Court Opinion

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Opinions of the United
2009 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

2-24-2009

Homa v. Amer Express Co
Precedential or Non-Precedential: Precedential

Docket No. 07-2921

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"Homa v. Amer Express Co" (2009). 2009 Decisions. Paper 1796.
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                                        PRECEDENTIAL

      UNITED STATES COURT OF APPEALS
           FOR THE THIRD CIRCUIT

                     No. 07-2921

  G.R. HOMA, individually and on behalf of all others
                similarly situated,

                                 Appellant

                            v.

  AMERICAN EXPRESS COMPANY; AMERICAN
   EXPRESS CENTURION BANK

    On Appeal from the United States District Court
             for the District of New Jersey
             (D.C. Civil No. 06-cv-02985)
       District Judge: Honorable Joel A. Pisano

             Argued on December 1, 2008

Before: AMBRO, WEIS, and VAN ANTWERPEN, Circuit
                     Judges.

              (Filed: February 24, 2009 )
F. Paul Bland, Jr., Esq. (Argued)
Public Justice
1825 K Street, N.W.
Suite 200
Washington, D.C. 20006

Gary S. Graifman, Esq.
Kantrowitz, Goldhamer & Graifman
210 Summit Avenue
Montvale, NJ 07645

       Counsel for Appellant

Julia B. Strickland, Esq. (Argued)
David W. Moon, Esq.
Stroock, Stroock & Lavan
2029 Century Park East
Suite 1800
Los Angeles, CA 90067

Louis A. Smith, Esq.
Greenberg Traurig
200 Park Avenue
P.O. Box 677
Florham Park, NJ 07932

       Counsel for Appellees

                               2
                OPINION OF THE COURT

VAN ANTWERPEN, Circuit Judge.

        This matter came before the United States Court of
Appeals for the Third Circuit on appeal from a final judgment
of the United States District Court for the District of New
Jersey. Appellant brought a class action and Appellees filed a
motion to compel arbitration based upon an agreement
between the parties. The District Court treated the motion to
compel as a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6) and dismissed Appellant’s complaint with
prejudice in favor of arbitration on an individual basis. This
appeal raises important issues under state law. Nevertheless,
we must first consider whether the Federal Arbitration Act
(“FAA”), 9 U.S.C. §§ 1-16, precludes this Court from
applying state law unconscionability principles to void a
class-arbitration waiver. We conclude that it does not. See
Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 687
(1996) (“[U]nconscionability[] may be applied to invalidate
arbitration agreements without contravening [the FAA].”).

          I. Factual and Procedural Background

        American Express Centurion Bank (“AECB”) is a
Utah industrial bank engaged in the business of, among other
things, issuing American Express credit cards. American
Express Company (“AEC”) is a New York corporation and is
the ultimate parent of AECB. In September of 2003, AEC
started a promotional credit card reward program in which it

                              3
claimed that users of its “Blue Cash” credit card (“Blue Cash
card”) could earn up to 5% cash back on purchases made with
the card. On February 8, 2004, AECB issued a Blue Cash
card to Appellant G.R. Homa (“Homa”), a New Jersey
resident. On June 29, 2006, Homa filed a complaint in the
District of New Jersey, purporting to represent a class of New
Jersey consumers who obtained a Blue Cash card on or after
September 30, 2003, as well as a subclass of New Jersey
cardholders who carried a monthly balance on their cards.
Homa contends that AEC and AECB (collectively,
“Appellees”) misrepresented the actual terms of the rewards
program and failed to award him the promised amount of cash
back in violation of the New Jersey Consumer Fraud Act.

        Upon issuance of the Blue Cash card, Appellees
mailed Homa a document entitled Agreement Between
American Express Credit Cardmember and American Express
Centurion Bank (“Agreement”), which delineated the terms
and conditions governing each cardholder’s account. The
Agreement included a provision requiring arbitration of all
claims upon election of either party and that specifically
required all claims to “be arbitrated on an individual basis . . .
[with] no right or authority for any Claims to be arbitrated [as]
a class action.” (“class-arbitration waiver”). The Agreement
also included a choice-of-law provision indicating that any
disputes arising out of the Agreement would be governed by
Utah state law.

        Appellees cited the aforementioned clauses from the
Agreement in arguing that Homa should be required to
arbitrate his claims on an individual basis because Utah law

                                4
expressly allows class-arbitration waivers in consumer credit
agreements. Homa, on the other hand, argued that New
Jersey law applied because, as the application of Utah law
would violate New Jersey’s public policy against certain
class-arbitration waivers, New Jersey choice-of-law principles
dictated that the Agreement’s choice of Utah law was invalid.
The District Court agreed with Appellees and ultimately
dismissed Homa’s complaint with prejudice in favor of
arbitration on an individual basis.

          II. Jurisdiction and Standard of Review

       Federal jurisdiction is based on diversity of citizenship
pursuant to 28 U.S.C. § 1332(d). This Court has appellate
jurisdiction under 9 U.S.C. § 16(a)(3). “We exercise plenary
review over questions regarding the validity and
enforceability of an agreement to arbitrate.” Edwards v.
HOVENSA, LLC, 497 F.3d 355, 357 (3d Cir. 2007).

                      III. Choice-of-law

        Appellees contend that the Agreement’s choice of Utah
law governs the current dispute. If the choice-of-law clause is
valid, Homa’s appeal will fail, as Utah Code Ann. § 70C-4-
105 expressly allows class action waivers in consumer credit
agreements. In evaluating whether a contractual choice-of-
law clause is enforceable, federal courts sitting in diversity
apply the choice-of-law rules of the forum state, which in this
case is New Jersey. See Gibbs v. Carnival Cruise Lines, 314
F.3d 125, 131 (3d Cir. 2002) (citing Klaxon Co. v. Stentor
Electric Mfg. Co., Inc., 313 U.S. 487 (1941)).

                               5
        “Ordinarily, when parties to a contract have agreed to
be governed by the laws of a particular state, New Jersey
courts will uphold the contractual choice if it does not violate
New Jersey’s public policy.” Instructional Sys., Inc. v.
Computer Curriculum Corp., 614 A.2d 124, 133 (N.J. 1992)
(citations omitted) (emphasis added). In deciding whether to
enforce a contractual choice of law, the Supreme Court of
New Jersey has cited the Restatement (Second) of Conflicts
of Laws § 187(2) (1969) (“Restatement”), which provides that
the law of the state chosen by the parties will apply unless

   (b) application of the law of the chosen state would be
   contrary to a fundamental policy of a state which has a
   materially greater interest than the chosen state in the
   determination of the particular issue and which * * *
   would be the state of the applicable law in the absence
   of an effective choice of law by the parties.

Id. (asterisks in original); see also North Bergen Rex
Transport, Inc. v. Trailer Leasing Co., 730 A.2d 843, 847-48
(N.J. 1999) (quoting same language).

        Homa contends that Muhammad v. County Bank of
Rehoboth Beach, Del., 912 A.2d 88 (N.J. 2006), indicates that
the Agreement’s ban on class-arbitration violates a
fundamental public policy of New Jersey. Muhammad held
that a class-arbitration waiver in a consumer contract between
a customer and a bank that gave out “pay day loans” was
unconscionable and stated that the “most important”
consideration in its holding was “the public interests affected
by the contract.” 912 A.2d at 99. In analyzing the public

                               6
interests factor, Muhammad engaged in a lengthy discussion
of the virtues of the class action mechanism, ultimately
concluding that

   [a]s a matter of generally applicable state contract law,
   it was unconscionable for defendants to deprive
   [plaintiff] of the mechanism of a class-wide action,
   whether in arbitration or in court litigation. The public
   interest at stake in [the ability of consumers]
   effectively to pursue their statutory rights under [New
   Jersey’s] consumer protection laws overrides the
   defendants’ right to seek enforcement of the
   class-arbitration bar in their agreement.

Id. at 100-01. Muhammad ultimately struck the class action
waiver and remanded with instructions to arbitrate on a class-
wide basis. Id. at 103.

       Muhammad suggests that the Supreme Court of New
Jersey might well find that the application of Utah law
allowing class-arbitration waivers in the context of a low-
value consumer credit suit violates a fundamental policy of
New Jersey.1 Before discussing this issue further, however,

       1
        The District Court made no findings of fact as to the
potential value of the New Jersey Consumer Fraud Act claims
in this case. Because the District Court treated Appellees’
“Motion to Compel Arbitration And Dismiss Action In Favor of
Arbitration, Or Alternatively, Stay Action Pending Arbitration”
as a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), we will, for the purposes of our discussion, accept
Appellant’s contention that “[b]ecause of the nature of the
individual class members’ claims in this litigation, few, if any,
could . . . afford to seek legal redress” if the case could not be
resolved on a class basis. See Palcko v. Airborne Express, Inc.,

                                7
we first must dispose of Appellees’ argument that the FAA
and this Court’s decision in Gay v. CreditInform, 511 F.3d
369 (3d Cir. 2007), preclude us from applying New Jersey
unconscionability principles to a class-arbitration waiver.

              IV. The Federal Arbitration Act

       Under Section 2 of the FAA, “an agreement in writing
to submit to arbitration an existing controversy arising out of
[a transaction involving commerce] shall be valid,
irrevocable, and enforceable, save upon such grounds as exist
at law or in equity for the revocation of any contract.” 9
U.S.C. § 2 (emphasis added). The United States Supreme
Court has interpreted the italicized provision as meaning that

   state law may be applied ‘if that law arose to govern
   issues concerning the validity, revocability, and
   enforceability of contracts generally.’ Thus, generally
   applicable contract defenses, such as fraud, duress, or
   unconscionability, may be applied to invalidate
   arbitration agreements without contravening § 2.

Doctor’s Associates, 517 U.S. at 686-87 (quoting Perry v.
Thomas, 482 U.S. 483, 492 n.9 (1987) (emphasis in original))
(citations omitted). Accordingly, this Court has stated that
“[t]he federal policy encouraging recourse to arbitration

372 F.3d 588, 597 (3d Cir. 2004) (“Our prior decisions support
the traditional practice of treating a motion to compel as a
motion to dismiss for failure to state a claim upon which relief
can be granted.”); Umland v. PLANCO Financial Services, Inc.,
542 F.3d 59, 64 (3d Cir. 2008) (when reviewing a district
court’s decision under Rule 12(b)(6), this Court must accept all
factual allegations in the complaint as true and view them in the
light most favorable to the plaintiff).

                               8
requires federal courts to look first to the relevant state law of
contracts . . . in deciding whether an arbitration agreement is
valid under the FAA.” Spinetti v. Service Corp. Int’l, 324
F.3d 212, 214 (3d Cir. 2003); see also Alexander v. Anthony
Int’l, L.P., 341 F.3d 256, 263-70 (3d Cir. 2003) (finding an
arbitration agreement unconscionable under Virgin Islands
law).

        In Gay, this Court addressed an argument that a class-
arbitration waiver should not be enforced because it was
unconscionable and ultimately applied the parties’ choice of
Virginia law in concluding that the waiver was valid. 511
F.3d at 387-95. The Gay Court then engaged in a lengthy
discussion of Pennsylvania law and rejected two Pennsylvania
cases—Lytle v. CitiFinancial Servs., Inc., 810 A.2d 643 (Pa.
Super. Ct. 2002) (abrogated by Salley v. Option One
Mortgage Corp., 925 A.2d 115 (Pa. 2007)), and Thibodeau v.
Comcast Corp., 912 A.2d 874 (Pa. Super. Ct. 2006)—as
being preempted by the FAA:

   To the extent . . . that Lytle and Thibodeau hold that
   the inclusion of a waiver of the right to bring
   judicial class actions in an arbitration agreement
   constitutes an unconscionable contract, they are not
   based ‘upon such grounds as exists at law or in
   equity for the revocation of any contract’ pursuant
   to section 2 of the FAA, and therefore cannot
   prevent the enforcement of the arbitration provision
   in this case.

Gay, 511 F.3d at 394 (quoting 9 U.S.C. § 2) (emphasis in
original). In support of this statement, Gay reasons that

   [i]t would be sophistry to contend . . . that the
   Pennsylvania cases do not ‘rely on the uniqueness

                                9
   of an agreement to arbitrate as a basis for a state-
   law holding that enforcement would be
   unconscionable[,]’ [because], though the
   Pennsylvania cases are written ostensibly to apply
   general principles of contract law, they hold that an
   agreement to arbitrate may be unconscionable
   simply because it is an agreement to arbitrate.

Id. at 395 (quoting Perry, 482 U.S. at 492 n.9).

        We note at the outset that Gay’s discussion of whether
Pennsylvania law is preempted by the FAA appears to be
dicta, as the Court “determined that [it] should enforce the
terms of [the] choice-of-law provision selecting the
application of Virginia law” and concluded that the class-
arbitration waiver at issue was not unconscionable under that
law, but nonetheless engaged in a discussion of
unconscionability under Pennsylvania law—“even if we
disregard the . . . choice-of-law provision and apply
Pennsylvania law . . . we would reach the same result.” Gay,
511 F.3d at 390-92 (emphases added); see also In re
McDonald, 205 F.3d 606, 612 (3d Cir. 2000) (defining
“dictum as ‘a statement in a judicial opinion that could have
been deleted without seriously impairing the analytical
foundations of the holding’”) (quoted reference omitted).

        Whether dicta or not, Appellees contend that Gay’s
rejection of Lytle and Thibodeau dictates our course here.
More specifically, Appellees argue that, even if the choice-of-
law provision were invalidated and New Jersey law were
applied, under Gay the FAA would preempt us from even
considering whether the class-arbitration waiver is
unconscionable under Muhammad. We disagree. Whatever
is true of Lytle and Thibodeau, Muhammad plainly does not
“hold that an agreement to arbitrate may be unconscionable

                              10
simply because it is an agreement to arbitrate.” Gay, 511 F.3d
at 395. What was held unconscionable in Muhammad was
not that the arbitration clause prevented the bringing of a
judicial class action; rather, it was that the arbitration
provision “deprive[d] Muhammad of the mechanism of a
class-wide action, whether in arbitration or in court
litigation.” 912 A.2d at 100–01 (emphasis added). In other
words, the defense Muhammad provides is a general contract
defense, one that applies to all waivers of class-wide actions,
not simply those that also compel arbitration. Therefore, there
are no grounds for FAA preemption. See Lowden v. T-Mobile
USA, Inc., 512 F.3d 1213, 1221 (9th Cir. 2008) (holding that
the application to an arbitration provision of a general ban on
class-action waivers was not preempted by the FAA because
that ban “appl[ies] equally to a contract that permits only
individual, not aggregate, litigation in court”).

        Gay only compels the opposite conclusion if, as
Appellees suggest, it is read as a blanket prohibition on
unconscionability challenges to class-arbitration provisions.
But such a reading is in direct conflict with the language of
the Supreme Court, which clearly holds that “generally
applicable contract defenses, such as . . . unconscionability,
may be applied to invalidate arbitration agreements without
contravening § 2.” Doctor’s Associates, 517 U.S. at 686-87;
see also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,
Inc., 473 U.S. 614, 627 (1985) (“Of course, courts should
remain attuned to well-supported claims that the agreement to
arbitrate resulted from the sort of fraud or overwhelming
economic power that would provide grounds ‘for the
revocation of any contract.’”). Thus Appellees’ argument that
Gay prohibits use of Muhammad to challenge the
Agreement’s class-arbitration waiver is unpersuasive.

                              V.

                              11
       Having determined that the FAA would not prevent
this Court from applying New Jersey law to the current case,
we return to the choice-of-law issue. As discussed supra in
Section III, this Court must predict whether the parties’ choice
of Utah law, which expressly allows class-arbitration waivers,
would be enforced under New Jersey’s choice-of-law rules.

        In light of the Muhammad court’s holding that “[t]he
public interest at stake in . . . consumers[’] [ability to
effectively] pursue their statutory rights under [New Jersey’s]
consumer protection laws ” constituted the “most important”
reason for holding a similar class-arbitration waiver
unconscionable, we predict that the Supreme Court of New
Jersey would find that the class-arbitration waiver at issue
violates the fundamental public policy of New Jersey. 912
A.2d at 99-101. In coming to the opposite conclusion, the
District Court made much of Muhammad’s “confirm[ation]
that class-arbitration waivers are not ‘per se
unenforceable[.]’” Homa v. American Exp. Co., Civ. No. 06-
2985, 496 F. Supp. 2d 440, 448 (D.N.J. 2007) (quoting
Muhammad, 912 A.2d at 101). We do not find this reasoning
persuasive because Muhammad’s public-interests analysis
addressed an issue identical to that presented in the current
case—whether the Supreme Court of New Jersey would
“permit enforcement of the provision in plaintiff’s contract
that allegedly precludes any realistic challenge to the
substance of her . . . contract’s terms.” Muhammad, 912 A.2d
at 99 (emphasis added). The Muhammad court answered that
question with a resounding “no,” noting that a class action
waiver becomes “problematic ‘when the waiver is found in a
consumer contract of adhesion in a setting in which disputes
between the contracting parties predictably involve small
amounts of damages.’” Id. (quoting Discover Bank v.
Superior Court, 113 P.3d 1100, 1110 (Cal. 2005) (holding
that a class-arbitration waiver in a consumer credit contract

                              12
was unconscionable)).

       In the current case, as in Muhammad, the contract at
issue bears the hallmarks of a contract of adhesion—it was
“‘presented on a take-it-or-leave-it basis, . . . in a standardized
printed form, [and] without opportunity for the ‘adhering’
party to negotiate except perhaps on a few particulars’”—and,
as Appellant’s underlying claim implicates less than five
percent of a cardholder’s overall credit card balance,
“predictably involves a small amount of damages.” Id. at 96,
99 (quoting Rudbart v. North Jersey Dist. Water Supply
Comm’n, 605 A.2d 681, 685 (N.J. 1992)). Assuming—as is
proper at the 12(b)(6) stage—that the claims at issue are of
low monetary value,2 the District Court should have denied

       2
        We are aware that, the same day Muhammad was
decided, the Supreme Court of New Jersey decided Delta
Funding Corp. v. Harris, 912 A.2d 104 (N.J. 2006), which
arrived at a result different than that reached in Muhammad.
The court was careful to distinguish the two decisions:

   In Muhammad . . . we found a class-arbitration waiver
   unconscionable in the context of low-value consumer
   claims. 912 A.2d at 99. Muhammad is distinguishable
   from the instant case, as Harris is seeking more than
   $100,000 in damages, and it is unclear whether that
   includes application of statutory multipliers. The
   plaintiff’s potential damages in Muhammad . . .,
   including statutory damage multipliers, totaled less than
   $600 in a complicated matter. 912 A.2d at 100. Harris’s
   claim is not the type of low-value suit that would not be
   litigated absent the availability of a class proceeding.
   Harris has adequate incentive to bring her claim as an
   individual action. Not only are her damages substantial,
   but the fact that her home is at stake in the foreclosure

                                13
the 12(b)(6) motion and concluded that, in light of
Muhammad, at this stage the class-arbitration waiver at issue
violates New Jersey’s fundamental public policy.

        Having decided that, at this stage, the class-arbitration
waiver violates fundamental New Jersey public policy as
applied to small-sum cases, we will now examine the other
two prongs of Restatement § 187(2)(b)—that New Jersey law
would apply in the absence of the parties’ choice-of-law
provision and that New Jersey has a materially greater interest
than Utah in the determination of the waiver’s validity. We
combine the analysis of the remaining § 187(2)(b) prongs
because, as New Jersey choice-of-law rules “require[]
application of the law of the state with the greatest interest in
resolving the particular issue that is raised in the underlying
litigation[,]” New Jersey law will necessarily apply in the
absence of an agreement if New Jersey has a materially
greater interest than Utah in the determination of the class-
arbitration waiver’s validity. Gantes v. Kason Corp., 679
A.2d 106, 109 (N.J. 1996).

        New Jersey’s governmental-interest analysis requires
an initial inquiry into whether there is an actual conflict
between the laws of Utah and New Jersey. Id. Comparison
of Muhammad, which declared unconscionable a class-
arbitration waiver that would preclude relief under New

   proceeding makes it likely that she would contact an
   attorney. The same cannot be said of low-value claims
   where individuals have little, if any, incentive to seek out
   an attorney.

Delta Funding, 912 A.2d at 115 (internal parallel citations
omitted).

                               14
Jersey’s Consumer Fraud Act (“NJCFA”), with Utah Code
Ann. § 70C-4-105, which explicitly states that class-action
waivers in open-end consumer credit contracts are valid,
reveals such a conflict. Having established an actual conflict,
we must now “‘identify the governmental policies underlying
the law of each state and how those policies are affected by
each state’s contacts to the litigation and to the parties’” so
that we can determine which state has the greater interest in
resolving the issue of the class-arbitration waiver’s validity.
Id. at 485 (quoting Veazey v. Doremus, 510 A.2d 1187, 1189
(N.J. 1986)).

        We have already discussed the policies underlying
Muhammad’s holding that “[t]he public interest at stake in . . .
consumers[’] [ability to effectively] pursue their statutory
rights under [New Jersey’s] consumer protection laws
overrides the defendants’ right to seek enforcement of the
class-arbitration bar in their agreement.” 912 A.2d at 100-01.
This is consistent with the fact that the “available legislative
history of [the NJCFA] demonstrates that the Act was
intended to be one of the strongest consumer protection laws
in the nation . . . [and] should be construed liberally in favor
of protecting consumers.” Huffmaster v. Robinson, 534 A.2d
435, 437-38 (N.J. Super. Ct. Law Div. 1986) (internal
quotation marks omitted). The parties have pointed us to no
caselaw 3 which directly addresses Utah Code Ann. § 70C-4-
105 or the policies underlying it, and our own research has

       3
        Although we have not found any caselaw specific to
Utah, the subject has been thoroughly discussed in many cases
and law review articles. See, e.g., Jack Wilson, “No-Class-
Action Arbitration Clauses,” State-Law Unconscionability, and
the Federal Arbitration Act: A Case for Federal Judicial
Restraint and Congressional Action, 23 Q UINNIPAC L. R EV. 737
(2004).

                              15
uncovered none. However, the fact that Utah is, to our
knowledge, the only state to have enacted such legislation
indicates a strong policy in favor of the enforcement of the
waivers. It is not unreasonable to assume that the Utah law
was enacted because of policies honoring freedom-of-contract
principles and intending to protect Utah banks from
unwarranted class-action suits.

        Appellees emphasize Utah’s contacts to the parties,
asserting that Utah is both the place of contracting and the
place of performance. They further assert that the “subject
matter” of the contract, Appellant’s account, is located in
Utah, because Appellee AECB is a Utah bank. On the other
hand, Appellee AECB is a wholly owned subsidiary of
Appellee AEC, a New York corporation, and, despite the
contract’s statement that AECB is located in Utah, Homa
must mail his credit card payments to Florida. New Jersey
has considerable contacts to the parties as well—Appellant is
a New Jersey resident and was physically located in New
Jersey during all of his dealings with Appellees. New Jersey
undoubtedly has the most significant contacts with the
litigation, as the only claims asserted are violations of the
NJCFA. Given the contacts that New Jersey and Utah have
with the parties and the litigation, and the policy reasons
underlying the states’ conflicting laws—particularly New
Jersey’s interest in protecting its consumers’ ability to enforce
their rights under the Consumer Fraud Act—we predict that
the Supreme Court of New Jersey would determine that New
Jersey has a materially greater interest than Utah in the
enforceability of a class-arbitration waiver that could operate
to preclude a New Jersey consumer from relief under the
NJCFA.

      We conclude that, if this is a small-sum case, then the
Supreme Court of New Jersey would apply New Jersey law to

                               16
the class-arbitration waiver. Having made that determination,
we must now apply New Jersey law to Appellant’s
unconscionability claim. We conclude that this issue comes
out the same way as the choice-of-law issue. That is, we hold
that, if the claims at issue are of such a low value as
effectively to preclude relief if decided individually, then,
under Muhammad, the application of Utah law to the class-
arbitration waiver is invalid and the class-arbitration waiver is
unconscionable. We will thus reverse the District Court order
dismissing this case in favor of arbitration and remand for
further proceedings consistent with this opinion.

Weis, J., Circuit Judge, concurring.

        We remand essentially because the District Court’s
ruling, constrained as it was by Rule 12(b)(6) of the Federal
Rules of Civil Procedure, did not fully address all of the
matters relevant to the contention that the Cardmember
Agreement contains an unconscionable class-action waiver.
Because all of the factors bearing on that issue are not
pertinent to our limited review in this case, the question of
unconscionability under New Jersey law remains open for
consideration on remand. See Sands v. McCormick, 502 F.3d
263, 267 (3d Cir. 2007) (when reviewing a motion to dismiss
under Rule 12(b)(6), we must accept a plaintiff’s factual
allegations as true, but “need not credit a plaintiff’s ‘bald
assertions’ or ‘legal conclusions’”) (quoting Morse v. Lower
Merion School Dist., 132 F.3d 902, 906 (3d Cir. 1997)). Our
opinion should be read with that understanding.

       The parties may note that the New Jersey Supreme
Court in Muhammad v. County Bank of Rehoboth Beach,
Del., 912 A.2d 88 (N.J. 2006), relied on several factors in

                               17
striking the class-action ban explaining, however, that such a
prohibition is not per se unconscionable. Id. at 96-97, 101;
see also Delta Funding Corp. v. Harris, 912 A.2d 104, 115
(N.J. 2006) (“under New Jersey law, [a] class-arbitration
waiver in [an] arbitration agreement is not unconscionable per
se”). Muhammad initially considered whether it was
presented with an adhesion contract, including its subject
matter, “the parties’ relative bargaining positions,” and the
amount of “economic compulsion motivating the ‘adhering’
party.” Id. at 96-97 (quoting Rudbart v. N. Jersey Dist. Water
Supply Comm’n, 605 A.2d 681, 687 (N.J. 1992)).

       Also relevant in Muhammad were “the public interests
affected by the contract.” Id. at 97 (quoting Rudbart, 605
A.2d at 687). The opinion expressed concern over the
consumer’s ability to obtain representation and counsel’s
incentive to undertake the litigation. Id. at 99-100. Matters
bearing on the Court’s appraisal included the lawsuit’s
complexity, the amount of damages involved, and the
availability of attorneys’ fees and statutory multipliers. Id. at
100. The size of potential damages was considered to be an
important consideration and was used to limit the holding to
“low-value” cases. Id. at 100 & n.5; see also Harris, 912 A.2d
at 115 (class-action arbitration ban was not unconscionable
when the damages involved were much greater than those in
Muhammad). Significantly, however, the Court did not
define the critical limitation, “low-value.”

      Complexity, or its lack, in the underlying claim may be
an important factor to be explored.

       When briefing the elements pertinent in Muhammad,
the parties should consider that the case before us alleges a
violation of New Jersey’s Consumer Fraud Act and its
provisions for both treble damages and attorneys’ fees.

                               18
N.J.S.A. 56:8-19. Under that statute, any counsel fees
awarded include time reasonably spent preparing and
prosecuting the case and need not necessarily be proportionate
to the damages recovered. Silva v. Autos of Amboy, Inc., 632
A.2d 291, 295-98 (N.J. Super. Ct. App. Div. 1993). The New
Jersey Supreme Court has explained that the legislature, intent
on protecting consumers’ rights, included attorneys’ fees in
the Act’s recovery provision “to attract competent counsel to
counteract the community scourge of fraud by providing
incentive for an attorney to take a case involving a minor loss
to the individual.” Wanetick v. Gateway Mitsubishi, 750
A.2d 79, 82 (N.J. 2000) (quoting Lettenmaier v. Lube
Connection, Inc., 741 A.2d 591, 593 (N.J. 1999)).

        The parties might also consider whether a provision in
the arbitration clause affects the public interests involved in
the case. The pertinent excerpt reads, “should any portion of
th[e] ‘Restrictions on Arbitration’ provision be deemed
invalid or unenforceable, then the entire Arbitration Provision
(other than this sentence) shall not apply.” If the District
Court strikes the class-action ban as unconscionable and is
compelled to apply the agreement’s prohibition on that
procedure, it is possible that the parties are not required to
arbitrate and may, instead, proceed to court. The parties
might address whether the potential loss of the arbitral forum
affects the public interests involved.

        Our opinion does not explore in depth the many issues
often involved in a controversy over class-action arbitration, a
procedure lacking the safeguards included in federal law
governing judicial class-actions. A number of law review
articles have discussed the complexities underlying cases like
the one before us. For two articles that present differing
perspectives, see Jean R. Sternlight As Mandatory Binding
Arbitration Meets the Class Action, Will the Class Action

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Survive?, 42 Wm. & Mary L. Rev. 1 (2000), and Jack Wilson
“No-Class-Action Arbitration Clauses,” State-Law
Unconscionability, and the Federal Arbitration Act: A Case
for Federal Judicial Restraint and Congressional Action, 23
Quinnipiac L. Rev. 737 (2004). The parties might find these
and similar articles helpful.

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