Can New Jersey Courts Reach a “Meeting of the Minds” With the Federal Arbitration Act?

Three recent decisions in New Jersey shed new light on the ongoing tension between the Federal Arbitration Act (“FAA”) and the standard of review utilized by the New Jersey courts concerning the enforceability of arbitration agreements.  Congress passed the FAA almost a century ago to address the hostility courts had towards private arbitration and put arbitration agreements “on equal footing” with other contracts.  In New Jersey, however, courts have been reaching decisions that appear to be at odds with the FAA and are increasing their focus on “mutual assent” – whether or not parties have reached a “meeting of the minds.”

Can Mutual Assent Be Found in an Email?

          Two recent decisions by the United States District Court for the District of New Jersey, Schmell v. Morgan Stanley & Co., Inc. and AT&T Mobility Services LLC v. Jean-Baptiste, address mutual assent where the company’s arbitration agreement was presented to employees by email.

Facts in Schmell

Mr. Schmell was employed as a Senior Vice President with Morgan Stanley from January 2006, until his termination in October 2017.  Schmell filed a complaint in the Superior Court of New Jersey, Monmouth County alleging wrongful termination.  Morgan Stanley subsequently removed the case to federal court and moved to compel arbitration pursuant to its Convenient Access to Resolutions for Employees (“CARE”) Arbitration Agreement.

Morgan Stanley’s CARE Agreement was sent out to employees through their work email address.  In relevant part, the email informed employees “that the program was mandatory unless they opted out and that their continued employment without opting out constituted acceptance” of the arbitration agreement (emphasis added).  The CARE Agreement was also available on Morgan Stanley’s internal human resources portal.  Schmell continued his employment without opting out and, in opposing the motion to compel arbitration, claimed that he never read the email and did not recall reviewing it, stating that he could receive possibly hundreds of emails in a given day.

The District Court’s Decision in Schmell

In the first of three separate decisions (Schmell I), the District Court Judge found that there was an unresolved question as to whether Schmell had notice of the CARE Agreement and denied Morgan Stanley’s initial motion to compel arbitration.  In particular, the Court noted that the notice question raised a genuine issue as to whether “there was a meeting of the minds [so that Schmell] could mutually assent to the terms of the CARE program.”  In a second decision (Schmell II), the Court ordered limited discovery to address this notice question, the goal being to “properly evaluate whether there was a meeting of the minds on the agreement to arbitrate.”  In the third-and-final decision (Schmell III), the Court ruled that the limited discovery had established that Schmell did indeed have notice of the email and, consequently, the CARE Agreement.  Therefore, although Schmell failed to opt out or otherwise respond to the email, such notice, particularly that the CARE program was mandatory, combined with his continuing employment without opting out, constituted his assent to be bound by the arbitration agreement.

Facts in Jean-Baptiste

          Ms. Jean-Baptiste was employed as an Assistant Store Manager for AT&T at the time she filed her complaint in the Superior Court of New Jersey, Union County alleging gender and race discrimination in violation of the New Jersey Law Against Discrimination.  AT&T removed the case to federal court and filed a motion to compel arbitration, pursuant to an agreement that had been presented to Jean-Baptiste by email in March 2016.  The email informed Jean-Baptiste that participation in the arbitration program was optional and also established a deadline for employees to opt out of the agreement, stating “[i]f you do not opt out by the deadline, you are agreeing to the arbitration process as set forth in the Agreement.” (emphasis added). Prior to the opt-out deadline, Jean-Baptiste accessed the arbitration agreement and clicked on a button that read “Review Completed.”  In opposing AT&T’s motion to compel arbitration, Jean-Baptiste argued that she never affirmatively agreed to be bound by the arbitration agreement and that her mere silence could not be construed as her assent to the terms.

The District Court’s Decision in Jean-Baptiste

The District Court, in considering whether Jean-Baptiste’s silence constituted her assent to the arbitration agreement, applied New Jersey contract principles, particularly that the enforceability of such an agreement could only result from an “explicit, affirmative agreement that unmistakably reflects the employee’s assent.”  The Court also cited the opinion in Schmell I, that such affirmation “need not be an actual signature, but must demonstrate a willingness and intent to be bound by the arbitration provision.”

The District Court’s decision addressed the differences between Ms. Jean-Baptiste’s case and the facts in Schmell. Whereas Mr. Schmell was notified that participation in the CARE Agreement was mandatory and that his continued employment without opting out signified assent to the agreement, the email sent by AT&T to Ms. Jean-Baptiste contained no such notification.  The District Court highlighted the fact that AT&T specifically told Jean-Baptiste that the decision to participate was “entirely up to her” and that there would be “no adverse consequences” if she chose not to participate in the program.  As such, the District Court found that Jean-Baptiste’s decision to continue her employment had nothing to do with her assent (or lack thereof) to the optional arbitration program and emphasized that “the burden of obtaining affirmative acceptance . . .  rests with employers.”

Shed the Pounds and the Arbitration Provision

In Flanzman v. Jenny Craig Inc., the New Jersey Appellate Division found that an arbitration provision between weight loss company Jenny Craig and a former employee was unenforceable because the agreement failed to identify where or how the parties would arbitrate their dispute.

Facts in Flanzman

Ms. Flanzman was employed with Jenny Craig for 26 years as a weight loss counselor before she was terminated at the age of 86.  She filed a complaint in Superior Court of New Jersey, Bergen County alleging age discrimination and discriminatory discharge in violation of the New Jersey Law Against Discrimination.  Jenny Craig moved to compel arbitration pursuant to an agreement that Ms. Flanzman had signed in 2011 – 20 years after she had been hired – as a condition of her continued employment.  The problem with Jenny Craig’s arbitration agreement, however, was that it failed to specify the forum in which the parties could bring their claims.

Trial and Appellate Decisions

The trial court found that the absence of a specified arbitration forum did not render the agreement unenforceable, instead it allowed Ms. Flanzman to choose the body that would conduct the arbitration.  The Appellate Division, however, reversed this decision, holding that the parties could not have reached a “meeting of the minds” without knowing what rights would replace their right to judicial resolution of their dispute and, therefore, the agreement lacked mutual assent.  The basis for the Appellate Division’s decision was adapted from the New Jersey Supreme Court’s decision in Atalese v. United States Legal Services Group, L.P., which instructed the lower courts to “take particular care in assuring the knowing assent of both parties to arbitrate, and a clear mutual understanding of the ramifications of that assent.”

Thus, since Jenny Craig’s arbitration agreement did not identify where and how the parties would arbitrate the dispute (such as, through the American Arbitration Association, or by creating a process for the selection of an arbitrator), this failure doomed the agreement.  Jenny Craig may still seek review by the New Jersey Supreme Court, which has as recently as September 2018 taken up cases to clarify the interplay between New Jersey contract law and the FAA.

Bottom Line

Courts applying New Jersey’s contract-principle approach to arbitration agreements have made it clear that courts will not assume that employees have intended to waive their right to a jury trial unless the agreements reflect their assent in unambiguous terms.  Likewise, employers should not assume that the bare existence of an arbitration agreement will be sufficient to compel arbitration.  As the Court noted in Schmell and Jean-Baptiste, employers bear the burden of obtaining their employee’s affirmative assent.  While, in some circumstances, an employee’s silence may be construed to signify assent, the better approach is to use the most unambiguous means possible – such as a signature.  As you can see, ambiguity on this issue leads to consequences that cut against the benefits of arbitration – such as speed in resolving disputes, relative informality, and cost-effectiveness.  Furthermore, Flanzman instructs that, in addition to requiring mutual assent to arbitrate, the parties must also have a mutual understanding as to the rights that will be afforded in arbitration, to replace those that have been waived.

For more information please contact John C. Petrella, Esq., Chair of the firm’s Employment Litigation Practice Group, at  jpetrella@nullgenovaburns.com, or Dina M. Mastellone, Esq., Chair of the firm’s Human Resources Practice Group, at dmastellone@nullgenovaburns.com, or 973-533-0777

New Jersey Courts Double-Down on Arbitration Enforcement

In late June 2018, New Jersey state and federal courts issued opinions on arbitration agreements that effectively reinforced the state’s rocky pro-arbitration bearings. The first opinion came from the Third Circuit Court of Appeals on June 20, 2018, in a case called Ace American Insurance Co. v. Guerriero. In Ace, the Third Circuit held that an employee must arbitrate his employment-related claims, despite his allegations that the company never provided him a full copy of the arbitration agreement. Only one day later, in Victory Entertainment, Inc., et al. v. Schibell, et al., the New Jersey Appellate Division held that strip club owner/managers must arbitrate an ownership dispute despite the employee’s argument that the arbitration agreement lacked clear and unambiguous language to do so.

An “Ace” In the Pocket for Arbitration Agreements In Federal Court

In Ace, after the employee and his counsel refused to arbitrate the employee’s employment claims, Ace filed a complaint in U.S. District Court in Newark, New Jersey, to compel arbitration under the Federal Arbitration Act (“FAA”). One day later, the employee filed a whistle-blower suit in New Jersey state court claiming that his employer illegally fired him after he reported to his supervisors that the company was destroying documents it was required to preserve in violation of the New Jersey Conscientious Employee Protection Act (“CEPA”). The employee alleged that he was never provided the company’s full three-page Employee Dispute Arbitration Policy and instead was only provided the signature page. The employer produced the signed acknowledgment page, which at the top read “Arbitration Agreement.” Moreover, the employee’s offer letter, which expressly referenced the Employment Dispute Arbitration Policy, was also signed by the employee.  Employees could also access the Employee Dispute Arbitration Policy using the company’s intranet site. The U.S. District Court enjoined the employee from pursuing his state court case and ruled in ACE’s favor, which was upheld on appeal to the Third Circuit.

Reinforcing the FAA’s “strong federal policy” of resolving parties’ disputes through arbitration by enforcing the parties’ arbitration agreements, the Third Circuit affirmed the District Court’s finding that the arbitration agreement was still enforceable, whether or not the employee actually read the agreement. The court found that the Employee Dispute Arbitration Policy unambiguously stated that the employee would “submit any employment-related legal claims to final and binding neutral third-party arbitration …” and specifically mentioned CEPA.  This decision confirms New Jersey’s strong pro-arbitration stance in federal court.

A “Victory” In State Court

In Victory Entertainment, employers also enjoyed a victory in the Appellate Division. The plaintiff was a manager part-owner of The Den, holding company for Delilah’s Den strip clubs throughout the state. His two business partners certified that plaintiff suffered spells of delusion that led him to mismanage the company, including brandishing a gun in the workplace, refusing to remit payment to vendors, and sexually harassing entertainers. After plaintiff was hospitalized for mental health issues, his two business partners, along with plaintiff and plaintiff’s counsel, executed a Sales Agreement whereby plaintiff’s trusted associate, as plaintiff’s agent, would purchase the two other owner’s shares of The Den over a 10-year period. The parties also drafted a separate Shareholder/Stakeholder (Deadlock) Agreement to resolve impasses between the shareholders and stakeholders, which created a 1/3 voting right between plaintiff’s agent/associate and the two part-owners. This Deadlock Agreement contained a binding arbitration clause. Although the shares in The Den were expressly subject to the terms and conditions of the Sales Agreement and the Deadlock Agreement, plaintiff and his trusted agent/associate were the only parties to the Deadlock Agreement.

When plaintiff’s mismanagement issues re-arose, the two part-owners executed their authority to remove plaintiff from managing the business. Plaintiff filed suit, claiming he was improperly removed.  The trial court dismissed his complaint and ordered that the parties arbitrate the dispute. Plaintiff appealed. In affirming the trial court’s decision, the Appellate Division found that although only the plaintiff and his trusted associate were parties to the arbitration clause, the two owners could enforce the arbitration clause since the Sales Agreement and the Deadlock Agreement arose from the same transaction. The two agreements were executed on the same day, pertain to the control and management of the same company, and contain numerous cross-references. Further, the Appellate Division determined the two part-owners could enforce the arbitration provision as either third-party beneficiaries or the trusted associate’s agents. Finally, the Appellate Division held the plaintiff claims were within the scope of the arbitration provision because they implicated the Deadlock Agreement explicitly or the alleged conduct occurred after the parties executed the agreement or related to the execution of the Deadlock Agreement.

Bottom Line

Unlike New York, and arguably contrary to the Federal Arbitration Act, New Jersey state courts have historically imposed a higher standard to enforce an arbitration agreement. The New Jersey Supreme Court has ruled that arbitration agreements in the state must provide “clear and unambiguous” terms that the parties are waiving the right to a jury trial. Although federal courts staunchly enforce arbitration agreements in favor of employers, employees sometimes reap the benefits of this state court hurdle for employers. Together, these recent opinions stand for the proposition that arbitration agreements may be strictly enforced in New Jersey.

While these opinions are triumphs for the enforcement of arbitration agreements, it is still imperative to include explicit language that your employees waive the right to a jury trial for all employment-related claims. Likewise, the law surrounding arbitration agreements is constantly shifting and all arbitration agreements should be carefully reviewed with counsel.

If you have questions on drafting arbitration agreements or arbitration disputes, please contact John C. Petrella, Esq., Chair of the firm’s Employment Litigation Practice Group, at jpetrella@nullgenovaburns.com, or Dina M. Mastellone, Esq., Chair of the firm’s Human Resources Practice Group, at dmastellone@nullgenovaburns.com, or 973-533-0777.

U.S. Supreme Court alert: American Express Co. v. Italian Colors Restaurant

Prior to its summer recess, the U.S. Supreme Court issued another decision concerning class arbitration which has implications for unionized and non-unionized employers with agreements to arbitrate workplace disputes.

In American Express Co. v. Italian Colors Restaurant, the Supreme Court held that the Federal Arbitration Act (FAA) does not permit courts to invalidate a contractual waiver of class arbitration simply because the plaintiffs’ cost of individually arbitrating their claims against the company exceeds their potential recovery. The Supreme Court reaffirmed its opinions in Stolt-Neilsen S.A. v. AnimalFeeds Inter. Corp., which held a company may not be compelled to submit to class arbitration without a contractual basis for doing so, and AT&T Mobility LLC v. Concepcion, which held the FAA preempts state laws that prohibit contracts from disallowing class arbitration.  

The plaintiffs in American Express were merchants who accepted American Express credit cards at their stores and restaurants. Their agreement with American Express contained a clause that required all disputes to be resolved through binding arbitration, and provided that “[t]here shall be no right or authority for any claims to be arbitrated on a class action basis.”

The merchants brought a class action suit against American Express alleging violations of various antitrust laws. American Express moved to compel individual arbitration pursuant to the clauses in its agreements with the merchants. The merchants certified to the trial court that the amount necessary to prove the antitrust claims could exceed one million dollars, whereas the maximum potential recovery for an individual was only $38,549. The trial court was not persuaded, and dismissed the merchants’ lawsuit pursuant to the class waiver provision. However, the Second Circuit Court of Appeals reversed, holding that because the merchants had shown they would incur “prohibitive costs if compelled to arbitrate under the class action waiver,” the waiver was unenforceable and class arbitration could proceed.

American Express appealed to the Supreme Court. The merchants argued there was a judge-made exception to the FAA, which allows courts to invalidate agreements that prevent the “effective vindication” of a federal statutory right — here, the fact that the cost of litigating the antitrust claims individually would be more than any recovery prevented the vindication of their rights. The Court rejected this argument, stating “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” In other words, the cost did not prevent the merchants from pursuing their antitrust claims, it simply made litigating the matter not worth their while financially. The Supreme Court ultimately held that arbitration agreements providing for a waiver of class arbitration may be enforced regardless of whether it is too expensive for plaintiffs to pursue their claims individually given the potential maximum recovery.

In light of recent Supreme Court decisions upholding class arbitration waiver provisions, employers should consider incorporating class waivers in employment agreements. However, particularly in light of the specificity required by courts and unresolved case law concerning class waivers on appeal from the National Labor Relations Board, employers should always confer with counsel when incorporating class waiver dispute resolution language in employment agreements to understand the risks and benefits of these provisions.

For more information on the implications of the American Express decision and preparing and implementing lawful class waiver provisions, please contact James J. McGovern, III, Esq., jmcgovern@nullgenovaburns.com, or Douglas J. Klein, Esq., dklein@nullgenovaburns.com, in the Labor Law Practice Group.

EASTERN DISTRICT COURT OF NEW YORK ENFORCES ARBITRATION AGREEMENT’S FLSA COLLECTIVE ACTION WAIVER

In the wake of the Eighth Circuit’s recent decision in Owens v. Bristol Care, Inc., the Eastern District Court of New York has joined the growing list of federal courts that have found FLSA collective action waivers contained in arbitration agreements enforceable.  In Torres v. United Healthcare Serv., 12 CV 923 (DRH) (ARL), 2013 U.S. Dist. LEXIS 14200 (E.D.N.Y. Feb. 1, 2013), the plaintiffs brought a collective action against the company claiming unpaid overtime. United Healthcare maintained an “Employment Arbitration Policy,” which required any dispute covered by the Policy to “be arbitrated on an individual basis” and provided that an individual employee could not “seek to bring his/her dispute on behalf of other employees as a class or collective action.”  Because each plaintiff had received a copy of the Policy upon hire and had electronically acknowledged that he or she read and agreed to the Policy’s terms, United Healthcare sought to compel arbitration.

The district court enforced United Healthcare’s Employment Arbitration Policy, holding that nothing in the language of the FLSA or its legislative history prevented an employee from waiving the right to pursue a collective action. The court found unavailing plaintiffs’ blanket assertion that the waiver would effectively prevent potential plaintiffs with small claims from bringing an FLSA claim due to the cost of individual arbitration. However, citing decisions of the Supreme Court and Second Circuit, the court recognized that such an agreement could be invalidated if the plaintiffs were able to offer sufficient evidence to establish that the cost of arbitration “would be prohibitively expensive.” Additionally, consistent with the Eighth Circuit’s position in Owens, the court declined to adopt the NLRB’s 2012 D.R. Horton decision, 2012 NLRB LEXIS 11, in which the NLRB found that collective action waivers violate employees’ right to engage in concerted activity guaranteed by Section 7 of the NLRA.  The court quoted Owens when it determined that the waiver at issue did not violate Section 7 because it did not prevent an employee from filing a complaint with the Department of Labor or other administrative agency, nor did it prevent such an agency “from investigating [or] . . . filing suit on behalf of a class of employees.”

While the United Healthcare decision is favorable for New York employers, the issue of the enforceability of FLSA class and collective action waivers is not yet settled. While the trend in federal courts is to find such waivers enforceable, the NLRB continues to use its holding in D.R. Horton to strike them down, and the Second Circuit and the United States Supreme Court have yet to address such a specific policy.  Accordingly, we advise all employers to confer with counsel over the risks and benefits of maintaining an FLSA class and collective action waiver policy and to ensure compliance with the specific holdings of these recent decisions.

For more information, please contact John R. Vreeland, Esq., Director of the firm’s Wage & Hour Compliance Practice Groupjvreeland@nullgenovaburns.com, or Joseph V. Manney, Esq., jmanney@nullgenovaburns.com.

NYC Council Moves To Protect City’s Unemployed

The NYC Council just passed a bill prohibiting employers from considering a job applicant’s current employment status when making a hiring decision. The bill is one of many recent initiatives at the federal, state and local level seeking to combat the nation’s unemployment rate. New York’s current unemployment rate is 8.8%, and 51% of unemployed New Yorkers have been searching for a job for over six months.

NYC is not the first to pass legislation seeking to protect the unemployed from discrimination. For example, New Jersey already prohibits employers from publishing job advertisements stating current employment is a requirement for job consideration. However, the new NYC law is the first to afford applicants a private cause of action in court for discrimination if they believe they have been discriminated against based on their unemployed status.

Mayor Bloomberg has stated his belief that the bill will discourage small businesses from hiring due to the threat of litigation, and he may veto it. However, City Council Speaker Christine Quinn vows the Council will override the Mayor’s veto.

In anticipation of the bill taking effect, NYC employers should evaluate hiring criteria and consider how employees’ present employment status is factored.  This is particularly important because of the risk of increased litigation stemming from claims of unlawful discrimination based on unemployed status.

For more information on the new NYC bill and developing and implementing valid hiring criteria, please contact John R. Vreeland, Esq., jvreeland@nullgenovaburns.com or Douglas J. Klein, Esq., dklein@nullgenovaburns.com in our Labor Law Practice Group.

Lawfulness of Employer Arbitration Policies Barring Class Actions Far From Settled

The NLRB continues to disapprove of employer policies limiting employees’ rights to pursue employment-related concerted action.  The question over the permissibility of arbitration class action waivers stems from recent U.S. Supreme Court decisions favoring deferral to arbitration.  In 2009, the U.S. Supreme Court handed down its seminal decision in 14 Penn Plaza LLC v. Pyett, where it enforced a collective bargaining agreement provision containing a clear and unmistakable waiver of employees’ right to pursue employment-related statutory claims in court in favor of arbitration.  Then, in 2011, in AT&T Mobility v. Concepcion, the U.S. Supreme Court held in the consumer context that a consumer arbitration agreement could bar class action lawsuits.

However, the NLRB has pushed back, strongly disfavoring arbitration policies requiring deferral of all employment-related claims to individual arbitration.  In 2011, in the DR Horton case, the NLRB held than an arbitration agreement requiring employees to waive their right to bring a joint, class or collective action as a condition of employment violated the NLRA.  The employer appealed that determination to the Fifth Circuit Court of Appeals where the case is still pending.

Then, just last month, an NLRB Administrative Law Judge struck down 24 Hour Fitness USA, Inc.’s policy requiring employees to waive their right to bring employment-related joint, class or collective actions in any arbitral or judicial forum.  The employer sought to distinguish its policy from the policy the NLRB deemed unlawful in DR Horton by pointing to the fact that employees could opt-out of the policy by taking a series of steps during the first 30 days of their employment.  However, the ALJ found that the opt-out provision was “an illusion” because the process was convoluted and employees were limited in their ability to identify coworkers who had also opted out.  The ALJ also rejected the argument that the U.S. Supreme Court’s pro-arbitration decisions like Concepcion meant 24 Hour Fitness’ policy should be upheld, holding that arbitration decisions in the consumer context are unrelated to arbitration decisions in the employment context.

Clearly, the issue over the permissibility of class action waivers in employment agreements is far from settled.  Employers should be cautious in requiring employees to waive their right to bring employment-related joint, class or collective actions in any arbitral or judicial forum until federal courts—and perhaps the U.S. Supreme Court—weigh in.  Employers are well advised to confer with counsel over the risks and benefits of maintaining such policies in light of the unsettled state of the law.  If you have any questions or for more information about implementing lawful arbitration clauses in employee handbooks, please contact Douglas E. Solomon, Esq., dsolomon@nullgenovaburns.com, or Douglas J. Klein, Esq., dklein@nullgenovaburns.com, in the Labor Law Practice Group.

New Jersey Interest Arbitration Reform: Are You Prepared For Your Next Round of Negotiations?

New Jersey public employers are currently feeling the effects of Arbitration Reform Bill P.L. 2010 c.105 (“the legislation”), which applies to any collective negotiations agreement (“agreement”) expiring on or after January 1, 2011 to March 31, 2014. This legislation sunsets on April 1, 2014. But in the meantime, the legislation greatly impacts the role of arbitration in police and firefighter contract negotiations by establishing a 2 percent cap on the aggregate increase in “base salary” that can be provided to public employees in an interest arbitration award. The legislation’s 2 percent cap prohibits an arbitrator from issuing an award that, on an annual basis, increases “base salary” by more than 2 percent of the aggregate amount expended by the employer on “base salary” items for the members of the union in the 12 months immediately preceding expiration of the agreement. An arbitrator can distribute the aggregate monetary value over the term of the agreement in unequal annual percentages.

In negotiations and during interest arbitration, disputes often arise as to what qualifies as “base salary” and “non-salary economic issues”. The legislation provides that the 2 percent cap applies to all “base salary” items, such as step increment payments, longevity and cost of living increases. The legislation specifically prohibits an arbitrator from issuing an award that addresses “non-salary economic issues” unless already included in the existing contract. “Non-salary economic issues” encompass paid time off, pension costs, and health /medical insurance costs. The legislation’s exclusion of “non-salary economic issues” from an award is particularly important because it restricts an arbitrator’s ability to create new cost items in successor contracts.

There is currently no case law to provide further guidance on the legislation’s distinction between “base salary” and “non-salary economic issues,” but we will provide updates on any new developments.

Should you need assistance or have any questions regarding interpretation or implementation of the legislation, please contact Joseph Hannon, Esq. or Phillip Rofsky, Esq. in our Labor Law Group.