written . . . notice or sign . . . which includes any provision that violates any clearly established legal right of a consumer or responsibility of a seller . . . as established by State or Federal law at the time the offer is made . . . or the . . . notice or sign is given or displayed.

To state a claim under the TCCWNA, a plaintiff must prove four elements: (1) that it is a consumer; (2) that defendant is a seller; (3) that the seller offered a consumer contract containing a provision that violated a legal right of the consumer or a responsibility of the seller; and (4) that it was an "aggrieved consumer." Any party found to have violated the TCCWNA is liable for a civil penalty of not less than $100, actual damages, or both, and reasonable attorneys' fees and court costs.

The questions certified to the Supreme Court in Spade arose out of two cases that had been consolidated by the district court. Each involved plaintiffs who ordered furniture pursuant to contracts that violated certain regulations promulgated by New Jersey's Division of Consumer Affairs. The regulations require, among other things, that furniture sellers deliver furniture to customers by or before the promised delivery date or provide written notice that they will not be able to do so. Sellers must also provide notice to the purchaser that if the delivery is late, the consumer has the option of canceling the order and receiving a full refund, or agreeing to accept delivery at a specified later date. The regulations also prohibit sellers from including certain language in their contracts, such as "all sales final," "no cancellations," and "no refunds." In Spade, plaintiffs alleged that the contracts they entered into with defendants did not contain language required by these regulations, contained language prohibited by these regulations, or both. Notably, however, plaintiffs received their furniture deliveries on time.

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In Lawsuit Over Allegedly Defective Baccarat Cards, Casino’s Damages Capped At Little More Than One Green Chip

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

The running battle between the Borgata and world renowned poker player Phil Ivey (among others) continues, and, fortunately, continues to be interesting. As I wrote about here and here, the Borgata sued Ivey and an associate, Cheng Yin Sun, after the two men won more than $9.6 million playing Baccarat at the casino. The Borgata claimed that the two men used an impermissible "edge sorting" scheme to win the money, and therefore breached their implicit contract with the casino to abide by the terms of the Casino Control Act. The scheme relied, in part on an alleged defect in the playing cards, which Ivey and Sun knew about and exploited. The Third Circuit described it as follows:

The scheme is called "edge sorting," where Sun would identify minute asymmetries on the repeating diamond pattern on the backs of the playing cards to identify certain cards' values, and would have the dealer turn those strategically important cards so that they could be distinguished from all other cards in the deck. Ivey and Sun would then be able to see the leading edge of the first card in the shoe before it was dealt, giving them 'first card knowledge,' and Ivey would bet accordingly.

The Borgata successfully moved for summary judgment against Ivey and Sun, and was awarded more than $10 million in damages.

In addition to suing the players, the casino also sued the manufacturer of the cards that were used in the edge-sorting scheme. Both moved for summary judgment, and both motions were initially denied without prejudice. After the district court's decision on the casino's summary judgment motion against Ivey and Sun, both renewed their motions. The district court again denied both, but in doing so, threw cold water on the casino's claims against the manufacturer, including holding that the most the casino could recover against the manufacturer was $26.88, the cost of the allegedly defective cards.

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You Can’t Be Compelled To Arbitrate In A Nonexistent Forum

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

This one may seem obvious, but, in MacDonald v. Cashcall, Inc., the U.S. Court of Appeals for the Third Circuit held that a contractual arbitration provision that calls for arbitration in an "illusory forum" is not enforceable. So, if you were thinking about trying to compel arbitration in Wakanda or before the Jedi Council, better think twice.

In MacDonald, plaintiff entered into a loan agreement with a entity known as Western Sky in connection with a $5,000 loan. The loan agreement stated that it was "subject solely to the jurisdiction of the Cheyenne River Sioux Tribe," and "governed by the . . . laws of the Cheyenne River Sioux Tribe." It also contained an arbitration provision requiring that any disputes arising out of the agreement be "conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of [the agreement]." But the agreement also provided that either party, after demanding arbitration, could select an arbitrator from the American Arbitration Association ("AAA") or Judicial Arbitration and Mediation Services ("JAMS") to administer the arbitration, and, if it did, "the arbitration [would] be governed by the chosen arbitration organization's rules and procedures" to the extent that they did not contradict the "law of the Cheyenne River Sioux Tribe." The agreement also contained a severability clause, providing that, if any provision of the agreement was deemed invalid, the remaining provisions would remain in effect.

Although plaintiff originally borrowed $5,000, "[h]e was charged a $75 origination fee and a 116.73% annual interest rate over the seven-year term of the loan, resulting in a $35,994.28 finance charge." After paying approximately $15,493 on the loan, which included $38.50 in principal, $15,256.65 in interest, and $197.85 in fees, plaintiff filed a putative class action lawsuit against defendants, asserting federal RICO claims and state law claims for usury and consumer fraud. Defendants moved to compel arbitration. The district court denied the motion, holding that the loan agreement's "express disavowal of federal and state law rendered the arbitration agreement invalid as an unenforceable prospective waiver of statutory rights." Defendants appealed.

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Unenforceable Clause In Arbitration Agreement Does Not Void Agreement

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

One of my children's preschool teachers was fond of saying, "you get what you get and you don't get upset." (Not to my little angel, of course, but to other children.) In Curran v. Curran, the Appellate Division basically applied this admonition to the parties to an arbitration agreement, holding that they got what they intended out of the agreement, therefore they could not argue, after the fact, that an unenforceable provision in the agreement voided the entire agreement.

In Curran, plaintiff filed for divorce from defendant. With the advice of counsel, the parties entered into a consent order to refer all issues incident to their divorce to arbitration under the New Jersey Arbitration Act. In the consent order, the parties acknowledged that any arbitration award that was entered could only be set aside or modified by a court under the limited grounds set forth in the Arbitration Act — e.g., the award was procured by fraud, corruption, or undue means, the court found evidence of "evident partiality" by the arbitrator, the arbitrator exceeded his or her powers, etc. But the parties also included a handwritten provision, which provided: "The parties reserve their rights to appeal the arbitrator's award to the appellate division as if the matter was determined by the trial court." This is the provision that would cause all of the problems.

After the arbitrator entered a preliminary award, plaintiff requested reconsideration. The arbitrator then issued a comprehensive award setting forth his findings of fact and conclusions of law. Plaintiff filed a motion in the Law Division for an order modifying the award, citing eight alleged "mistakes of law" made by the arbitrator. Plaintiff also argued that the intent of the handwritten provision was not to allow for direct appeal to the Appellate Division, but was instead was evidence that the parties intended a more searching review of the award that what would normally be allowed under the Arbitration Act. The trial court agreed, holding that the paragraph itself was unenforceable because it purported to "create subject matter jurisdiction by agreement." The trial court noted that "[t]he authority of a court to hear and determine certain classes of cases rests solely with the Constitution and the Legislature." But the trial court agreed with plaintiff that the handwritten provision demonstrated the parties' intent to provide for "a little more review" than what would normally be allowed under the Arbitration Act. Therefore, the trial court "in essence act[ed] as the Appellate Division of the arbitrator." It performed a comprehensive review of the arbitrator's decision and affirmed the award.

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