Arbitration Agreements In New Jersey Nursing Home Contracts Are Enforceable, But Some Provisions Are Voidable For “Substantive Unconscionability.”

In an August 10, 2010 opinion that was approved for publication, the New Jersey Appellate Division addressed the Federal Arbitration Act (“FAA”) and its impact on New Jersey’s Nursing Home Responsibilities and Rights of Residents Act (“Residents’ Rights Act”). Estate of Ruszala v. Brookdale Living Communities, Inc., No. A-4403-08T1 (N.J. Super. App. Div. Aug. 10, 2010). In particular, the court was called upon to decide whether the FAA preempts New Jersey’s Residents’ Rights Act, which renders invalid and unenforceable “[a]ny provision or clause waiving or limiting the right to sue … between a patient and a nursing home.” The Ruszala court concluded that the FAA indeed renders the Residents’ Rights Act’s ban on arbitration clauses invalid; however, it went on to “rely[] on well-established principles of contract law to declare certain provisions of the arbitration agreements unenforceable under the doctrine of substantive unconscionability.”

The consolidated Ruszala cases involved two elderly residents of assisted living facilities who had suffered injuries at their respective facilities and later died. In the negligence and wrongful death litigation that ensued, the defendant facilities moved to compel binding arbitration, based on the arbitration and limitation of liability provisions contained in the residency agreements signed by the plaintiffs.

At the trial level, after allowing limited discovery on the issue of enforceability of the provisions, the court had denied the defendants’ motions.

On appeal, the Appellate Division reversed the lower court’s finding that the FAA was inapplicable to the arbitration agreements contained in the residency agreements. It found that the case “involved” interstate commerce because of the economic activities performed by the facilities, and concluded that the FAA in fact preempts the anti-arbitration provisions of New Jersey’s  Residents’ Rights Act: “[o]ur State’s prohibition of arbitration agreements in nursing home contracts, designed to protect the elderly, is … irreconcilable with our national policy favoring arbitration…. Under our federal system of government, national policy prevails.” Slip op. at 5, 28.

However, the Ruszala court affirmed the lower court’s finding that some of the arbitration agreement provisions were unenforceable, based on the doctrine of substantive unconscionability. In particular, the provisions limiting discovery, limiting compensation for non-economic damages, and precluding punitive damages, were found to be substantively unconscionable, and were stricken from the arbitration agreement.

The Appellate Division was “satisfied that the residence agreements are contracts of adhesion.” Having so found, the Court went on to consider the four factors for substantive unconscionability set forth in Rudbart v. North Jersey District Water Supply Commission, 127 N.J. 344, 356, cert. denied, 506 U.S. 871 (1992):

[1] the subject matter of the contract; [2] the parties’ relative bargaining positions, [3] the degree of economic compulsion motivating the ‘adhering’ party, and [4] the public interests affected by the contract.

Id.  The Ruszala court applied these factors and found unconscionable the limitation of discovery, the limitation of compensatory damages, and the prohibition of punitive damages, and accordingly severed those provisions from the contract.

The Ruszala court opined that the discovery restrictions to be “arguably the most palpably egregious.” By limiting depositions to experts only, plaintiffs would be unable to depose facility staff members directly responsible for the care of the resident, or any other fact witnesses. It found that the compensatory damages cap permits nursing home operators “to budget potential liability as a mere cost of doing business.” The Ruszala court also declared that the punitive damages ban thwarts society’s expression of disapproval of “intolerable conduct,” and eliminates the deterrent effect that punitive damages afford. As it concluded,

When considered together, the restrictions on discovery, limits on compensatory damages, and outright prohibition of punitive damages form an unconscionable wall of protection for nursing home operators seeking to escape the full measure of accountability for tortious conduct that imperils a discrete group of vulnerable consumers. This is precisely the evil the Legislature sought to enjoin by passing the [Residents’ Rights Act].

Slip op. at 37.

Finally, the court remanded the case for a hearing as to whether one of the plaintiffs had actual or implied authority to enter into the contract on her husband’s behalf, to determine whether a valid contract had been formed between the parties.

The case is annexed here – Estate of Ruszala v. Brookdale Living Communities, Inc.