The past several years have witnessed the creation of an entirely new body of law devoted to the question of whether and under what circumstances a waiver of procedural and substantive rights in a consumer contract can be enforced. The recent Appellate Division decision in Morgan v. Sanford Brown Inst.¹ presents the latest chapter in this ongoing story.

Class Action Waivers

In Muhammad v. County Bank of Rehoboth Beach, Delaware,² the New Jersey Supreme Court held that a class action waiver in the arbitration clause of a consumer contract was unconscionable and violated the public interest.³ Interpreting Muhammad to provide a defense against “all waivers of class-wide actions, not simply those that also compel arbitration,” the Third Circuit in Homa v. American Express Co.⁴ held that the Muhammad court’s ruling was not preempted by the Federal Arbitration Act (“FAA”).⁵ Two years later, however, the U.S. Supreme Court decided AT&T Mobility v. Concepcion,⁶ a case that the Third Circuit subsequently interpreted as overruling its Homa decision.⁷ In Litman v. Cellco P’ship, the Third Circuit held that Muhammad’s ban on class action waivers in arbitration clauses was indeed preempted by the FAA.⁸

In the state court system, the leading Appellate Division decision acknowledged the ruling in Concepcion but highlighted a footnote preserving state courts’ ability to reject arbitration clauses by “invoking traditional legal doctrines governing the formation of a contract and its interpretation.”⁹ The decision then proceeded to do just that, holding that the arbitration clauses at issue (containing class action waivers) were “too plagued with confusing terms and inconsistencies to put a reasonable consumer on fair notice of their intended meaning.”¹⁰ Subsequent Appellate Division decisions have followed this lead.¹¹ The lower federal courts, on the other hand, have had little difficulty applying arbitration provisions with class action waivers in consumer contracts.¹²

Fee Waivers

In Delta Funding Corp. v. Harris,¹³ decided the same day as Muhammad, the New Jersey Supreme Court held that arbitration clauses providing that each side will bear its own attorneys’ fees and costs – thereby negating a prevailing consumer’s entitlement to a statutory fee award (such as those prescribed by the State’s Consumer Fraud Act¹⁴ or the federal Truth in Lending Act¹⁵) – are unconscionable and invalid.¹⁶ While most courts have adopted this approach,¹⁷ one federal court has held that such a provision “merely reflects the ‘American’ Rule of attorney’s fees, and it certainly does not ‘shock the court’s conscience.’”¹⁸

Treble Damage Waivers: The Morgan Decision

Over the years, courts have routinely held that the Consumer Fraud Act’s treble damage remedy is available to prevailing plaintiffs in arbitration proceedings.¹⁹ However, no court has addressed whether entitlement to such damages may be waived in an arbitration clause.²⁰ This was the issue before the court in Morgan.

The defendant in Morgan, a provider of career training programs, required its customers to sign an Enrollment Agreement with an arbitration clause.²¹ In addition to a bar on attorneys’ fees, the clause provided that “[t]he arbitrator will have no authority to award consequential damages, indirect damages, treble damages or punitive damages.”²² Quoting the Supreme Court decision in Delta Funding, the Appellate Division first stated the general principle that “by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral rather than a judicial forum.”²³ It then went on to hold that the bar on waiving attorneys’ fees applied with equal force to a waiver of treble damages. According to the court, such a waiver is both unconscionable and unenforceable.²⁴

Severability

While the Appellate Division invalidated the treble damage waiver in Morgan, it did not invalidate the arbitration clause in toto. Consistent with the majority of courts, it severed the offensive provisions from the contract and referred the case to arbitration.²⁵