Businesses in search of a New Year’s resolution should consider taking a fresh look at their arbitration agreements with their customers. Although the United States Supreme Court has not hesitated to enforce such agreements, many state courts remain hostile—sometimes openly so—to arbitration as a means of dispute resolution. In this alert we examine a recent decision finding that an agreement was ambiguous—and therefore unenforceable—because it stated that “either party may choose to arbitrate a dispute.” Even though it is an unpublished outlier that should not withstand review, it is an important reminder that businesses should continually review their customer-facing contracts in light of recent changes in the law.

The Issue

It is not uncommon for arbitration agreements in consumer contracts to use some variant of “either party may choose to arbitrate a dispute.” And it is not a mystery why. Indeed, such language serves several consumer-friendly purposes, for example emphasizing that the agreement is bilateral rather than unilateral, and clarifying that consumers do not breach the agreement—and by doing so become liable for the costs incurred in enforcing it—merely by virtue of filing suit in court. Although some plaintiffs have argued that such language creates a race to the courthouse in which the winner gets to choose the venue, and some businesses have moved away from such language in order to avoid such arguments altogether, courts have routinely found that such language “merely manifests the parties’ intent that arbitration be obligatory if either party so chooses.”

The Case

But the New Jersey Appellate Division may have just become the first appellate court to hold otherwise. In Trout v. Winner Ford, the plaintiff filed a putative class action and alleged that the defendant had violated the usual panoply of consumer-protection statutes by failing to disclose that a $75 fee would be added to his loan. The defendant responded by moving to compel individual arbitration pursuant to the parties’ arbitration agreement. That agreement permitted either party to choose to have a dispute decided in arbitration, either by commencing or compelling arbitration:

Either you or Lessor/Finance Company/Holder (“us” or “we”) (each, a “Party”) may choose at any time, including after a lawsuit is filed, to have any Claim related to this contract decided by arbitration. Neither party waives the right to arbitrate by first filing suit in a court of law. . . .

The agreement also made clear that, if either party did choose to have a dispute decided in arbitration, the dispute would not be decided under the same procedures that are available in court:

If either you or we choose to arbitrate a Claim, then you and we agree to waive the following rights:

  • RIGHT TO A TRIAL, WHETHER BY A JUDGE OR A JURY
  • BROAD RIGHTS TO DISCOVERY AS ARE AVAILABLE IN A LAWSUIT
  • OTHER RIGHTS THAT ARE AVAILABLE IN A LAWSUIT

As would be expected, the trial court enforced the arbitration agreement. It found that the arbitration agreement was not “ambiguous or vague in any way,” and that “it applie[d] to any claims related to this contract. . . . [And] it doesn’t matter whether it’s a statutory claim or a common law claim, it’s all claims. And it’s clear that class actions are not permitted by this particular agreement.” The plaintiff then appealed the decision.

The Decision

The Appellate Division reversed. The crux of its decision—the relevant part of which consisted of only two short paragraphs—was that the agreement did not “affirmatively inform[] plaintiff he could not pursue his statutory rights in court.” It reasoned that the word “may” is optional rather than obligatory, and therefore “leaves open the possibility a party may also proceed with a cause of action in court.” Because that language contained no “clear and unambiguous statement” that arbitration was the “exclusive remedy,” it reversed the trial court and refused to enforce the parties’ agreement.

That reasoning does not withstand scrutiny. Indeed, even if one assumes for the sake of argument that the heightened “clear and unambiguous” standard is not preempted by the Federal Arbitration Act, there is no principled reason why an agreement must state that arbitration is the parties’ “exclusive remedy.” On the contrary, it is perfectly reasonable for parties to agree that one party may file suit in court and, if it does, that the other party then has the choice to proceed in court or in arbitration. After all, that is far and away the most common context in which arbitration agreements are invoked.

In short, the court reached the wrong result because it asked the wrong question. The relevant question is not whether agreements state that arbitration is the exclusive remedy no matter what, but whether they state that arbitration will be the exclusive remedy if a party invokes its contractual right to require arbitration. And there is no denying that this agreement met that standard.

The Takeaway

It remains to be seen whether the defendant will seek further review of the Appellate Division’s ruling. For now it is unpublished, and is therefore unlikely to be cited, let alone followed, by another court. But even if it remains only an unpublished outlier, it is further evidence that New Jersey courts remain hostile to arbitration, and that businesses should stress-test their arbitration agreements—and indeed all of their customer-facing contracts—in light of recent developments in the law.