The ever increasing threats of mass arbitration have led many companies to re-examine the terms of their contracts with consumers and to include provisions intended to guard against such threats.  One of the options some companies may find themselves considering is doing away with the arbitration clause but keeping the class action waiver.

A class action waiver with an agreement to arbitrate is enforceable under the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act preempts state laws that prohibit class action waivers in arbitration agreements.  563 U.S. 333, 352 (2011).  However, a freestanding class action waiver, i.e., without an agreement to arbitrate, may be unenforceable in some states, including in California if certain conditions are met.  Discover Bank v. Superior Ct., 36 Cal. 4th 148, 162 (2005).

The New Jersey Supreme Court recently heard oral argument on this issue and may soon resolve this debate under New Jersey law.  In Pace v. Hamilton Cove, tenants of an apartment building brought a putative class action alleging that the building management made false promises that the apartment would have 24/7 security.  475 N.J. Super. 568 (App. Div.), leave to appeal granted, 255 N.J. 342 (2023).  The tenants asserted claims of common law fraud and violations of the state Consumer Fraud Act.  The defendants moved to dismiss the suit, advancing the argument, among others, that the plaintiffs’ lease agreements contained a class action waiver.

The trial court declined to dismiss the suit.  On interlocutory appeal, the Appellate Division of the New Jersey Superior Court affirmed and held that standalone class action waivers are unenforceable as a matter of law and public policy.  In particular, the appellate court recognized that the right to pursue a class action may be waived in an arbitration agreement, but reasoned that in the context of a freestanding class action waiver, the policies favoring arbitration and encouraging enforcement of arbitration agreements do not apply.  Instead, New Jersey’s public policy favoring class actions means that standalone class action waivers cannot be enforced, according to the appellate court.

Earlier this month, the New Jersey Supreme Court heard oral argument in this case, and may rule on this issue in the near future.  The outcome of this appeal will be of interest to companies that are considering getting rid of the arbitration clause in their contracts for fear of mass arbitration threats but are hoping to keep the class action waiver.