Pace v. Hamilton Cove, 258 N.J. 82 (2024). Class action waivers and mandatory arbitration provisions often appear together in consumer contracts. They are among the tools sellers use to restrict consumers’ ability to seek redress for wrongful seller conduct such as consumer fraud, the subject of the allegations in this case. Plaintiff tenants alleged that they were promised certain security services at defendants’ residential building in Weehawken, but defendants did not keep those promises. Plaintiffs sued on behalf of a putative class. Their leases had a class action waiver but no mandatory arbitration clause.
A number of cases have held that a class action waiver accompanied by a mandatory arbitration clause is enforceable. The question in this case was whether a class action waiver without a mandatory arbitration provision is against public policy and unenforceable. As discussed here, the Appellate Division so held after granting leave to appeal, affirming the Law Division, which had denied defendants’ motion to dismiss. Defendants got the Supreme Court to grant leave to appeal. The Supreme Court unanimously reversed and remanded in an opinion by Justice Pierre-Louis that applied de novo review.
No federal or New Jersey case that upheld class action waivers when accompanied by a mandatory arbitration clause suggested that a waiver was unenforceable if a mandatory arbitration provision were absent, the Court said. “Nor does the fact that class actions advance several important policy goals mean that they cannot be waived. Our law supports the contractual waiver of many rights that advance important goals, such as the constitutional right to a jury trial, provided that the requisite procedural safeguards surrounding the waiver are met.” The Court distinguished cases elsewhere that had voided class action waivers where a statute “expressly permits class actions” (the Consumer Fraud Act, Justice Pierre-Louis observed, does not).
The question then became whether the class action waiver in plaintiffs’ leases was unconscionable. The leases were alleged to have been contracts of adhesion, but that fact was only “the beginning, not the end of the inquiry.” The Court applied the factors of Rudbart v. N. Jersey Water Dist. Water Supply Comm’n, 127 N.J. 344 (1992), to determine unconscionability. Those factors are “1) the subject matter of the contract, (2) the parties’ relative bargaining positions, (3) the degree of economic compulsion motivating the adhering party, and (4) the public interests affected by the contract.”
The Court discussed the first factor only briefly. The second factor– relative bargaining power– did not favor either side. “The landlord here is certainly in a superior bargaining position given the standard-form lease agreement presented. Although both plaintiffs obtained some apparently negotiated benefits in their leases like free rent for a period of time, the lease was in essence a take-it-or-leave-it contract.” But the circumstances here differed from prior cases where the Court had found unconscionability. Those cases involved sellers preying on consumers with extortionate interest on payday loans or taking advantage of an elderly woman with little formal education. Here, “plaintiffs had time to consult with an attorney and were free to seek out alternative housing arrangements if they did not agree with the lease’s terms.”
As to the third factor, plaintiffs did not allege economic compulsion. And while the Court did not “suggest that a complaining party must be under dire circumstances to make a successful showing under factor three, … the record must contain some indicia of economic compulsion. There were likely many other apartments “available for a monthly rent comparable to the $3,700 rent at issue here.”
Finally, plaintiffs failed factor four. “Plaintiffs would have us believe they were faced with only two
options: bringing a class action or not instituting an action at all. Yet nothing in the record supports that dilemma. To the contrary, plaintiffs acknowledged in their complaint that another tenant has brought an individual suit against defendants. The class action waiver here does not prohibit plaintiffs, and similarly situated tenants of Hamilton Cove, from individually vindicating their statutory rights under the CFA, which allows for treble damages and recovery of attorneys’ fees for successful claims. Because the class action waiver at issue does not functionally operate as an exculpatory clause,” it was not unconscionable, so plaintiffs lost.
The ruling that a class action waiver need not be accompanied by a mandatory arbitration clause appears correct. But it was surprising that the Court would have found facts, such as that other apartments were available at comparable rents, at the motion to dismiss stage, without record evidence beyond the complaint to go on. Did the availability of other apartments refer only to those in Weehawken, or were defendants permitted to contend that apartments elsewhere were in the same competitive market, and how far would that relevant market area extend? Since the Court remanded instead of dismissing outright, there could be discovery on such issues.
Another issue on which discovery might have been appropriate was the fact, critical to the Court’s Rudbart analysis, that a lone tenant filed his or her own individual action against defendants. The Court concluded that that meant that plaintiffs were not without recourse if they could not pursue a class action. But the action of a single tenant at this large development does not automatically show that an individual action is realistic. That was likely an idiosyncratic filing, one that few if any other tenants would realistically make given the time and expense of suing well-resourced defendants on their own. Did that tenant attract counsel to handle his or her individual case? Could these plaintiffs have done so? The Court’s conclusion on factor four appears hasty.
Moreover, dismissals on motions to dismiss are normally without prejudice. The Court did remand this case for further proceedings, perhaps indicating that plaintiffs should be given the chance to replead adequately on the unconscionability issue. But the Court did not say that explicitly, and there may be a dispute about that on remand.