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Arbitration Clause Ruled Invalid in Educational Institute’s Enrollment Agreement

By on July 8, 2016 in Arbitration, Uncategorized with 0 Comments

An arbitration agreement can be enforceable in a consumer contract if it clearly and unambiguously explains that the consumer is giving up the right to pursue relief in a judicial forum. In the recent New Jersey Supreme Court case, Morgan v. Sanford Brown Institute, 2016 N.J. LEXIS 563 (2016), the Court considered the enforceability of an arbitration clause in the enrollment agreement of Sanford Brown Institute, a private educational institution offering medical-related training programs. The Court also decided whether the court or the arbitrator should determine the arbitrability of the claims filed by the plaintiffs against Sanford Brown.

The plaintiffs, Annemarie Morgan and Tiffany Dever, filed suit against defendants Sanford Brown Institute and Career Education Corporation, claiming that misrepresentations and deceptive business practices of the defendants and certain administrators at the school led them both to enroll in the school’s ultrasound technician program. The enrollment agreement signed by both plaintiffs contained a lengthy arbitration clause, which required that any disputes relating to the student’s enrollment would be resolved through an arbitration with AAA.

In response to the lawsuit, the defendants filed a motion to compel arbitration. However, they did not make it clear at the trial court level that they wanted an arbitrator, rather than the court, to decide whether the parties agreed to arbitration. The trial court denied the motion on the basis that the arbitration provision did not inform the plaintiffs that they were waiving their statutory remedies and because the provision conflicted with the remedies available under the Consumer Fraud Act.

On appeal to the Appellate Division, that court reversed the trial court and ruled that the trial court erred in failing to enforce the arbitration agreement’s provision that the arbitrator would decide the issue of arbitrability. It determined that the suit should be submitted to arbitration and the arbitrator should decide as an initial issue whether the dispute was arbitrable.

In further appealing this decision to the New Jersey Supreme Court, the plaintiffs contended that they did not understand that the arbitration provision denied them the right of access to a judicial forum and a jury trial. They claimed that the arbitration provision was ambiguous and did not provide the information needed for them to make an effective knowing and voluntary waiver of their rights. More specifically, they argued that the enrollment agreement failed to explain that arbitration was a substitute for their right to seek relief in court.

The Supreme Court reversed the Appellate Division. While this appeal was pending before the Supreme Court, the Court decided the case of Atalese v. U.S. Legal Servs., 219 N.J. 430 (2014), which set forth the standard for the enforceability of an arbitration clause in a consumer contract. For an arbitration clause to be enforceable, the clause must clearly and unambiguously state that the consumer would be giving up the right to pursue relief in a court of law.

As a further threshold issue, the Supreme Court reviewed Sanford Brown’s delegation clause. A delegation clause in an arbitration provision would state whether the arbitrator or the court would decide the initial issue of the validity of the provision and whether the dispute was subject to arbitration.

The Court noted that, unless the parties have clearly delegated to an arbitrator the decision as to whether the parties have agreed to resolve the dispute through arbitration, the issue is for a court to decide. Here, the Sanford Brown agreement did contain a “delegation clause,” which stated that “any objection to arbitrability or the existence, scope, validity, construction, or enforceability” of the agreement to arbitrate would be resolved pursuant to the arbitration agreement. The defendants argued that this case was distinguishable from Atalese because it contained a delegation clause, which required an arbitrator, not the court to decide the arbitrability of the dispute.

The Supreme Court found that that state contract law contract principles applied to the enforceability of the agreement, as well as the purported delegation clause. For an agreement to be enforceable, there must be a meeting of the minds based upon an understanding of the contract’s terms. The meaning of arbitration is not self-evident to the average consumer who would not understand that arbitration is a substitute for the right to pursue a claim in court – unless it is clearly explained.

The Court held that the Sanford Brown enrollment agreement and its delegation clause both suffered from the same fatal flaw in that they did not clearly explain to the plaintiffs that they were waiving their right to seek relief in court for a breach of the enrollment agreement or a statutory violation under the Consumer Fraud Act. Hence, the Court found that both the arbitration provision and the purported delegation clause were unenforceable.

Because there was some confusion over the challenge to the defendants’ delegation clause, the Court added some important guidance for future litigants seeking to enforce a delegation clause in an arbitration agreement. The party seeking to enforce a delegation clause in an arbitration agreement should clearly argue before the motion court that the decision as to whether the parties agreement to arbitrate should be decided by the arbitrator, not the court. On the flip side, the party opposing the enforceability of the arbitration clause must specifically challenge the delegation clause. The failure to challenge the delegation clause will result in the arbitrability being decided by the arbitrator, not the court.

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Betsy G. Ramos

About the Author

About the Author:

Ms. Ramos is an Executive Committee Member and Co-Chair of the Litigation Department at Capehart Scatchard, P.A. located in Mount Laurel, New Jersey. She is an experienced litigator with over 25 years experience handling diverse matters. Practice areas include tort defense, business litigation, estate litigation, tort claims and civil rights defense, construction litigation, insurance coverage, employment litigation, shareholder disputes, and general litigation.

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