In Arafa v. Health Express Corp., (A-6-19-/083174) (July 14, 2020),the Supreme Court of New Jersey held that that arbitration agreements can be enforceable under the New Jersey Arbitration Act (NJAA), even if those agreements would be otherwise exempt from arbitration under Section 1 of the Federal Arbitration Act (FAA). In so ruling, the court clarified that transportation workers can be compelled to arbitrate under the NJAA even though they may be exempt from the FAA.
Facts of Arafa v. Health Express Corp
The New Jersey Supreme Court’s decision resolves two related cases, both of which involved arbitration agreements in contracts for employment that arguably fall within the Section 1 of the FAA. The so-called “exemption clause” provides the FAA shall not “apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”
In Gloria Colon v. Strategic Delivery Solutions, LLC, defendant Strategic Delivery Systems, LLC (SDS) is a licensed freight forwarder and broker. Each plaintiff entered into an identical employment agreement with SDS. Directly at issue are Paragraphs 19 (providing that the laws of the Vendor’s state of residence govern the agreement), 20 (an “Agreement to Arbitrate,” including an agreement to be bound by the FAA, as well as a “Voluntary Waiver to Join a Class”), and 24 (severance clause) of the employment agreements. Plaintiffs filed a class action complaint against SDS, alleging that SDS violated New Jersey laws by failing to pay overtime wages and illegally withholding monies.
The trial court granted SDS’s motion to dismiss and compel arbitration. The Appellate Division substantially agreed with the trial court, holding that plaintiffs waived their right to a jury trial. The appellate court remanded, however, for a determination of whether plaintiffs were engaged in interstate transportation because, “if plaintiffs are not engaged in interstate commerce, then the FAA’s section one exemption would not apply (assuming they are providing transportation services), and plaintiffs would be required to arbitrate their claims under the FAA.” If on the other hand plaintiffs “are engaged in interstate commerce and exempt under the FAA,” then the court “will enforce the arbitration provision under the NJAA.” The Colon court likewise found that plaintiffs had clearly and unambiguously waived their ability to proceed as a class on their statutory claims, distinguishing this case from Muhammad v. County Bank of Rehoboth Beach, DE, 189 N.J. 1, 15-16 (2006), in which the Court found unconscionable a class-arbitration waiver embedded in a consumer contract of adhesion, because Colon “does not involve a class- arbitration waiver and it was not a consumer contract.”
In Essam Arafa v. Health Express Corporation, plaintiff Essam Arafa began working for defendant Health Express Corporation (Health Express) in April 2016. He was hired to deliver medicines and pharmaceutical products from pharmacies and medical offices in New Jersey to customers throughout the state and in surrounding areas. Plaintiff signed an employment agreement and an arbitration agreement with Health Express. The arbitration agreement indicated that it “is governed by the [FAA].” It contained both a “Class Action Waiver” and an “Enforcement Clause” providing that “in the event any portion of this Agreement is deemed unenforceable, the remainder of it will be enforceable.” Plaintiff filed a class action complaint against Health Express, alleging violations of New Jersey’s Wage and Hour and Wage Payment Laws, among other claims.
The trial court granted Health Express’s motion to dismiss and compel arbitration and ordered the class to pursue all claims in arbitration on an individual basis. The Appellate Division reversed, holding that plaintiff was exempt from the FAA and its requirements concerning arbitration under section 1 and that the inapplicability of the FAA undermined the entire premise of the parties’ contract.
NJ Supreme Court Decision in Arafa v. Health Express Corp
The New Jersey Supreme Court sided with the defendants in both cases, holding the arbitration agreements are enforceable. “We now hold that the NJAA applies in the absence of the FAA and that the arbitration agreements at issue are enforceable under the NJAA if the FAA does not apply,” Justice Faustino Fernandez-Vina wrote. “We therefore agree with the Appellate Division’s decision in Colon and reverse the judgment of the Appellate Division in Arafa.”
In reaching its decision, the court rejected arguments that the NJAA was not applicable unless it was expressly invoked in the agreement. “In short, for arbitration agreements forged since 2003, there has been no need to express an intent that the NJAA would apply because its application has been automatic, absent preemption. In these appeals, we are well beyond the date upon which application of the NJAA became mandatory for all non-exempt arbitration agreements, whenever made, that are governed by the laws of New Jersey,” Justice Fernandez-Vina explained. “We therefore reject any argument that the absence of an express invocation of the NJAA means that it cannot apply. Rather, the NJAA applies to the agreements unless preempted by the FAA.”
With regard to preemption, the New Jersey Supreme Court went on to hold that the “application of the NJAA” would not “frustrate the principal purpose of the FAA by discriminating against arbitration agreements.” It further rejected the argument that finding the arbitration agreement enforceable under the NJAA would conflict with Congress’s intent to exclude certain kinds of contracts for work from arbitration. “Congress’s motive behind the exemption was to provide more specific legislation for workers engaged in transportation services,” Justice Fernandez-Vina wrote. “Congress did not intend to exclude transportation workers from arbitration altogether, but rather to subject their agreements to other statutes that may or may not require arbitration.”
Based on the foregoing, the New Jersey Supreme Court concluded that the NJAA will apply to the agreement in Arafa and may apply to the agreement in Colon if it is determined upon remand that section 1 applies.