From JDSupra, Thomas Howley and Robert Szyba discuss a recent case in which the New Jersey Supreme Court said that an arbitration agreement was valid even though it did not specify a arbitrator, arbitration organization or process for selecting either. Thomas and Robert write:
Seyfarth Synopsis: In Flanzman v. Jenny Craig, Inc., the New Jersey Supreme Court reversed the Appellate Division and held that an arbitration agreement may bind the parties even if the agreement does not designate a specific arbitrator, arbitration organization, or process for such a designation. In situations where there is no such designation, the default rules found in the Federal Arbitration Act and New Jersey Arbitration Act will apply to fill any gaps in the agreement.
The New Jersey Supreme Court recently issued an opinion in Flanzman v. Jenny Craig, Inc. reversing the Appellate Division and enforcing the parties’ arbitration agreement. Plaintiff, a former employee, argued that the arbitration agreement was unenforceable because it did not designate a specific arbitrator, arbitration organization, or process for such a designation. The Court rejected this argument because both the New Jersey Arbitration Act (NJAA) and Federal Arbitration Act (FAA) provide default procedures for the selection of an arbitrator where the agreement is silent.
By reversing the Appellate Division, the NJ Supreme Court rejected an overly broad reading of Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430, 447 (2014), which held that parties to an enforceable arbitration agreement must clearly and unambiguously agree to arbitrate and surrender the right to sue in court. Flanzman is one of several recent decisions from the NJ Supreme Court — which we blogged about here and here — that support the federal and state policies favoring arbitration agreements. When drafting an arbitration agreement, it may be preferable to specify the agreed-upon arbitrator or arbitral forum to avoid disputes later, but where the parties opt to leave the agreement silent, it will not be rendered unenforceable.
The Flanzman v. Jenny Craig, Inc. Decisions
Plaintiff was an employee of Jenny Craig, Inc. and, in 2011, signed an Arbitration Agreement in connection with her employment. In 2017, Plaintiff left the company and sued for age discrimination, constructive discharge, discriminatory discharge, and harassment. Relying on the Agreement, Defendants moved to dismiss the complaint and compel arbitration.
The trial court granted the motion to dismiss and ordered the parties to arbitrate the claims. In doing so, the Court acknowledged the federal policy favoring arbitration agreements and rejected Plaintiff’s argument that the Agreement could not be enforced without a choice-of-law provision or a provision specifying an arbitral forum.
The Appellate Division reversed, finding that the Agreement was not valid because it did not designate an “arbitral forum,” a term that it defined as “the mechanism — or setting — that parties utilize to arbitrate their dispute.” While it stated that failure to “identify a specific arbitrator” would not render an agreement unenforceable, it held that the failure to identify the “general process for selecting an arbitration mechanism or setting … deprived the parties from knowing what rights replaced their right to judicial adjudication.”
The NJ Supreme Court rejected this reasoning and reversed the Appellate Division. First, the Court noted the policies favoring arbitration agreements, which are codified in the FAA and NJAA. Second, the FAA and NJAA both provide “default” provisions that authorize a court, upon application of a party, to decide an issue left open by the parties with respect to the selection and appointment of their arbitrator. Accordingly, the arbitration agreement at issue was enforceable even though the parties did not chose a specific arbitrator or arbitral forum.
Flanzman v. Jenny Craig, Inc. is one of several recent decisions from the NJ Supreme Court that uphold the federal and state policies favoring arbitration agreements, even though it should be noted that the dispute in this case arose before the statutory amendments to the New Jersey Law Against Discrimination that limit the enforceability of arbitration agreements in cases involving discrimination, harassment, or retaliation, which the Court did not have occasion to address here. Nevertheless, in addition to enforcing this arbitration agreement — despite its failure to designate an arbitrator or arbitral forum — it also provided helpful guidance for drafting arbitration agreements going forward. Specifically, the Court provided a few guidelines to assist parties going forward:
- “[A] detailed description of the contemplated arbitration in an arbitration agreement enhances the clarity of that agreement.”
- “If the parties identify a specific arbitrator or arbitrators or agree to retain an arbitrator affiliated with a given arbitration organization who will apply that organization’s rules, they may avoid future disputes.”
- “[I]t may be advantageous for parties to designate in their agreement an arbitral organization but also provide an alternative method of choosing an organization should the parties’ primary choice be unavailable…. [i]n many settings, such a provision could provide a sound and practical basis to proceed.
With this decision, the NJ Supreme Court sets the goal posts for enforceable arbitration agreements and, more importantly, provides helpful guidance for drafting.