A federal appeals court has declined to enforce an arbitration provision that an Avis subsidiary printed in a different location than the main contract for a rental car.

The U.S. Court of Appeals for the Third Circuit agreed with a judge in the District of New Jersey that contracts reviewed and signed by Payless Car Rental customers did not sufficiently incorporate by reference the language calling for arbitration of disputes. The arbitration language was either printed on the backside of the rental agreement or on a "rental jacket" that was handed to consumers with the contract folded up inside.

The ruling in a class action over allegedly unauthorized fees charged to customers, represents a defeat for Reed Smith, which represented the car rental company.

According to Third Circuit Judge Patty Shwartz, the parties agreed that five of the plaintiffs in the class action suit are bound by the laws of New Jersey, and two others are bound by Florida law. Under New Jersey law, for a separate document to be incorporated into a contract it "must be described in such terms that its identity may be ascertained beyond doubt," Shwartz said.

Third Circuit Judge Patty Shwartz.

The contract states that the customer "reviewed & agreed to all notices & terms here and in the rental jacket, but the phrase 'rental jacket' is not defined or even used in the U.S. Agreement and is not otherwise so specific or identifiable that the customer could ascertain the document. In fact, the rental jacket itself is labeled 'Rental Terms and Conditions' rather than 'rental jacket.' Thus, the U.S. Agreement does not sufficiently describe the rental jacket to incorporate it by reference," Shwartz wrote.

In addition, there is no evidence to suggest that consumers were told about the arbitration agreement printed on the rental jacket when they signed the contract, Shwartz said.

Likewise, under Florida law, a separate document is incorporated into a contract where it is sufficiently described in writing, Shwartz said. Although Florida's test is less strict than New Jersey's, she said, the rental jacket was not "sufficiently described" to meet Florida's requirement to be deemed included into the original contract, Shwartz said. "The U.S. Agreement also lacked any description of where the rental jacket could be found or what the rental jacket was," Shwartz wrote.

Shwartz was joined by Judges Thomas Ambro and Stephanos Bibas in upholding U.S. District Judge Kevin McNulty. The panel also found that McNulty correctly concluded a genuine dispute exists over whether plaintiffs who received the two-sided contract were on reasonable notice of the arbitration provision, Shwartz said. That document is printed with the statement, "By signing below, you agree to the terms and conditions of this Agreement, and you acknowledge that you have been given an opportunity to read this Agreement before being asked to sign."

"This language does not direct the customer to the back side or inform him of its terms," and the lack of reference to the underside implies "that the agreement consists of the text only on the front side," Shwartz said.

"We are extremely excited for our clients," Greg Kohn of Nagel Rice in Roseland, who represented the plaintiffs along with Lisa Considine and David DiSabato of The Wolf Law Firm in North Brunswick, said in an email.  "The Third Circuit correctly recognized that Payless could not compel customers to arbitrate their claims that Payless improperly charged them for additional services that they did not want and specifically declined. This opinion effects Payless' ability to compel arbitration under their rental agreement across the country. Our clients are looking forward to proceeding with the case and obtaining justice for them and the class."

 Kim Watterson of Reed Smith in Pittsburgh, who argued for Avis at the Third Circuit, did not respond to a request for comment.