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Cohen v. Chase Bank, N.A.

2010 WL 183542 (U.S. Dist. Ct. D. N.J. 2010) (Unpublished)

ARBITRATION; CLASS ACTIONS — New Jersey will honor other state’s laws upholding an arbitration provision in a credit card agreement if there is a proper choice of law provision is in a credit card agreement, but will excise a class action waiver from the agreement even though not invalidating the entire agreement by reason of the purported class action waiver.

A New Jersey resident opened a line of credit with a Delaware bank. The bank sent the borrower an agreement and then sent her two form notices regarding arbitration amendments. These amendments, known as “bill stuffers,” were not returned as undeliverable and the borrower did not object to either amendment. She continued to use her credit card after the amendments were sent. Many of the arbitration provisions were in bold print. Among other things, the amendments stated that: (a) any disputes must be submitted to binding arbitration; (b) card-members waived their right to bring a class action; (c) an arbitrator was to apply “any applicable law” in determining whether the prevailing party could recoup its fees and costs; and (d) the parties were to use a choice-of-law provision set forth in the amendments. The bank instituted an arbitration claim against the borrower when she failed to pay the balance due on her account. The arbitrator then entered an award in the bank’s favor for the amount due plus interest. The borrower sued the bank.

The District Court ruled in favor of the bank and ordered the borrower to pay the arbitrator’s award. It declared that the arbitrability question was an issue for judicial determination unless the parties clearly and unmistakably provided otherwise, which was not the case here. It also noted that the New Jersey Supreme Court has held that, “[w]hen deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally … should apply ordinary state-law principles that govern the formation of contracts.” It further noted the Supreme Court had clarified that, “where a contract contains an arbitration clause, there is a presumption of arbitrability [and d]oubts should be resolved in favor of coverage.” The Court observed that New Jersey also had a strong policy favoring arbitration of disputes. Since its research disclosed no case where the New Jersey Supreme Court had analyzed a choice-of-law clause in a credit card member agreement, it needed to predict how the New Jersey Supreme Court would rule in such a case.

Under New Jersey choice-of-law rules, “ordinarily, when parties to a contract have agreed to be governed by the laws of a particular state, New Jersey courts will uphold the contractual choice if [doing so] does not violate New Jersey’s public policy.” Here, the parties’ contractual choice-of-law state was Delaware, as set forth in the amendments. In Delaware, “bill stuffer” amendments to credit card agreements – including those adding terms relating to arbitration – are valid. The Court then looked to recent New Jersey Supreme Court cases that had examined public policy implications of arbitration clauses contained in adhesion contracts. It found that the New Jersey Supreme Court has held that when looking at a contract of adhesion, there are four factors to determine if it is enforceable: (a) the subject matter of the contract; (b) the parties’ relative bargaining positions; (c) the degree of economic compulsion motivating the “adhering” party; and (d) the public interests affected by the contract. It noted that the New Jersey Supreme Court has held that although the first three factors suggest a high degree of procedural unconscionability, these factors did not, by themselves, render a contract unenforceable. In analyzing the disputed clause in each contract, the New Jersey Supreme Court focuses on the fourth factor, the public interest.. The United States District Court did the same and analyzed two elements of the arbitration clause at issue in making its determination: a fee-shifting provision and a class-action waiver. Because the fee-shifting provision in this case was limited by the “any applicable law” language, the arbitrator did not have unfettered discretion to allocate the entire cost or arbitration to the consumer when a prevailing consumer has a statutory right to recover costs and attorneys’ fees. Accordingly, the Court predicted that the New Jersey Supreme Court would find that this fee-shifting language would not be contrary to New Jersey public policy and would not render the arbitration clause unenforceable. As to the class action waiver provision, it noted that the New Jersey Supreme Court held that it would be unlikely that each individual consumer would pursue their small claim in a separate action and thus financial entities would gain an advantage almost equivalent to closing the door to all small claimants. It thus found such waivers to be unconscionable and unenforceable. However, the New Jersey Supreme Court has held that if the body of an agreement to arbitrate is valid, a class action waiver can be severed. In this case, the District Court did the same thing.

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