NJ Supreme Court Affirms—Full Steam Ahead on Arbitration in New Jersey

Seyfarth Synopsis: The NJ Supreme Court issues its combined opinion in two cases that we previously blogged about (Colon v. Strategic Delivery Solutions, LLC and Arafa v. Health Express Corporation), holding that arbitration agreements can be enforceable under the New Jersey Arbitration Act (NJAA), even if those agreements would be otherwise exempt from arbitration under Section 1 of the Federal Arbitration Act (FAA).

On July 14, 2020, the New Jersey Supreme Court decided two cases involving arbitration agreements in contracts that the transportation-worker plaintiffs argued fell under Section 1 (the “Exemption Clause”) of the FAA: Colon v. Strategic Delivery Solutions, LLC and Arafa v. Health Express Corporation. The question posed in both cases was whether the disputed arbitration agreements could be enforced under the NJAA, even if they were exempt from the FAA pursuant to the U.S. Supreme Court’s New Prime Inc. v. Oliveira decision, which held that all transportation workers were subject to the Exemption Clause. Ultimately, the New Jersey Supreme Court held that the NJAA applies even if the parties to the agreements are exempt under FAA § 1.

We previously blogged about Colon and Arafa when they were before the Appellate Division. In Colon, the Appellate Division granted the defendants’ motion to dismiss and compel arbitration, holding that even if plaintiffs were engaged in interstate commerce (and thus, were exempt under the FAA), the NJAA, which does not have a corollary to the FAA’s § 1, would still apply and compel their claims to arbitration. The case was remanded to determine whether plaintiffs engaged in interstate commerce. In the separate Arafa case, the Appellate Division held that the plaintiffs were exempt under FAA § 1, but did not address the critical NJAA issue.

Any question that remained as to whether arbitration agreements subject to the FAA’s Exemption Clause are nevertheless enforceable pursuant to the NJAA was definitively resolved by the New Jersey Supreme Court. The Court affirmed the Appellate Division in Colon and reversed Arafa, holding that transportation workers can be compelled to arbitrate under the NJAA if they are exempt from the FAA.

The Court held that, consistent with the New Prime decision, FAA § 1 exempts from the FAA only contracts of transportation workers engaged in interstate commerce. Indeed, the term “workers” is not limited to employees and also includes independent contractors. The plaintiffs in Arafa were therefore exempt from the FAA, whereas Colon was remanded to determine whether the plaintiffs were transportation workers engaged in interstate commerce.

Significantly, the Court also rejected arguments that the NJAA could not be applied unless it was expressly invoked in the agreement. For arbitration agreements forged after the NJAA was passed in 2003, the NJAA applies automatically unless preempted by the FAA. In upholding the arbitration agreement, the Court also held that plaintiffs voluntarily waived their ability to proceed as a class. All Justices joined the opinion, except Justice Albin, who concurred in the judgment, but dissented to note that the class-waiver provisions were unconscionable because the provisions prevented litigants from pursuing claims that predictably involved small amounts of damages.

This decision is a helpful reminder for employers with national or regional workforces to consider state law nuances (of which there are many) when drafting arbitration agreements. While the Court noted that the NJAA is “nearly identical” to the FAA and would apply in this instance even if plaintiffs were exempted from the FAA, this decision also highlights the possibility for divergent results under the FAA and NJAA. It remains best practice to incorporate applicable state arbitration statutes into agreements and include language reflecting the workers’ clear and unambiguous waiver of a jury trial on covered claims and waiver of the ability to proceed on a class or collective basis.

For additional tips on drafting arbitration agreements and employment contracts in general, please contact the authors, your Seyfarth attorney, or any member of the Labor & Employment team.