A federal appeals court has revived a proposed class-action suit alleging that a service contract violates New Jersey law because it denies consumers the right to collect attorney fees if they win an arbitrated dispute and requires splitting arbitration costs.
The suit, brought by used-car purchaser Tijuana Johnson, asserts that the provision is invalid under the state’s Truth in Consumer Contract Warranty and Notice Act.
In February 2011, Johnson bought a $1,380 “Wynn’s Plus Used Vehicle Service Contract” for the 2007 Saturn she purchased from Genesis Auto Sales, a used-vehicle store in Burlington, N.J., the suit says.
Wynn’s Extended Care Inc. administered the service contract; National Casualty Co. insured it.
In May 2011, the Saturn’s engine needed to be replaced. Wynn’s authorized an inspection of the vehicle but refused to pay for repairs, contending the problem was covered by the General Motors warranty, the suit asserts, and the service contract excludes coverage if there is coverage under a manufacturer’s warranty.
GM denied coverage, however, because Wynn’s auto shop had already dismantled the engine.
When Wynn’s still refused to cover the repairs, she sued it and National Casualty, claiming, in part, that the Wynn’s service contract provision waiving attorney fees and splitting costs violated New Jersey’s warranty law. The dealership isn’t a defendant.
Wynn’s paid for the repairs after litigation began, but the suit continued because it also sought damages for loss of use of the Saturn for six months and for insurance and towing expenses, the decision said. She also paid about $2,160 to the finance company during that period.
The suit alleges that Wynn’s and National Casualty have entered into more than 10,000 service contracts in New Jersey through at least 110 dealerships.
The defendants denied liability, and a lower-court judge dismissed the case without trial.
‘Clearly established legal right’
In reversing that decision, the 3rd Circuit U.S. Court of Appeals said, “We conclude that the service contract’s provision waiving attorney’s fees and splitting costs violates a clearly established legal right under New Jersey law.”
The warranty law and the state’s Consumer Fraud Law entitle successful plaintiffs to recoup their attorney’s fees and costs, the panel said in an opinion written by Judge D. Brooks Smith, and provisions that deny plaintiffs the right to recover legally mandated attorney fees and costs are unconscionable.
Andrew Bell, a New York City lawyer for Johnson, said state law includes the right of successful plaintiffs to have unsuccessful defendants cover the full costs of arbitration.
“This was a significant decision to uphold consumers’ right not to have contracts presented to them that violate New Jersey law,” he said.
The next procedural steps in the case are for the defendants to file a formal answer to the complaint and for Johnson to ask the judge to certify a class of consumers who purchased service contracts with the allegedly invalid provision, Bell said.
Kevin McKeon, a defense lawyer in Cherry Hill, N.J., said he has not been authorized to speak about the case.
The Service Contract Industry Council and National Federation of Independent Business filed a friend of the court brief supporting the defendants, while the New Jersey Association for Justice and Consumers League of New Jersey filed a brief siding with Johnson.