In 2014, the New Jersey Supreme Court held in Atalese v. U.S. Legal Services Group, L.P. that in order to be enforceable, arbitration clauses must contain an express waiver of the parties’ right to seek relief in a court of law.  Earlier this month, in County of Passaic v. Horizon Healthcare Services, Inc., the New Jersey Appellate Division ruled that Atalese does not apply to arbitration clauses in contracts between commercial entities.  That result, standing alone, is significant, since as one commentator has observed, it is a “published decision that fundamentally reshapes the interpretation of arbitration clauses in commercial contracts.”

But beyond the context of commercial contracts, the ramifications of County of Passaic might one day lead to Atalese being overturned even as applied to consumer and employment contracts on Federal Arbitration Act (FAA) preemption grounds. 

Section 2 of the FAA provides that a written arbitration agreement involving interstate commerce “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  (emphasis added).  Under this “saving clause,” a state law contract defense to arbitration must apply generally to “any contract,” not just to arbitration clauses, which cannot be singled out for special treatment.  Thus, the U.S. Supreme Court has held that the FAA preempted a state law requiring that “[n]otice that a contract is subject to arbitration” be “typed in underlined capital letters on the first page of the contract.”  The Court emphasized: “[S]tate law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.  A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with [the text of § 2].”  Moreover, several courts, including the Ninth Circuit, have held that under the FAA, a contract defense that applies only to certain types of contracts, but not others, is not “generally applicable” within the meaning of the FAA’s saving clause and cannot be interposed to defeat enforcement of an otherwise valid arbitration clause.

County of Passaic narrowed the scope of Atalese, limiting its applicability to arbitration clauses in consumer and employment contracts and exempting commercial arbitration clauses from its scope.  This result confirms that the “stricter approach” imposed by Atalese—which conditions the enforceability of an arbitration clause on its inclusion of an express waiver of the parties’ right to seek relief in a court of law—is not a generally applicable rule of New Jersey contract law that would be protected by the FAA’s saving clause.  Notably, under County of Passaic, Atalese does not even apply to all New Jersey contracts with arbitration clauses, much less New Jersey contracts as a whole.  Thus, assuming that County of Passaic withstands any further review, a strong argument could be made that the FAA preempts Atalese even in the context of consumer and employment arbitration clauses.

Might this be the beginning of the end for Atalese?  Only time will tell.  We’ll keep you updated on further developments in this important area.