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NJ Supreme Court Holds Invalidity of Transaction as a Whole Does Not Negate Arbitration Agreement

The Supreme Court of New Jersey held that where a plaintiff challenges the validity of a transaction as a whole and not specifically the arbitration agreement that is included as part of a transaction, the plaintiff must arbitrate their claims because an arbitration agreement is severable and enforceable, notwithstanding a plaintiff’s general claims about the invalidity of the transaction as a whole.

Accordingly, the judgment of the appellate court was reversed and the trial court orders compelling arbitration were reinstated.

A copy of the opinion in Goffe v. Foulke Management Corp. is available at:  Link to Opinion.

The plaintiffs each purchased cars from the defendant car dealerships.  As part of their purchases, the plaintiffs each signed several agreements (collectively, “sales contracts”), including arbitration agreements.

The arbitration agreements provided that “[i]f either you or we file a lawsuit . . . or other action in a court, the other party has the absolute right to demand arbitration following the filing of such action.”  They further provided that “[t]his agreement applies to all claims and disputes between you and us.”

Following the sales, the plaintiffs brought separate lawsuits against the respective dealerships, each alleging that the dealerships engaged in deceptive and unconscionable practices, including misrepresentations and concealment in the buying process.  Based on the alleged wrongful conduct, the plaintiffs asserted claims under New Jersey consumer fraud statutes, the federal Truth in Lending Act, and for common law fraud.

After the dealerships moved to dismiss each case and compel arbitration, the trial courts granted the motions and ordered arbitration.

The plaintiffs appealed and the appellate court consolidated the cases.  The appellate court then reversed the orders of the trial courts.  In reaching its decision, the appellate court applied the summary judgment review standard to the motions to compel arbitration and concluded that under the Third Circuit’s ruling in Guidotti v. Legal Helpers Debt Resolution, L.L.C., 716 F.3d 764 (3d Cir. 2013), the trial courts should have conducted an evidentiary hearing to resolve, as a threshold issue, whether the parties entered into an enforceable contract.

The New Jersey Supreme Court then granted the dealerships’ petitions for certification.

The central issue before the New Jersey Supreme Court was “whether plaintiffs should be compelled to address their claims before an arbitrator.”

The plaintiffs argued that because their sales contracts were invalid, either in the formation or because they were effectively rescinded through the contract’s cancellation, then the arbitration agreements also could not be enforced because they were part of the overall invalid sales contracts.

The dealerships argued that the question of the enforceability of the arbitration agreements was a question for the arbitrator to decide and not the courts because the plaintiffs did not issue a challenge specifically to the arbitration provisions.

In analyzing the issue, the New Jersey Supreme Court noted that “[i]n applying the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 to 16, the United States Supreme Court has provided substantial guidance on the question of whether arbitration should be compelled in situations such as we address in this case.”

Moreover, “New Jersey case law acknowledges the preeminence of the national policy established by Congress through the FAA as well as the Supreme Court’s holdings interpreting and implementing that policy.”

Thus, “we look to the Supreme Court’s decisions to guide us in the enforcement of arbitration agreements according to their terms.”

First, the New Jersey Supreme Court reviewed the decision in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801 (1967), wherein the Supreme Court of the United States (SCOTUS) “held that when a plaintiff raises a claim of fraud in the inducement of a contract as a whole – rather than fraud in the making of the arbitration agreement itself – the FAA requires that the dispute be resolved by the arbitrator.”

SCOTUS’s determination in Prima Paint “recognized that arbitration agreements are severable from the rest of the contract and that the arbitration agreement may be valid separate and apart from the contract as a whole, provided that a party has not challenged the arbitration agreement itself.”

Further, “[SCOTUS] reaffirmed the Prima Paint rule more recently in” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S. Ct. 1204 (2006) and Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772 (2010).

The New Jersey Supreme Court noted that “Plaintiffs do not dispute the validity of the arbitration agreement itself nor do they dispute the delegation provision within it that delegates the question of arbitrability to the arbitrator.”

Instead, “they have continuously maintained that the contract was the product of fraudulent inducement and that the arbitration agreement – within that sales contract – is thus also invalid.”

Thus, based on SCOTUS precedent, the New Jersey Supreme Court had “no doubt that the arbitration agreements in plaintiffs’ contracts . . . are entitled to enforcement.”

Further, “the argument that either plaintiff did not understand the import of the arbitration agreement and did not have it explained to her by the dealership is simply inadequate to avoid enforcement of these clear and conspicuous arbitration agreements that each signed.”

Accordingly, the New Jersey Supreme Court held that the plaintiffs “must arbitrate their claims as to the enforceability of the overall sales contract,” as well as “their various statutory and common law claims.”

Moreover, “because plaintiffs here challenge the contract as a whole rather than the arbitration agreement itself, we hold that the Guidotti summary judgment standard does not apply in this instance.”

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Jeffrey Karek practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in defending consumer finance lawsuits in both state and federal trial courts, and on appeal. Such litigation includes allegations brought under TILA, HOEPA, RESPA, FDCPA, TCPA, FCRA, and state consumer protection statutes, including in the defense of putative class actions. Jeff received his Juris Doctor from the University of Michigan Law School, and graduated magna cum laude with a Bachelor of Business Administration degree from Western Michigan University.

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