AT&T Mobility Permits Nullification of Arbitration Agreements Containing Class-Action Waivers When Agreements are so Ambiguous and Internally Inconsistent that Mutual Assent is Lacking

In AT&T Mobility LLC v. Concepcion, the United States Supreme Court held that the Federal Arbitration Act preempted state laws providing that arbitration agreements containing class-action waivers are unconscionable and therefore unenforceable. But the Supreme Court also stated that “generally applicable contract defenses” continue to apply to arbitration agreements, so long as such defenses do not conflict with the FAA or frustrate its purposes.

In its first published opinion addressing AT&T Mobility, New Jersey’s Appellate Division, in NAACP of Camden County East, et al. v. Foulke Management Corp., faithfully followed AT&T Mobility by holding that arbitration agreements containing class waivers may not be struck down as unconscionable or against public policy. But the Appellate Division, relying on fundamental contract doctrine, still found a way to avoid the arbitration agreement — and the class-waiver provision it contained — in the consumer contract before it.

In Foulke Management the defendant, a car dealership, sought to dismiss a consumer class-action complaint because the named plaintiff ostensibly waived her right “to bring a class action lawsuit or class arbitration” in an arbitration agreement she signed when she bought a car from the defendant. The provisions of the parties’ agreement to arbitrate were spread across three separate documents which, according to the Appellate Division, were internally inconsistent as to certain material provisions, including the class-waiver provision. As the Appellate Division put it:

The class-waiver provision in the three key documents are thus collectively riddled with vague and inconsistent provisions. A purchaser easily could find it difficult to harmonize and understand such dissonant terms.

The Appellate Division rejected the consumer’s argument that the class-action waiver rendered the arbitration agreement unconscionable and therefore unenforceable, finding that AT&T Mobility precluded it from invalidating the arbitration agreement on such grounds. But the Appellate Division read AT&T Mobility as allowing courts to consider other types of contract defenses, particularly those defenses going to the making of the arbitration agreement, when deciding whether an arbitration agreement with a class-waiver provision should be enforced. According to the Appellate Division, “in the aftermath of AT&T Mobility, state courts remain free to decline to enforce an arbitration provision by invoking traditional legal doctrines governing the formation of a contract and its interpretation.”

Applying those “traditional legal doctrines” to the facts before it, the Appellate Division concluded that the “cumulative effect of the many inconsistencies and unclear passages in the arbitration terms” required a finding that there was no mutual assent – no meeting of the minds – on the essential terms of the parties’ arbitration agreement. Because mutual assent was lacking, the Appellate Division found that the various arbitration provisions, including the class-waiver provisions, were unenforceable.

The Foulke Management decision shows that, notwithstanding the Supreme Court’s AT&T Mobility opinion, state courts will continue to scrutinize arbitration agreements and class-waiver provisions closely and will continue to apply to such agreements traditional contract defenses which apply to all contracts (not just arbitration agreements).