On October 17, 2018, New Jersey’s Appellate Division, in a published decision, refused to enforce an arbitration clause in an employment agreement where the clause did not select a forum for arbitration thereunder or describe a process for selecting such a forum.  In Flanzman v. Jenny Craig, Inc. et al., the plaintiff, after being terminated at the age of eighty-two, sued her former employer for employment discrimination pursuant to New Jersey’s Law Against Discrimination.

The employer then moved to compel arbitration, relying on an arbitration agreement signed by the plaintiff several years before in order to maintain her employment.  The broadly worded arbitration clause unmistakably provided that the parties agreed that “in lieu of a jury or civil trial,” they would settle any disputes between them – whether based upon statute or common law, contract or tort – “by final and binding arbitration.”  The agreement did not, however, identify a forum for the arbitration.

The trial court granted the motion to compel arbitration based upon the arbitration clause, but, on appeal, the Appellate Division reversed.  The court reasoned that, where an arbitration agreement does not select an “arbitral institution,” such as the American Arbitration Association (“AAA”) or Judicial Arbitration and Mediation Services (“JAMS”), the parties will not know basic information concerning the rights and procedures that would replace judicial adjudication, and thus, the parties will not have had the requisite “meeting of the minds” for enforcement of the agreement.   The court further explained that institutions like the AAA or JAMS have well-established arbitration rules and procedures for different types of disputes, and by specifically selecting one of these arbitral institutions, the parties are informed about the rights and procedures that will replace the rights that they have waived by agreeing to arbitration.

The court took pains to clarify that it was not imposing any special requirements on the type of language parties must use (as such requirements would violate the Federal Arbitration Act, which has been interpreted to prohibit courts from subjecting arbitration agreements to more burdensome requirements than other types of contracts).  To that end, the court cited, as an example, an out-of-state decision upholding an arbitration agreement where the agreement identified a forum and thereafter a process for selecting a forum should the named forum become unavailable.

It remains to be seen whether the Flanzman decision will be reviewed by the Supreme Court of New Jersey.  It is, however, consistent with a recent trend whereby New Jersey courts carefully scrutinize arbitration agreements, particularly in the employment context.  New Jersey-based employers are therefore well-served to remain abreast of these legal developments to ensure the enforceability of arbitration agreements.  And, following Flanzman, such agreements should identify an arbitral institution such as JAMS or AAA for the forum of the arbitration or, alternatively, should describe the method of and rules (or the process for selecting the method and rules) for any subsequent arbitration.

On August 23, 2018, New Jersey’s intermediate appellate court in Roman v. Bergen Logistics, LLC et al., ruled that employers could not contractually limit the remedies available for successful employment discrimination claims.  In that case, the plaintiff-employee and defendant-employer had signed an arbitration agreement at the time of the employee’s hiring.  The agreement provided that all employment-related claims, including statutory claims, would be resolved exclusively by final and binding arbitration.  Further, the agreement waived the plaintiff-employee’s right to collect punitive damages.

Subsequently, the plaintiff-employee sued her employer alleging claims for sexual harassment under New Jersey’s Law Against Discrimination (“LAD”).   In the trial court, the defendant-employer successfully obtained dismissal of the action based upon the arbitration agreement.  However, on appeal, the court ruled that the portion of the agreement purporting to limit the employee’s ability to recover punitive damages was unenforceable, reasoning that the availability of punitive damages served important public policy interests under the LAD: to deter misconduct and punish the wrongdoer. The appellate court therefore dismissed the action based upon the employee’s agreement to arbitrate any dispute, but invalidated the damages limitation as to the employee’s LAD-based claims so that, in any subsequent arbitration, the employee would be able to recover punitive damages.

The court’s ruling is consistent with a notable trend in New Jersey law, whereby courts uphold the parties’ freedom of contract but limit or invalidate portions of arbitration agreements on public policy grounds to the extent they impinge upon statutorily-granted rights under the LAD.  For example, in Rodriguez v. Raymours Furniture Co., 225 N.J. 343 (2006), the State’s highest court concluded that a provision in an employment application, purporting to require the employee to file any employment-based claim within six-months, was unenforceable as to the employee’s LAD-based claim.  The Court explained that, supplanting the applicable two-year statute of limitations for LAD claims with a mere six-month window effectively denied the employee important substantive rights provided by the statute.

New Jersey-based employers should review and potentially modify their current employment contracts to ensure that they are consistent with this current trend in the law.  While agreements to submit disputes to binding arbitration – including employment discrimination claims – will generally be upheld, limitations on substantive rights and remedies conferred by the LAD will likely be deemed unenforceable.

On Monday, May 21, 2018, the U.S. Supreme Court issued what is widely regarded as the most important decision for U.S. employers this year.  In a 5-4 decision, in Epic Systems Corporation v. Lewis (and two other related matters), Justice Neil Gorsuch, writing for the majority, held that workplace employment agreements that bar employees from participating in class and collective action litigation against their employers do not violate federal labor laws.  In so holding, the Court rejected the position of the National Labor Relations Board (“NLRB”) and other courts that such agreements violate the National Labor Relations Act’s (“NLRA”) protection of employees’ Section 7 rights to engage in “concerted activity.”

“The policy may be debatable but the law is clear:  Congress has instructed that arbitration agreements . . . must be enforced as written” wrote Justice Gorsuch, who went on to state that the Supreme Court was compelled to abide by “a congressional command requiring us to enforce, not override, the terms of the arbitration agreements before us.”  Citing the Federal Arbitration Act’s (“FAA”) “emphatic directions” that require courts to enforce arbitration agreements, the Court overturned NLRB and multiple courts’ decisions that found class and collective action waivers inequitable, and held that only employment agreements procured by fraud, duress, and unconscionability will not be enforced.

Leading up to the Epic Systems decision, the NLRB originally held in 2012, in D.R. Horton, Inc., that arbitration programs that include class and collective action waivers ran afoul of the NLRA,  which nullified the FAA’s policy favoring arbitration agreements. Numerous courts around the country have followed the NLRB including the Sixth, Seventh and Ninth Circuits, while others including the Second, Fifth and Eighth Circuits, have not so held.  Epic Systems now resolves this Circuit split.

Importantly, the Court also held that a state law attempting to circumvent the FAA’s mandates will not stand. States, therefore, cannot try to enact their own legislation to circumvent Epic Systems.

Following Epic Systems, and absent Congressional intervention, employers are permitted to enter into and enforce individual arbitration agreements containing class and collective action waivers.  Even employers who do not currently have individual arbitration agreements containing such waivers with their employees can modify their current employment agreements to include such terms.

It is important for all employers to carefully review their employment agreements and put considerable thought into whether an arbitration agreement with a class and collective action waiver is appropriate.

How times have changed. Not so long ago, courts and litigants were unreceptive to alternative dispute resolution (ADR). Now parties make much more use of these alternatives to litigation.  Steven Adler, Chair of the Employment Law Department of Cole Schotz recently had an article on the subject published in the MArch 28, 2011 issue of the New Jersey Law Journal.  Click here to read the article.