NJ Appeals Court Invalidates Arbitration Provision for Failing to Specify Forum

In Order to be Enforceable, Arbitration Provisions Must State Where and How Disputes Will Be Resolved…

In order to be enforceable, arbitration provisions must state where and how disputes will be resolved, according to the Appellate Division of the New Jersey Superior Court. In Flanzman v. Jenny Craig, Inc., the court invalidated the arbitration provision in an employment agreement between Jenny Craig, Inc. and a former employee because it failed to specify the forum for arbitrating claims.

Arbitration Agreement

The plaintiff, Marilyn Flanzman (Flanzman or Plaintiff), had worked for Jenny Craig, Inc. (Jenny Craig or Defendant) for 26 years as a weight loss counselor. Jenny Craig gradually reduced Plaintiff’s full-time hours to only three hours per week. The substantial reduction in hours led to her termination. At the time of her termination, Flanzman was 82 years old.

Flanzman subsequently filed suit, alleging (1) age discrimination and harassment in violation of the New Jersey Law Against Discrimination (NJLAD); (2) discriminatory discharge and/or constructive termination in violation of the NJLAD; and (3) aider and abettor liability under the NJLAD. Defendant then filed its motion to compel arbitration relying on the parties’ arbitration agreement.

Plaintiff has no recollection of signing the document that contained the arbitration agreement, which the parties did not execute when the defendant hired her. Rather, in 2011, twenty years after she was hired, Jenny Craig presented her with the document, which she signed to maintain her employment. In pertinent part, the agreement provides:

Any and all claims or controversies arising out of or relating to [plaintiff’s] employment, the termination thereof, or otherwise arising between [plaintiff] and [defendant] shall, in lieu of a jury or other civil trial, be settled by final and binding arbitration. This agreement to arbitrate includes all claims whether arising in tort or contract and whether arising under statute or common law including, but not limited to, any claim of breach of contract, discrimination or harassment of any kind.

The agreement did not specify an arbitral forum. As explained by the Appellate Division, a forum is the mechanism that parties use to arbitrate their dispute. Examples include an arbitral institution, such as the American Arbitration Association (AAA) or the Judicial Arbitration and Mediation Services (JAMS), as well as a general method for selecting a different arbitration setting. The court further noted that “[t]he mechanism or setting for the proceeding is important because the rights associated with arbitration forums may differ depending on which forum the parties choose, or on how they define the arbitral process.”

The trial court ordered the parties to proceed to arbitration, but determined that because the arbitration agreement omitted the forum, the “the choice of which arbitral body would conduct the arbitration would be turned over to the [p]laintiff.” On appeal, Flanzman argued that that the arbitration agreement lacked mutual assent and is therefore invalid as a matter of contract law. She further maintained that the parties did not reach a “meeting of the minds” as to the rights that replaced her right to a jury trial.

Appellate Division’s Decision

The Appellate Division agreed and reversed the order compelling arbitration. “We hold that the parties lacked a ‘meeting of the minds’ because they did not understand the rights under the arbitration agreement that ostensibly foreclosed plaintiff’s right to a jury trial,” the panel stated. 

In reaching its decision, the court emphasized prior precedent requiring that the party signing an arbitration “must be able to understand– from clear and unambiguous language– both the rights that have been waived and the rights that have taken their place.” It went on to conclude that an arbitration agreement is unenforceable if a party lacks the required understanding of what rights replace the right to judicial adjudication.

“Selecting an arbitral institution informs the parties, at a minimum, about that institution’s general arbitration rules and procedures,” the panel explained. “Without knowing this basic information, parties to an arbitration agreement will be unfamiliar with the rights that replaced judicial adjudication. That is, the parties will not reach a ‘meeting of the minds.’”

The Appellate Division noted that while the parties must reach a “meeting of the minds,” there are no magic words required. It explained:

We do not mean to imply that the parties must detail in the arbitration agreement the exact manner in which the arbitration proceeding will proceed. See, e.g., N.J.S.A. 2A:23B-15(a) (giving the arbitrator such discretion). But to understand the ramifications of a waiver of a jury trial, the parties must generally address in some fashion what rights replace those that have been waived. Without limitation, the parties might generally indicate in their agreement that one or more individuals will arbitrate the case, or they could identify an arbitral institution. Doing so addresses the rights that replaced the right to judicial adjudication.

Message for New Jersey Businesses

Because the decision in Flanzman v. Jenny Craig, Inc. calls into question similar arbitration provisions, it could have a significant impact on New Jersey businesses. It is important to note, however, that Jenny Craig may still seek review by the New Jersey Supreme Court. Until the state’s highest court renders a decision, businesses should review their arbitration agreements to confirm that they are not subject to similar attacks. For guidance, we encourage you to contact a member of the Scarinci Hollenbeck Litigation Group.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Joel Kreizman, at 201-806-3364.