New Jersey Permits Class Action Waivers Without Arbitration Clause

William Pace of Robert Walters (Plaintiffs) entered into lease agreements with the Hamilton Cove Apartments (Hamilton Cove) in Weehawken, New Jersey, which boasted “elevated, 24/7 security.” Such security was no doubt necessary, given Weehawken’s notoriety as the location of the dueling grounds where Aaron Burr (left) mortally wounded Alexander Hamilton (below, right).  Oddly enough, Plaintiffs did not rely on that fact but on Weehawken’s crime rate, alleged to be 1/3 higher than the New Jersey average.  Hmmph. There’s no musical about that.

The lease incorporated various addenda, one of which contained a class action waiver. Upon discovering that the complex did not in fact have the elevated security it claimed to have, Plaintiffs sought to bring a class action challenge to the lease under New Jersey’s Consumer Fraud Act. Hamilton Cove sought dismissal and asked the court to strike the class allegations.

The trial court denied Hamilton Cove’s motion. The intermediate appellate court affirmed, finding a class action waiver unenforceable as a matter of law and public policy when not linked to an arbitration clause.

In July, the New Jersey Supreme Court unanimously reversed in Pace v. Hamilton Cove. The Court first found that, in the absence of legislative action, the principle of freedom of contract overrides any public policy against class action waivers. The Court also found that the class action waiver is not unconscionable.

Although I am no fan of class-action waivers, and I hope that the New Jersey legislature takes note, I agree with the Supreme Court that the appellate court’s reasoning was a bit inside out. The appellate court started with AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), in which SCOTUS held that the Federal Arbitration Act (FAA) pre-empted state bans on class-action waivers. We gathered responses to that case here and here. The appellate court made the mistake of thinking that if you remove the FAA’s pre-emption, then class-action waivers violate public policy. That might be true if the legislature had so decreed, but New Jersey’s legislature has not done so. It should do so now, but until then, the Supreme Court is correct that nothing in New Jersey law or public policy prohibits class-action waivers.

While class actions serve an important purpose, the Court notes, that does not mean that parties, exercising their right to freely contract, cannot waive class actions. Other states have enacted statutory protections for class actions; New Jersey has not. While any particular class-action waiver may be unenforceable if unconscionable or at odds with other legal doctrines, New Jersey has adopted no per se ban on class-action waivers not in connection with arbitration clauses.

The Court next proceeds to the question of whether the waiver at issue here is unconscionable.  The Court assumed without deciding that the leases at issue were adhesive contracts. In such cases, New Jersey has a four part test, considering both substantive and procedural components on the agreement. Courts consider: (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. 

As to the first factor, landlord/tenant agreements are governed by the Consumer Fraud Act (CFA), which presumably is a factor that favors Plaintiffs.  The Court did not think the parties’ bargaining positions cut in favor of either party. Plaintiffs had three days to consider the lease and seek the advice of counsel. The Plaintiffs were under no compulsion. Public interests would be adversely affected if the class-action waiver prevented Plaintiffs from vindicating their rights under the CFA, but here the Court found that Plaintiffs could pursue their claims on an individual basis. 

The Court concluded that Plaintiffs knowingly and voluntarily waived their rights to proceed via class action. The case was remanded for further proceedings.