On Arbitration Clauses

I recently had the privilege of arguing as amicus counsel before the Supreme Court in the case Morgan v. Sanford Brown Institute.  As with all too many consumer cases in recent memory, the case involves an arbitration clause, in which a business – in this case a for profit college – sought to strip consumers of their ability to file a lawsuit in a Court of law.  The facts of the case were pretty straight-forward, Annemarie Morgan and Tiffany Dever each entered into an enrollment agreement with Sanford Brown to take medical sonography courses. The cost for sixteen months of courses was an astronomical $37,500 – more than triple what a year of in-state tuition would have cost them at my alma mater, Rowan University, for the 2015-2016 year.  Unfortunately for Ms. Morgan and Ms. Dever, they were not told that the course in medical sonography was unaccredited – meaning they could not receive the licenses they needed to work in the sonography field in New Jersey.  

Ms. Morgan and Ms. Dever filed a lawsuit, alleging that Sanford Brown committed fraud by, among other things, not advising them that the program was unaccredited – and in fact telling them that Sanford Brown was being awarded “specialized accreditation.”  Sanford Brown responded by pointing the court to an arbitration clause contained in the small print of the agreement, in paragraph 10 on page 4 of the enrollment agreement, a clause that ran for 49 lines  total.  Inside the fine print of paragraph 10 was an arbitration clause, which not only said Ms. Morgan and Ms. Dever agreed to arbitrate claims, but also waived their right to (1) file a complaint together, or as a class action; (2) obtain the damages contained in the New Jersey Consumer Fraud Act – including attorney’s fees, treble damages, and punitive damages.  The paragraph also contained a clause which vaguely alluded to the power of an arbitrator to determine the question of “arbitrability.”  While the agreement failed to explain what that meant, Sanford Brown has argued that it meant that a Court could not even hear a challenge that the parties had not formed an agreement to arbitrate.  

As the U.S. Supreme Court has repeatedly made clear, the question of whether a contract was formed is one that is left for state law, and it is only after a court finds that an agreement to arbitrate was formed that the arbitrator can decide arguments between the parties.  (See, e.g.  First Options of Chicago v. Kaplan, 514 U.S. 938, 944 (1995)). This basic principal is one which underlies the Federal Arbitration Act – that it was the intention of Congress to enforce the agreement of the parties to arbitrate.  Volt Invo. Scis. V. Bd. Of Trs., 489 U.S. 468, 478 (1989).  If there was no agreement then there is no reason to force the parties to an arbitration.  Defendant’s argument is premised on the idea that the U.S. Supreme Court has applied some sort of Federal Contract law to arbitration clauses containing a clause such as the one at issue in Morgan.  Defendants rely on the case of Rent-A-Center v. Jackson, a 2010 US Supreme Court opinion in which the question of whether a contract was agreed to was not at issue.  The U.S. Supreme Court specifically noted in its opinion that it was not addressing questions of contract formation in that opinion.  Rent-A-Center v. Jackson, 561 U.S. 63, fn. 2 (2010).   

During oral argument Defendant argued that once a company puts a clause in an arbitration agreement that delegates the question of arbitrability to an arbitrator, a Court has no role to play except to order the parties to arbitration.  This argument reveals what underlies all of these clauses and the unspoken reality that these clauses – and the ever expanding waivers of consumer rights in them – are not about the agreement of the parties.  They are about businesses using the fine print of form contracts, which consumers are not allowed to negotiate, to strip everyday people of their rights under the law.  

I remain hopeful that the Supreme Court will apply the longstanding Federal Case law, and refuse to expand the Rent-A-Center opinion as proposed by Defendants.  The question of whether the parties formed an agreement to arbitrate is one that has always been and should always be for a Court of law to decide.  To find otherwise would not only unfairly strip consumers of their rights, but would also run counter to the very policies underlying the Federal Arbitration Act.  

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