Kernahan v. Home Warranty Adm'r of Fla., Inc.
199 A.3d 766
| N.J. | 2019Background
- Amanda Kernahan bought a home service warranty from defendants and later cancelled and received a refund; she then sued alleging CFA, TCCWNA, and breach of covenant of good faith and fair dealing.
- The contract contained a five-line alternative-dispute-resolution section titled "MEDIATION" that also included clauses referring to "mandatory arbitration," the AAA, and the AAA "Commercial Mediation Rules," plus limits on recoverable damages and a class-action waiver.
- Defendants moved to dismiss and compel arbitration; the trial court denied the motion, finding the ADR provision ambiguous and not a clear mutual assent to arbitrate; the Appellate Division affirmed.
- Defendants sought review arguing the Appellate Division misapplied Atalese and (initially) that Atalese conflicted with the FAA as interpreted in Kindred Nursing; defendants later abandoned the direct FAA preemption challenge to Atalese.
- The Supreme Court of New Jersey reviewed de novo and held the ADR provision failed to show mutual assent to arbitrate because it was confusing (mediation vs arbitration), inconspicuous, in too-small font, and internally contradictory about applicable rules.
- The Court affirmed the Appellate Division judgment (as modified): the clause is unenforceable and Kernahan may proceed in court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the ADR provision created a valid agreement to arbitrate | Kernahan: provision is ambiguous, inconspicuous, lacks waiver language and explanation of arbitration | Defendants: clause (esp. word "exclusively") clearly makes arbitration the exclusive forum | Held: No mutual assent — provision is confusing (mixes "MEDIATION" and "arbitration"), font/conspicuousness inadequate, and terms internally contradictory, so unenforceable |
| Whether Atalese's clarity/waiver requirements conflict with the FAA / Kindred Nursing | Kernahan: Atalese reflects neutral, generally applicable contract-law requirements for waiver clarity | Defendants: Appellate Division overread Atalese and created a Kindred-prohibited clear-statement rule (initially argued Atalese conflicted with Kindred) | Held: Court did not resolve conflict because defendants disclaimed the direct conflict; threshold mutual-assent failure disposes of the case |
| Whether the use of AAA "Commercial Mediation Rules" and the caption "MEDIATION" fatally undermines an arbitration clause | Kernahan: labeling and reference to mediation rules misleads a consumer into thinking process is nonbinding and voluntary | Defendants: (implicit) party could read whole clause to see arbitration is required | Held: References to mediation rules and misleading caption meaningfully confuse and undercut the claim of a binding arbitration agreement |
| Whether consumer-protection/plain-language requirements (e.g., font size, conspicuousness) affect enforceability | Kernahan and amici: PLA and Atalese require clear, conspicuous notice when rights (court/jury) are waived | Defendants: clause read as a whole not ambiguous; "exclusive" suffices | Held: Conspicuousness and readability matter for mutual assent in consumer contracts; small font and placement exacerbated ambiguity and supported unenforceability |
Key Cases Cited
- Atalese v. U.S. Legal Servs. Grp., L.P., 219 N.J. 430 (N.J. 2014) (consumer arbitration clause must clearly convey waiver of right to proceed in court)
- Kindred Nursing Ctrs. L.P. v. Clark, 137 S. Ct. 1421 (U.S. 2017) (state rules that single out arbitration agreements for disfavored treatment violate the FAA)
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (U.S. 2011) (FAA preempts state rules that undermine arbitration agreements; enforce agreements according to their terms)
- Volt Info. Scis., Inc. v. Bd. of Trs., 489 U.S. 468 (U.S. 1989) (parties are not required to arbitrate absent agreement; state contract law governs formation)
- First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (U.S. 1995) (courts should apply ordinary state-law contract principles when deciding whether parties agreed to arbitrate)
- Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (U.S. 1991) (FAA places arbitration agreements on the same footing as other contracts)