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April 28, 2016 by Joseph J. DePalmaDownload PDF

Life after Concepcion: Use of Ordinary Contract Principles To Nullify Forced Arbitration ClausesJoseph J. DePalma

The United States Supreme Court erected a considerable barrier to consumers who want to have their disputes with sellers resolved in court. Its decision in ATT Mobility LLC v Concepcion, 563 U.S. 333 (2011), ushered in a new concept in American jurisprudence, forced arbitration. Take it or leave it arbitration clauses, restricting a person’s right to a jury trial, to join claims with others, and to proceed as a class action, have now become commonplace in virtually all consumer contracts. Despite this hurdle, courts have begun to give closer scrutiny to these purported “agreements.”

Concepcion is rooted in the principle that arbitration is a creature of contract. If parties formed an agreement to resolve disputes through arbitration, courts must abide by the intent of the parties. In a line of cases pushing back against forced arbitration, however, courts have focused on fundamental principles of contract law to determine whether an agreement was in fact reached. Absent consideration, mutual assent or a meeting of the minds, there is no contract. The most recent of these decisions from New Jersey was issued less than a week ago.

In Bernetich, Hatzell & Pascu, LLC v. Medical Records Online, Inc., Superior Court of New Jersey, Appellate Division, Docket No. A-0657-15T3 (decided April 22, 2016), the court struck down an arbitration clause because it lacked consideration. The facts are straightforward.

A law firm (plaintiff BHP) requested that a hospital furnish copies of medical records relating to a potential client. The hospital had engaged a third party provider (defendant MRO) to fulfill requests for medical records. Under New Jersey law, the provider of medical records may charge only a reasonable fee, which must be based on “actual costs.” BPH thus had a pre-existing right to these medical records at actual cost. MRO invoiced BHP, charging them more than the permissible limits. The invoice contained an arbitration provision barring class actions. Nonetheless, BPH filed a class action suit about the overcharge.

MRO invoked the arbitration clause and sought to dismiss the lawsuit. BPH’s attack on the arbitration provision was that it lacked consideration. The Appellate Division agreed with BPH and allowed the lawsuit to proceed.

The court began its analysis by citing to bedrock law that arbitration remains a “matter of contract,” and that a parties are not required to arbitrate when they have not agreed to do so. The court stated,” [n]o contract is enforceable… without the flow of consideration-both sides must ‘get something’ out of the exchange.” Further, consideration cannot be furnished by fulfilling a pre-existing duty. Since BHP had a pre-existing right to receive these medical records at actual cost, the law firm did not receive anything out of the arbitration agreement that it did not already have. Thus, there was no consideration, and no valid contract to arbitrate was formed. The court stated, “In sum, the alleged agreement to arbitrate lacks consideration. BH&P may not be held to the terms of the arbitration provision in the invoice.”

The Bernetich, Hatzell & Pascu decision was grounded in a case decided by the New Jersey Supreme Court. In Atalese v. U.S. Legal Services Group, 219 N.J. 430 (2014), the Court held that an arbitration agreement, just like any other agreement, requires the mutual assent of the parties. Applying customary principles of contract law, Atalese struck an arbitration agreement providing for the relinquishment of an important constitutional right because the clause was not clear and unambiguous.

Similarly, in Noble v. Samsung Electronics America, LLC, No. 2:2015 cv 03713 (D.N.J. 2016) [Disclosure: I am one of the counsel of record for plaintiff in that case], the court denied Samsung’s motion to compel arbitration, finding that an arbitration clause, hidden in a 135 page document, did not give Noble the opportunity to know it existed. The court said, “Therefore, no meeting of the minds could have occurred. Without that, the arbitration agreement is unenforceable.” This case is on appeal.

Although a successful challenge to setting aside an arbitration agreement remains demanding, the plaintiff practitioner will want to dust off his or her first year law school book on contracts and focus argument on contract formation. Sharp application of these fundamentals can provide sufficient support to strike down these clauses.