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Kernahan v. Home Warranty Administrator of Florida, Inc.

Supreme Court of New Jersey

January 10, 2019

Amanda Kernahan, Plaintiff-Respondent,
v.
Home Warranty Administrator of Florida, Inc. and Choice Home Warranty, Defendants-Appellants.

          Argued September 12, 2018

          On certification to the Superior Court, Appellate Division.

          Lori Grifa argued the cause for appellants (Archer & Greiner, attorneys; Lori Grifa, of counsel and on the briefs, and Michael J. Plata and Josiah Contarino, on the briefs).

          John E. Keefe, Jr., argued the cause for respondent (Keefe Law Firm and Law Office of Jonathan Rudnick, attorneys; Stephen T. Sullivan, Jr., and Jonathan Rudnick, on the briefs).

          David R. Kott argued the cause for amici curiae New Jersey Business and Industry Association, Commerce and Industry Association of New Jersey and New Jersey Chamber of Commerce (McCarter & English, attorneys; David R. Kott, Edward J. Fanning, Jr., and Zane C. Riester, of counsel and on the briefs, and Steven H. Del Mauro, on the briefs).

          James A. Barry argued the cause for amicus curiae New Jersey Association for Justice (Locks Law Firm and Law Offices of Charles N. Riley, attorneys; James A. Barry, Michael Galpern, Andrew P. Bell and Charles N. Riley, on the brief).

          George W. Conk argued the cause for amicus curiae New Jersey State Bar Association (New Jersey State Bar Association, attorneys; Robert B. Hille, President, of counsel and on the brief, and George W. Conk and Timothy E. Dinan, on the brief).

          LaVECCHIA, J., writing for the Court.

         In this appeal, the Court addresses whether parties to a consumer contract intended to create an agreement to arbitrate through the insertion of language within an alternative dispute resolution provision.

         Plaintiff Amanda Kernahan purchased a "home service agreement" from defendants Home Warranty Administrator of Florida, Inc., and Choice Home Warranty (collectively, defendants). When she became dissatisfied, she filed a complaint in Superior Court seeking statutory and common law relief. Plaintiff claimed that the agreement misrepresented its length of coverage and that the deceptively labelled "MEDIATION" section of the agreement failed to inform her that she was waiving her right to a jury trial and would be deterred from seeking the additional remedies of treble damages, punitive damages, and attorney's fees and costs. Defendants filed a motion to dismiss the complaint with prejudice in favor of arbitration, citing the alternative dispute resolution provision.

         The trial court denied defendants' motion to dismiss, concluding that the arbitration provision is unenforceable. The court found the provision both ambiguous and noncompliant with Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430 (2014), "in either its form or its function." The trial court reasoned that the provision does not contain clear language that would inform the consumer she is agreeing to arbitrate all disputes and that she is waiving her right to a jury trial. The court cited the provision's failure to convey unambiguously to a consumer that there is a difference between resolving a dispute in court and resolving it in arbitration. The court subsequently denied defendants' motion for reconsideration, rejecting defendants' argument that language stating that all claims will be resolved "exclusively" by arbitration would or should have adequately informed plaintiff that she is waiving her right to proceed in court, as opposed to use of other available dispute resolution processes.

         The Appellate Division affirmed the trial court's refusal to dismiss the complaint, and this Court granted certification. 231 N.J. 334 (2017).

         HELD: The so-called "arbitration agreement" within this consumer contract fails to support a finding of mutuality of assent to form an agreement to arbitrate. The provision's language is debatable, confusing, and contradictory -- and, in part, misleading. The "arbitration agreement" is also obscure when this consumer contract is viewed as a whole. The provision does not fairly convey to an ordinary person that arbitration would be the required method of dispute resolution. Accordingly, this arbitration agreement is not enforceable.

         1. Federal and state law governing arbitration agreements guide this matter. Both the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 to 16, and the New Jersey Arbitration Act, N.J.S.A. 2A:23B-1 to -32, value the benefits from arbitration of disputes and encourage enforcement of arbitration agreements. In a recent opinion, the Supreme Court emphasized the FAA's "equal-treatment principle," stating that the FAA not only preempts any state rule that facially discriminates against arbitration but also "displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements." Kindred Nursing Ctrs. L.P. v. Clark, 581 U.S. ___, 137 S.Ct. 1421, 1426 (2017). The Court cautioned that state court decisions that rest on general principles may violate the FAA if they implicitly "rely on the uniqueness of an agreement to arbitrate as [their] basis." Ibid. (pp. 2-3, 16-18)

         2. New Jersey codifies its own hospitable approach toward arbitration in the New Jersey Arbitration Act, using terms nearly identical to those of the FAA. The statutory policies of the FAA and New Jersey law are in synchronicity. In this state, when called on to enforce an arbitration agreement, a court's initial inquiry must be -- just as it is for any other contract --whether the agreement to arbitrate all, or any portion, of a dispute is "the product of mutual assent, as determined under customary principles of contract law." Atalese, 219 N.J. at 442. And, equivalent to federal law, parties may not be compelled "to arbitrate when they have not agreed to do so." Ibid. (pp. 19-20)

         3. In Atalese, this Court relied on mutuality of assent as its animating principle when considering the enforceability of an agreement to arbitrate in a consumer contract for debt-adjustment services. 219 N.J. at 442. At bottom, the judgment in Atalese, which declined to enforce the arbitration provision at issue, is rooted in the notion that mutual assent had not been achieved because the provision did not, in some fashion, explain that it was intended to be a waiver of the right to sue in court. Id. at 436. Because the provision could not be deemed a knowing waiver of the right to sue in court, a meeting of the minds did not occur. Id. at 435, 447. The consumer context of the contract mattered. (pp. 20-21)

         4. Here, the Court again reviews consumer contract language to determine whether there was mutuality of assent to form an agreement to arbitrate. But, unlike in Atalese, the question in this case is whether mutuality of assent is achieved when a provision confusingly and unpredictably shifts between the terms "arbitration" and "mediation" and the procedures for those proceedings. The parties and amici disagree on whether the term arbitration is self-defining. The Court examines the use of the word "arbitration" in the context of the contract to determine if its meaning is apparent, and whether it can supply the mutual assent required for the provision to constitute a meeting of the minds. In this matter, the meaning of the provision is not apparent from the manner in which it relayed information to the consumer who signed the contract. Although the Court does not expect a specific recitation of words to effect a meeting of the minds to create an agreement to arbitrate, the construct and wording of the instant provision are too confusing and misleading to meet simple plain wording standards demanded by the public policy of this state for consumer contracts. (pp. 21-23)

         5. Atalese stands for the proposition that an arbitration agreement is clearly enforceable when its terms affirmatively state, or unambiguously convey to a consumer in a way that he or she would understand, that there is a distinction between agreeing to resolve a dispute in arbitration and in a judicial forum. 219 N.J. at 442-44. Here, the ambiguity that affects the mutuality of assent question focuses on the overall language of the provision and whether the plaintiff-consumer fairly should have known that by signing her contract, she was knowingly assenting to arbitration as an exclusive remedy. On a macro level, the contract fails to signal to consumers that it contains an arbitration provision affecting their rights because the alternative dispute resolution provision's "arbitration agreement" is located within a section labeled "MEDIATION." Even when located, the small size of the print makes the provision burdensome to read and appears to violate the font size requirements of the Plain Language Act, N.J.S.A. 56:12-1 to -13. As for the substance of the provision, its terms are contradictory. Mediation and arbitration are distinct and different procedures. (pp. 23-27)

         6. Defendants initially petitioned asking the Court to hold that Atalese runs afoul of Kindred Nursing. However, defendants have abandoned that argument. Even if defendants maintained that argument, the Court would not need to address any perceived conflict between those cases because the threshold issue of whether the instant provision's language contains sufficient clarity to form any agreement about arbitration is easily answered. This provision does not meet the rudiments for showing a mutual assent to have arbitration be the only means of dispute resolution permitted to plaintiff, necessarily foreclosing her from pursuing her right to bring an action in court. Reading the provision as a whole, the references to arbitration cannot be harmonized with the title of the section ("MEDIATION") and the intended use of the Commercial Mediation Rules in order to give rise to an enforceable agreement to arbitrate. Because the contract contains material discrepancies that call into question the essential terms of the purported agreement to arbitrate, mutual assent is lacking. Accordingly, the arbitration agreement is not enforceable. (pp. 27-31)

         AFFIRMED AS MODIFIED.

          JUSTICE ALBIN, CONCURRING, agrees that the purported arbitration clause in this consumer contract case is unenforceable. However, Justice Albin would address the issue of whether Atalese runs afoul of Kindred Nursing and the FAA, and he is confident that, when presented with the issue, the Court will reaffirm the continued vitality of New Jersey's long-established jurisprudence.

          CHIEF JUSTICE RABNER and JUSTICES ALBIN, PATTERSON, FERNANDEZ-VINA, SOLOMON, and TIMPONE join in JUSTICE LaVECCHIA's opinion. JUSTICE ALBIN filed a separate, concurring opinion.

          OPINION

          LaVECCHIA, JUSTICE.

         In this appeal, we address whether parties to a consumer contract intended to create an agreement to arbitrate through the insertion of language within an alternative dispute resolution provision. See Atalese v. U.S. Legal Servs. Grp., L.P., 219 N.J. 430, 435 (2014) (observing that inclusion of arbitration provisions in consumer contracts is now "commonplace").

         Both the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 to 16, and the New Jersey Arbitration Act, N.J.S.A. 2A:23B-1 to -32, value the benefits from arbitration of disputes and encourage enforcement of arbitration agreements. See Roach v. BM Motoring, LLC, 228 N.J. 163, 173-74 (2017). In determining whether to give effect to the disputed alternative dispute resolution provision here, we are mindful that federal law requires that arbitration agreements be placed "on equal footing with all other contracts." Kindred Nursing Ctrs. L.P. v. Clark, 581 U.S. ___, 137 S.Ct. 1421 (2017) (quoting DIRECTV, Inc. v. Imburgia, 577 U.S. ___, 136 S.Ct. 463, 465 (2015)). Our case law recognizes that obligation as well. See Atalese, 219 N.J. at 440-41 (collecting cases).

         In dispensing even treatment to arbitration agreements, basic contract formation and interpretation principles still govern, for there must be a validly formed agreement to enforce. See Volt Info. Scis., Inc. v. Bd. of Trs., 489 U.S. 468, 478 (1989); Garfinkel v. Morristown Obstetrics & Gynecology Assocs., P.A., 168 N.J. 124, 132 (2001). We apply state law principles of contract formation in that analysis. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995) ("When deciding whether the parties agreed to arbitrate a certain matter . . ., courts generally . . . should apply ordinary state-law principles that govern the formation of contracts.").

         In this matter, plaintiff Amanda Kernahan entered into an agreement with defendants for a home maintenance warranty. When she became dissatisfied, she filed a complaint in Superior Court seeking statutory and common law relief. Defendants sought dismissal of the action, arguing that the contract's alternative dispute resolution provision, labeled "MEDIATION," contained language that required plaintiff to proceed with her claims exclusively through arbitration.

         The trial court refused to dismiss plaintiff's complaint, finding in the language of the provision no mutuality of assent to have formed an agreement to arbitrate. The Appellate Division affirmed. We granted certification to review defendants' argument that an overly demanding review resulted in a prohibited hostility to arbitration. Defendants also contended that our recent decision in Atalese, which examined a contract for mutuality of assent to arbitrate, thereby waiving one's right to pursue claims in court, violated recent United States Supreme Court pronouncements in Kindred Nursing about FAA requirements. Because defendants have retreated from their argument that our decision in Atalese transgresses the FAA under Kindred Nursing, we do not address that contention. We will not address an argument that, at this time, is advanced only by amici.

         In our de novo review of the pivotal provision at issue in the disputed contract, we conclude that the so-called "arbitration agreement" within this consumer contract fails to support a finding of mutuality of assent to form an agreement to arbitrate. The provision's language is debatable, confusing, and contradictory -- and, in part, misleading. The "arbitration agreement" touted by defendants is also obscure when this consumer contract is viewed as a whole. The provision does not fairly convey to an ordinary person that arbitration would be the required method of dispute resolution.

         Accordingly, for the reasons expressed herein, we concur in the judgment that declined to enforce this provision as an understandable mutual agreement to arbitrate disputes, which, thereby, allowed plaintiff to proceed with her claims in the action she filed in court.

         I.

         A.

         Because this appeal arises from a denial of a motion to dismiss, we recite the facts as alleged in plaintiff's November 30, 2015 putative class action complaint. In the spring of 2015, plaintiff purchased a "home service agreement" from defendants Home Warranty Administrator of Florida, Inc., and Choice Home Warranty (collectively, defendants). The agreement was essentially a consumer contract whereby defendants would pay for and arrange for a certified contractor to repair or replace certain home appliances at plaintiff's property in Orlando, Florida, in exchange for the contract term price of $1050.

         Becoming dissatisfied, plaintiff cancelled the contract in June 2015 and received a refund of the purchase price.[1] In November 2015, she filed the instant complaint alleging that defendants violated the Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -20; the Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA), N.J.S.A. 56:12-14 to -18; and the implied covenant of good faith and fair dealing. She claimed that the agreement misrepresented its length of coverage and that the deceptively labelled "MEDIATION" section of the agreement failed to inform her that she was waiving her right to a jury trial and would be deterred from seeking the additional remedies of treble damages, punitive damages, and attorney's fees and costs.[2] Defendants filed a motion to dismiss the complaint with prejudice in favor of arbitration, citing the agreement's alternative dispute resolution provision.

         The alternative-dispute-resolution section of the agreement that is the focus of this appeal appears on the fifth and last page of the contract, and it reads in full as follows:

G. MEDIATION
In the event of a dispute over claims or coverage You agree to file a written claim with Us and allow Us thirty (30) calendar days to respond to the claim. The parties agree to mediate in good faith before resorting to mandatory arbitration in the State of New Jersey. Except where prohibited, if a dispute arises from or relates to this Agreement or its breach, and if the dispute cannot be settled through direct discussions you agree that:
1. Any and all disputes, claims and causes of action arising out of or connected with this agreement shall be resolved individually, without resort to any form of class action.
2. Any and all disputes, claims and causes of action arising out of or connected with this Agreement (including but not limited to whether a particular dispute is arbitrable hereunder) shall be resolved exclusively by the American Arbitration Association in the state of New Jersey under its Commercial Mediation Rules. Controversies or claims shall be submitted to arbitration regardless of the theory under which they arise, including without limitation contract, tort, common law, statutory, or regulatory duties or liability.
3. Any and all claims, judgments and awards shall be limited to actual out-of-pocket costs incurred to a maximum of $1500 per claim, but in no event attorneys fees.
4. Under no circumstances will you be permitted to obtain awards for, and you hereby waives [sic] all rights to claim, indirect, punitive, incidental and consequential damages and any other damages, other than for actual out-of-pocket expenses, and any and all rights to have damages multiplied or otherwise increased. All issues and questions concerning the construction, validity, interpretation and enforceability of this Agreement, shall be governed by, and construed in accordance with, the laws of the State of New Jersey, U.S.A. without giving effect to any choice of law or conflict of law rules (whether of the State of New Jersey or any other jurisdiction), which would cause the application of the laws of any jurisdiction other than the State of New Jersey.

[(bolded emphasis in original) (underlined emphases added).]

         Before the trial court, defendants argued that the contract's "arbitration provision" is valid and enforceable, containing several clauses that put plaintiff on notice that she is waiving her right to a jury trial, even though the provision does not explicitly reference a jury trial. Defendants maintained that the provision satisfied this Court's prior case law, including Atalese, because the provision's language is "clear on [its] face" and without ambiguity.

         Plaintiff argued that the arbitration requirement is ambiguous and that it is not conspicuous in the written document. She further argued that the arbitration language in the alternative dispute resolution provision does not satisfy the requirements for a knowing waiver of rights, citing Atalese and emphasizing the provision's failure to convey what arbitration is or how it is different from a court proceeding. Plaintiff maintained, in sum, that the failure to include language amounting to a knowing waiver coupled with the lack of conspicuousness of the arbitration language, buried in this contract's small font, precluded enforcement of defendants' asserted "arbitration agreement."

         The trial court denied defendants' motion to dismiss in an oral opinion, concluding that the arbitration provision is unenforceable. The court found the provision both ambiguous and noncompliant with Atalese "in either its form or its function." The trial court reasoned that the provision does not contain clear language that would inform the consumer she is agreeing to arbitrate all disputes and that she is waiving her right to a jury trial. The court cited the provision's failure to ...


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