Earlier this year, the New Jersey Supreme Court held in Pace v. Hamilton Cove that class action waivers in consumer contracts that do not contain an arbitration clause (i.e., a stand-alone class action waiver) are not per se contrary to public policy. While cautioning that such waivers may be unenforceable if found to be unconscionable or otherwise violative of state law, the court upheld the waiver in this case because the plaintiffs clearly and unambiguously waived their right to maintain a class action and the parties’ lease contract was not unconscionable as a matter of law.

In Pace, plaintiffs brought a class action against defendants under the New Jersey Consumer Fraud Act (CFA) when they discovered that their apartment complex did not have around-the-clock security, contrary to defendants’ alleged representations. The defendants moved to dismiss the claims, or strike the class allegations, because the lease agreement contained an express class action waiver in which the plaintiffs agreed that any claims against the defendants would be brought in their “individual capacity,” and they “expressly waive[d] any right and/or ability to bring, represent, join or otherwise maintain a Class Action or similar proceeding against [the defendants] … in any forum.”

The trial court denied defendants’ motion and the Appellate Division affirmed, holding that a class action waiver in a contract that does not contain a mandatory arbitration provision “is unenforceable as a matter of law and public policy.” The Appellate Division acknowledged that under the U.S. Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion, class action waivers in consumer contracts are valid and enforceable under the Federal Arbitration Act (FAA), which preempts inconsistent state law. However, the Appellate Division reasoned, Concepcion and the FAA are “irrelevant” in the absence of an arbitration clause. Therefore, the Appellate Division concluded, stand-alone class action waivers in consumer contracts cannot be enforced as a matter of public policy, regardless of whether they are unconscionable, because they deprive consumers of fundamental procedural and due process rights provided by New Jersey law.

The New Jersey Supreme Court granted defendants’ motion for leave to appeal and reversed the Appellate Division’s ruling. The court held that the Appellate Division erred in establishing a bright-line rule invalidating class action waivers in consumer contracts in the absence of an arbitration clause. The court emphasized that Concepcion “nowhere suggest that class waivers cannot be enforced outside the arbitration context,” and New Jersey law supports the contractual waiver of many rights that advance important goals, including the constitutional right to a jury trial. Still, “a particular class action waiver in a given contract may be unenforceable if found to be unconscionable or invalid under general contract principles.”

The New Jersey Supreme Court next found that the class action waiver in Pace was not unconscionable under New Jersey law. Among other things, it found that (1) the plaintiffs knowingly and voluntarily waived their right to a class action and were clearly on notice that they could only proceed with a lawsuit against the defendants on an individual basis, (2) while the lease was essentially a take-it-or-leave-it contract, the plaintiffs had time to consult with an attorney and were free to seek out alternative housing arrangements if they disagreed with the lease’s terms, as they had the ability to choose from a vast selection of comparably priced apartments, and (3) the class action waiver did not preclude plaintiffs from individually vindicating their statutory rights because in the CFA “there is neither a controlling statutory provision that expressly permits class actions … nor a clear statement of public policy disfavoring class action waivers.”

Since Concepcion is the law of the land and is applicable in both federal and state courts, it is easier to enforce a class action waiver in a consumer contract if it is contained in an arbitration clause governed by the FAA. However, as Pace demonstrates, there can be circumstances in which a stand-alone class waiver is enforceable depending on the facts, the applicable law and/or the jurisdiction involved. The obverse is also true. In fact, in a case we wrote about last year, the Rhode Island Supreme Court refused to enforce a stand-alone class action waiver because that state’s Deceptive Trade Practices Act provides that consumers “may … bring an action on behalf of themselves and other similarly injured and situated persons to recover damages.”

We will continue to update you on decisions in this important area.