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NJ Supreme Court Rules Delegation Clause in Arbitration Agreement Unenforceable

This morning the New Jersey Supreme Court issued its opinion in Morgan v. Sanford Brown Institute and found that the arbitration agreement, which Defendants claimed waived students’ rights to challenge any portion of the agreement in court, was unenforceable.  The Locks Law Firm appeared as amicus curiae on behalf of the New Jersey Association for Justice and I was privileged to argue the case before the Court this past December.

 

Annemarie Morgan and Tiffany Dever, the plaintiffs in the lawsuit, 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.  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 (size nine font) print of the agreement, in paragraph 10 on page 4 of the enrollment agreement, a clause that ran for 750 words and thirty-five unbroken 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; and (2) obtain the damages available under 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.”  (As succinctly stated by the Court, “[a]rbitrability is whether the parties have agreed to submit to an arbitrator or a court the authority to decide whether a dispute is subject to arbitration.”) While the agreement failed to explain what that “arbitrability” clause meant, Sanford Brown argued that it meant that a court had no power even to hear a challenge that the parties had not formed an agreement to arbitrate in the first place.  The Appellate Division agreed with Defendants and ordered the case to arbitration.

 

Today, the Supreme Court reversed the Appellate Division, ruled that both the arbitration and arbitrability clause was unenforceable, and ordered the case remanded to the trial court, allowing the plaintiffs to be heard on the merits of their case.  The Court adopted the argument put forth by NJAJ, and found that the arbitration and delegation clause failed to meet the standards of both the United States Supreme Court, announced in First Options of Chi., Inc. v. Kaplan, 514 U.S. 938 (1995) and the New Jersey Supreme Court, announced in Atalese v. U.S. Legal Services Group, 219 N.J. 430 (2014), cert. den., 135 S.Ct. 2804 (2015).

 

Arbitration agreements are subject to state law principles on contract formation.  If under state law an agreement to arbitrate has been formed, any purported agreement to delegate the question of arbitrability must meet the “clear and unmistakable” standard enunciated by the United States Supreme Court in First Options.  The New Jersey Supreme Court held in the present case that no agreement to arbitrate had been formed under Atalese, expressly stating that courts must consider the requirements of the Plain Language Act, N.J.S.A. 56:12-10 (requiring that consumer contracts be written in simple, clear and understandable language, and among other things suggesting clauses like the one at issue should be written in “at least 10 point type”) to determine if an agreement has been formed.

 

After considering the arbitration clause, and its attempt to delegate the question of arbitrability, the Court held “[t]he best that can be said about the arbitration provision is that it is as difficult to read as other parts of the enrollment agreement.”  Based upon the unclear wording, the small font size, the length of the agreement, and the failure to explain what rights were being given up by students, the Court held that the clause was unenforceable and found that the students are entitled to pursue their claims in a court of law.

 

Ultimately, the Court reached the correct decision under both state and federal law, refusing to allow a hidden clause of unclear meaning to bar defrauded consumers from their rights to have their cases heard in a court of law.  This decision will assist the trial courts in future cases determining if arbitration agreements in consumer contracts are enforceable.