On July 10, 2024, the Supreme Court of New Jersey issued its decision in Pace v. Hamilton Cove, ruling that class action waivers in consumer contracts are enforceable, reversing the Appellate Division’s ruling. The Appellate Division’s ruling created a bright-line rule that invalidated class action waivers in New Jersey unless they were coupled with an arbitration agreement. Justice Pierre-Louis wrote the unanimous court opinion (Justice Fasciale did not participate).
Litigation in the case began with two residents filing a lawsuit against their housing provider, alleging common law fraud and a violation of the New Jersey Consumer Fraud Act (CFA), and sought class action status. The plaintiffs in the lawsuit both signed lease contracts that included class action waivers. The class action waivers at issue are included in the National Apartment Association’s (NAA) Click & Lease offerings. The housing provider argued the existence of the class action waivers signed by the plaintiffs and sought to dismiss the claims or strike the class allegations. At both the trial court and the appellate court, rulings were issued in favor of the plaintiffs. The defendants appealed to the Supreme Court of New Jersey, urging the Court to reverse the bright-line rule from the Appellate Division.
NAA filed an amicus brief in support of the housing providers arguments. NAA told the Court that if allowed to stand, the bright-line rule put in place by the Appellate Division would harm housing providers who rely on standard forms, and would lead to significant, harmful economic impact on residents, housing providers, and suppliers in the housing industry. Additionally, NAA also noted that housing providers that use “industry-recommended form leases” and rely on their bargained for contracts with residents would be unfairly prejudiced by the bright-line rule, which could lead to higher costs and rents for residents.
Overview of Statutory Text and Prior Case Law Surrounding Contractual Waiver of Rights
The Court noted that there is no controlling statutory provision that expressly permits class actions nor a clear statement of public policy that disfavors class action waivers. In conducting its analysis, the Court first looked at whether class action waivers are unenforceable when no arbitration agreement is present (the bright-line rule established by the Appellate Division.) The Court stated that while class waivers are frequently coupled with arbitration provisions to prevent class arbitration, class actions waivers and arbitration provisions are distinct mechanisms, with the Court specifically noting that “Simply because courts have considered and upheld class waivers accompanied by arbitration agreements [ . . . ] does not mean that an arbitration provision is necessary to a class waiver’s enforceability.” The Court also reviewed statutes and prior case law, and found that while class actions advance important policy goals, New Jersey law supports the contractual waiver of rights that advance important goals, “provided that the requisite procedural safeguards surrounding the waiver are met.” The Court recently addressed the freedom to contract in Boyle v. Huff, holding that “our case law underscores New Jersey’s strong public policy in favor of the freedom to contract, a policy limited only in those circumstances where a contract would otherwise violate public policy.” In the Court’s view, since there is no controlling statutory provision to expressly permit class actions and no clear statement of public policy that disavows them, the waiver’s enforceability should be evaluated through the lens of if it is unconscionable and under traditional contract formation principles. Under this analysis, the bright-line rule was overturned, with the Court specifically noting that context matters. A class waiver may be unenforceable if it is found to be unconscionable or invalid under general contract principles. The rest of the Court’s analysis turned on the specific lease agreements at issue in the case.
Class Action Waiver Not Found Unconscionable In Specific Context of NAA’s Click & Lease Materials
The Court looked at the specific provisions in the lease contract to determine if they were unconscionable (as the plaintiffs claimed). While the Court has recognized that a contract of adhesion* necessarily involves some measure of procedural unconscionability, the test laid out in Rudbart v. North Jersey District Water Supply Commission (Rudbart test) must be met. The Rudbart factors that the Court considers when determining whether to enforce a contract of adhesion as a matter of policy are: (1) the subject matter of the contract, (2) the parties’ relative bargaining positions, (3) the degree of economic compulsion motivating the adhering party, and (4) the public interests affected by the contract. The Rudbart test would be used to determine if the contract would be considered “so oppressive or inconsistent with the vindication of public policy that it would be unconscionable to permit its enforcement” as laid out in Delta Funding Corp. v. Harris.
In reviewing the lease contract at issue, the Court noted that the class action waiver was “written in a simple, clear, understandable and easily readable way [ . . . ] and it clearly and unambiguously put plaintiffs on notice that they could only proceed with a lawsuit against defendants on an individual basis.” The Court found that the Rudbart test was not met in this case, having noted in the opinion that the plaintiffs had time to consult an attorney, were free to seek out alternative housing arrangements with other housing providers, and specifically noted that the waiver text did not prohibit the plaintiffs (and others similarly situated) from individually vindicating their statutory rights under the CFA. (In the plaintiffs’ complaint, they acknowledged that another resident had filed an individual suit against the housing providers.) As a result, the Court found that the waiver was not unconscionable.
Post Pace Ruling
NAA is pleased with the Court’s ruling in this case, as the outcome has a positive effect on NAA’s Click & Lease offerings in New Jersey. As a result of the Court’s decision, New Jersey housing providers should continue to work with their risk management and legal teams to review their lease agreements along with any language related to class action waivers and arbitration provisions as a result of the ruling in Pace.
NAA continues to track and share updates on the legal issues impacting its members and will continue to serve as a voice for the industry in courtrooms across the nation. For more information on NAA’s Legal Advocacy Program, please click here or contact Ayiesha Beverly.
*Note: Plaintiffs argued that the lease contract was a contract of adhesion and unconscionable. No court expressly found that the contract at issue in this case was an adhesion contract. The Supreme Court’s ruling noted that the lease contract at issue was arguably a contract of adhesion. Even if arguably a contract of adhesion, the Court’s opinion states that such a classification is not enough to rule the contract unenforceable, the Rudbart test would still need to be met.