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New Jersey Supremes Rule Against Class Action Waivers In Binding Arbitration Clause

August 11, 2006 - Trenton, New Jersey

The New Jersey Supreme Court on Thursday held that a provision in a payday loan contract forbidding participation by the consumer in class-wide arbitration is unenforceable. The court decided that the appropriate remedy is to sever the provision and enforce the remaining valid portions of the arbitration agreement.

Binding Arbitration is a legal alternative to litigation in which the parties agree in advance that, should a dispute arise, they will submit their positions to a neutral third party for resolution. Arbitration dates back to the 18th century. Factoid: The American Arbitration Association was founded in 1926.

Binding Arbitration Agreements in rent-to-own and payday loan contracts are all the rage. All branches of government see arbitration as a positive outcome, relieving congestion in the courts while offering more efficient relief for consumers as well as some level of protection for business. The New Jersey decision upheld the arbitration agreement, but struck down the class-wide clause of the agreement.

Download the full decision as an Adobe Acrobat PDF.

Case history

On May 23, 2003, plaintiff Jaliyah Muhammad received a short-term, single advance, unsecured loan of $200 from defendant, County Bank of Rehoboth Beach, Delaware. The principal plus a $60 finance charge was due on June 13, 2003. The annual percentage rate (APR) listed on the note was 608.33%. Muhammad extended the loan twice (with a $60 finance charge each time), resulting in a total of $180 in finance charges. She also obtained two similar loans from County Bank in April and June 2003.

To receive a loan, Muhammad had to complete and sign three pages of standard form contracts. The 2- page LOAN APPLICATION form contained the arbitration agreement, which included a provision that stated that all disputes "shall be resolved by binding individual (and not class) arbitration" under the procedures of the National Arbitration Forum (NAF). Above the signature line, the LOAN APPLICATION also stated, "By signing below you also agree to the Agreement to Arbitrate All Disputes and the Agreement Not To Bring, Join or Participate In Class Actions."

Muhammad also signed a LOAN NOTE AND DISCLOSURE form, which contained sections titled "Agreement to Arbitrate All Disputes" and "Agreement Not To Bring, Join or Participate In Class Actions." The first of those sections provided that all disputes "shall be resolved by binding individual (and not joint) arbitration" under the procedures of the NAF. Directly above the signature line, the LOAN NOTE AND DISCLOSURE stated, "BY SIGNING BELOW, YOU AGREE TO ALL OF THE TERMS OF THIS NOTE, INCLUDING THE AGREEMENT TO ARBITRATE ALL DISPUTES AND THE AGREEMENT NOT TO BRING, JOIN OR PARTICIPATE IN CLASS ACTIONS."

In February 2004, Muhammad filed a putative class-action suit against County Bank, Main Street Service Corp. (a loan servicer for County Bank), and Easy Cash and Telecash (both registered trade names of County Bank). She alleged that Easy Cash, Telecash, and Main Street violated the Consumer Fraud Act, the civil usury statute, and the New Jersey RICO statute by charging and conspiring to charge illegal rates of interest. She also alleged that County Bank aided and abetted the other defendants' unlawful conduct by renting out its name without actually funding the loans.

Muhammad argued that the arbitration agreement was unconscionable based on the class-action waiver and other provisions. The trial court disagreed and granted defendants' motion to compel arbitration pursuant to the Federal Arbitration Act (FAA). The Appellate Division affirmed in a published opinion.

The Supreme Court granted Muhammad leave to appeal. Amici curiae briefs were filed in support of plaintiff by Legal Services of New Jersey; AARP, the Consumers League of New Jersey, and the National Association of Consumer Advocates; and the Attorney General on behalf of the New Jersey Division of Consumer Affairs. Amici briefs were filed in support of defendants by the Chamber of Commerce of the United States of America and the New Jersey Business and Industry Association.

Supreme Court Opinion Summary

The New Jersey Supreme Court held that the provision in this consumer loan contract that forbids class-wide arbitration is unconscionable and thus unenforceable. The appropriate remedy is to sever the unconscionable provision and enforce the remaining valid portions of the arbitration agreement.

News Source

RTO Online, Staff Writer

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