In Aftermath of The U.S. Supreme Court’s New Prime Decision, NJ Appellate Division Enforces Some Driver Arbitration Agreements, Invalidates Others

On June 4 and June 5, 2019, two different Appellate Division panels issued opinions discussing the enforceability of arbitration agreements signed by pharmaceutical delivery drivers who claimed the defendants violated New Jersey’s Wage and Hour and Wage Payment Laws. One panel held unanimously that the arbitration agreements are enforceable against the drivers under New Jersey state law despite the parties’ agreement “to comply and be bound by the Federal Arbitration Act” (FAA). Colon v. Strategic Delivery Solutions (“SDS”) (June 4, 2019). The second panel held, also unanimously, that since the parties expressly agreed that the FAA would govern their agreements and the U.S. Supreme Court’s New Prime decision made the FAA inapplicable to their agreements, the arbitration agreements were invalid. Arafa v. Health Express (June 5, 2019). The Colon v. SDS plaintiffs have petitioned the New Jersey Supreme Court for certification; Health Express has done the same.

Colon v. SDS Decision

In the SDS case, the lower court enforced the arbitration agreements at issue but did not find whether SDS’s driver were in interstate commerce; the New Prime decision had not issued at the time. Applying the New Prime decision, the Appellate Division determined it could not decide whether the FAA applied to the arbitration agreements, because the lower court had not resolved whether the drivers were in interstate commerce. Accordingly, the Appellate Division remanded the case to the trial court. However, the Appellate Division held that even if the drivers are found to be driving in interstate commerce, thereby making the FAA inapplicable to the arbitration agreements, since the FAA does not preempt state law, New Jersey’s Arbitration Act (“NJAA”) would apply to the arbitration agreements, and the Appellate Division would enforce the arbitration agreements under the NJAA. The court noted that the “agreement expressly provided that it was governed by the state law where the vendor resided, which in this case meant New Jersey. The agreement did not say that the NJAA did not apply.”

The Appellate Division also enforced the jury trial waiver and the collective action waiver. The Appellate Division explained that since the jury trial waiver was linked to the arbitration agreement, the jury trial waiver was effective. The Appellate Division reasoned that the class action waiver was not linked to the arbitration agreement, was clear and unambiguous, and required the plaintiffs to arbitrate their substantive “claims on an individual (non-class) basis.” The court reinstated the complaint and sent the case back to the Law Division for a determination whether SDS’s drivers are exempt under the FAA.

The Appellate Division did not address the SDS agreement’s “Reformation” clause, which stated in the event any provisions are determined to be illegal, invalid or unenforceable, the agreement is to be modified so that it is enforceable, or if modification is impossible, then the invalid provision is to be severed from the agreement, with no effect on the remaining provisions of the agreement On remand, the effect of the Reformation clause will likely be litigated.

Arafa v. Health Express Decision

The Appellate Division’s holding in Health Express was short and straightforward. After the New Prime decision, the court agreed to reinstate the plaintiff’s appeal from the lower court’s dismissal of the complaint and arbitration order. Health Express apparently conceded that its drivers drove in interstate commerce. The court focused on the contractual FAA language: “This Agreement is governed by the Federal Arbitration Act….” Plaintiffs argued that in view of the quoted language and the New Prime decision, there was no meeting of the minds as to the law governing the arbitration agreement. Generally, the Appellate Division agreed with plaintiffs and held that Health System’s contract with plaintiff “qualifies under Section 1 under the FAA [and] the FAA cannot govern the arbitration agreement, as contemplated by the parties [and] their arbitration agreement is unenforceable for lack of mutual assent.” The court reversed the dismissal of the complaint and remanded the case to the lower court. Unlike the SDS agreements, there was no language making New Jersey law applicable to the Health Express arbitration agreement. The court did not address the final language in the arbitration agreement, as follows: “Except as stated in paragraph A(3) above, in the event any portion of this Agreement is deemed unenforceable, the remainder of it will be enforceable.”

Bottom Line

A lesson learned from these two decisions is that, as the scope of the FAA is refined by the courts, a prudent drafting approach may be to include in the arbitration agreement alternative language that instructs the parties, and informs the reviewing court, as to the body of law that applies to the arbitration agreement in the event the FAA is determined not to apply.

For more information on this court development, wage and hour law compliance, or arbitration agreements, please contact Patrick W. McGovern, Esq., Partner in the firm’s Labor Law, Employee Benefits and Executive Compensation, Immigration Law and Wage and Hour Compliance Practice Groups, at PMcGovern@genovaburns.com.