New Jersey Supreme Court Expands Enforceability of Class Action Waivers

The New Jersey Supreme Court’s decision in Pace v. Hamilton Cove affirms the enforceability of class action waivers in contracts absent mandatory arbitration agreements. C. Allen Garrett Jr. of the Kilpatrick firm writes that this ruling introduces an alternative strategy for companies seeking to limit class litigation without relying on arbitration clauses.

The court rejected a categorical rule tying the enforceability of such waivers to arbitration agreements and instead applied general contract principles to determine the waiver’s validity.

This case arose when tenants of Hamilton Cove alleged fraud under New Jersey’s Consumer Fraud Act after discovering that the apartment complex did not provide the promised 24/7 security.

The lease agreements included a class action waiver but no arbitration clause. Plaintiffs challenged the agreements as unconscionable contracts of adhesion. Both the trial court and the Appellate Division found the waiver unenforceable, prompting an appeal to the New Jersey Supreme Court.

The Supreme Court overturned the lower courts, rejecting the assertion that class action waivers are only enforceable when paired with arbitration clauses. It emphasized New Jersey’s public policy favoring freedom to contract, provided procedural safeguards are met.

Applying a four-factor test, the court determined that the leases were not unconscionable, as tenants had alternatives and the waiver did not function as an exculpatory clause. The court concluded that enforceability depends on specific contract circumstances, not on the presence of arbitration.

For companies navigating mass arbitrations, Pace signals a potential shift. Companies might consider whether stand-alone class action waivers in consumer agreements would be found unconscionable. If enforceable, such defendants could omit a mandatory arbitration agreement and avoid the risk of mass arbitration.