Muhammad v. County Bank-Class Action Defense Cases: FAA (Federal Arbitration Act) Governed Arbitration Clause Forbidding Class Actions Unconscionable New Jersey Supreme Court Holds
New Jersey Supreme Court Holds that Provision in Arbitration Agreement Prohibiting Class Actions is Unconscionable but Severable so that Plaintiff may Pursue Class-Wide Arbitration
A part-time college student filed a class action against a lender for alleged violations of New Jersey consumer-fraud statutes; the defense moved to compel arbitration of plaintiff’s individual claim based on a class-action bar in an arbitration agreement. Muhammad v. County Bank of Rehoboth Beach, Delaware, ___ A.2d ___, 2006 WL 2273448 (N.J. August 9, 2006). The student had received a short-term unsecured loan in the amount of $200 on May 23, 2003, which she promised to repay, together with a “finance charge” of $60, on June 13, 2003. This meant that the annual percentage rate of the loan was 608.33%. Slip Opn., at 4. She extended the loan twice; each extension required an agreement to pay a $60 finance charge. Unable to pay the loan, plaintiff filed a class action against the lender. Id., at 8.
The loan application signed by plaintiff contained an arbitration clause requiring that any dispute be arbitrated, and that barred “bring[ing], join[ing] or participat[ing] in any class action,” Slip Opn., at 5-6. Plaintiff also executed a “Loan Note and Disclosure” form that reiterated the prohibition against class actions. Id., at 6-7. The defense moved to compel arbitration; the trial court granted the motion and the appellate court affirmed. Id., at 9-10. The New Jersey Supreme Court addressed “whether a provision in an arbitration agreement that is part of a consumer contract of adhesion is unconscionable and therefore unenforceable because it forbids class-wide arbitration.” Slip Opn., at 2-3.