Contracts Requiring Nursing Home Residents To Arbitrate Disputes With Facility Enforceable But With Exceptions

Recently before the New Jersey Appellate Division was the issue of whether §2 of the Federal Arbitration Act ("FAA"), 9 U.S.C.A. § 2, which declares the arbitration provision in contracts "valid, irrevocable, and enforceable," preempts the public policy of this state as expressed by the Legislature in N.J.S.A. 30: 13-8.1, a key component of the Nursing Home Responsibilities and Rights of Residents Act, which renders void and unenforceable "[a]ny provision or clause waiving or limiting the right to sue ... between patient and nursing home." Ruszala v. Brookdale Living Communities, Inc., 1 A.3d 806 (App. Div. 2010) held that the Federal Arbitration Act preempts New Jersey's Nursing Home Responsibilities and Rights of Residents Act. The court considered New Jersey's laws protecting the elderly and infirm against a national policy favoring arbitration as an alternative forum for resolving civil disputes. Ultimately, the court diffused this tension by both respecting the supremacy of federal law while relying on well-established principles of contract law to declare certain provisions of the arbitration agreements unenforceable under the doctrine of substantive unconscionability.

On a consolidated appeal, the two plaintiffs each signed residency agreements with two New Jersey assisted living facilities. Subsequently, each resident suffered significant injuries and later died as a result. The plaintiffs brought suits sounding in negligence and wrongful death against each facility and other individuals associated with the ownership and operation of these facilities. Both contracts signed by the plaintiffs contain identical arbitration and limitation of liability provisions, requiring claims be resolved through binding arbitration. Other sections of the arbitration and limitation of liability clause significantly restrict discovery, limit compensatory damages and prohibit punitive damages.

Upon reviewing the record developed before the trial court, the Appellate Division reversed and found that the FAA preempts the anti-arbitration provision in N.J.S.A. 30:13-8.1. The court also found that the economic activities performed by these nursing facilities in servicing the residency contracts "involve" interstate commerce. The Appellate Division affirmed the trial court's determination that some of the arbitration provisions are unenforceable based on the doctrine of substantive unconscionability. While the panel found that the residency agreements were contracts of adhesion as they were presented on a "take-it-or-leave-it" basis, evidencing the indicia of procedural unconscionability, they were not automatically disallowed under the state Supreme Court's ruling in Rudbart v. North Jersey District Water Supply Commission, 127 N.J. 344 (1992). The Appellate Division was satisfied that the discovery restrictions, limitations on compensation for non-economic damages and the outright preclusion of punitive damages form an unconscionable wall of protection for nursing home operators seeking to escape the full measure of accountability for tortuous conduct that imperils a discrete group of vulnerable consumers. After striking these provisions from the residency agreement, the Appellate Division held that the arbitration agreement was found enforceable.

A determination of whether an arbitration agreement is enforceable must be made on a case-by-case basis. Numerous factors to determine substantive unconscionability must be considered, which include, but are not limited to, the subject matter of the contract, the parties' relative bargaining positions, the degree of economic compulsion motivating the adhering party and the public interest affected by the contract. As noted in Ruszala, the unconscionability issue centered on limitations of discovery, the capping of compensatory damages to a seemingly arbitrary figure and the outright prohibition of punitive damages. However, in the right case, arbitration is cheaper, faster and less subject to jury passion and prejudice.

*Phil is an associate in the firm's Cherry Hill, New Jersey, office. He can be reached at (856)-414-6005 or at pjanderson@mdwcg.com [1].