NJ Supreme Court on Agreements to Arbitrate

We have previously noted the New Jersey Supreme Court’s somewhat radical view of arbitration agreements — including the proposition that, to be enforceable, each party to the contract needs to understand what arbitration means.  This principle has been applied to a subsequent dispute before the State Supreme Court, resulting in the holding that a provision of an arbitration agreement in a student enrollment contract delegating the authority to determine arbitrability to the arbitrator is invalid where the students were not put on notice that (a) a court would not determine arbitrability, or (b) a court would not determine anything whatsoever inasmuch as the students had irrevocably waived their right to judicial access.

In Morgan v. Sanford Brown Institute, a complaint was brought in state court by students alleging fraud against Sanford Brown Institute (a for-profit educational institution offering medical ultrasound training).  Defendant Sanford Brown unsuccessfully argued a motion to compel arbitration, implicitly acknowledging that the court had authority to grant such relief.  The school neither relied upon the delegation clause in the arbitration agreement (empowering an arbitrator, not a court, to determine arbitrability of claims), nor cited any law with respect to the validity of such delegation provisions.  The trial court denied the motion but the school prevailed before the Appellate Division, which reversed the trial court, dismissed the students’ complaint, and directed that the claims be sent to arbitration.  Here, for the first time, the court held that “the parties ‘clearly and unmistakably’ agreed an arbitrator would determine issues of arbitrability.”  The trial court’s error, therefore, consisted of its not submitting the issue of arbitrability to an arbitrator.

Ignoring its own holding, the Appellate Division panel nevertheless made certain legal findings with respect to the arbitration agreement, determining inter alia that the arbitration agreement’s limitation on the award of statutory damages and exclusion of other protections of the New Jersey Consumer Fraud Act were unconscionable and unenforceable.

The Supreme Court reversed, holding the entire arbitration agreement unenforceable and remanded to the trial court for (presumably) reinstatement of the students’ claim.  The rationale for the Supreme Court’s action was consistent with, but an extension of, its previous holding in Atalese v. U.S. Legal Services Group.  That case, in turn, was founded on the proposition that, pursuant to the Federal Arbitration Act, the enforceability of agreements to arbitrate was to be determined by generally applicable state law principles of contract, which (in New Jersey) meant that “a consumer had to have some understanding that, by accepting arbitration, she is surrendering her common-law and constitutional right of access to the courthouse.”  Because, in the court’s view, “state law governs not only whether the parties formed a contract to arbitrate their disputes, but also whether the parties formed an agreement to delegate the issue of arbitrability to an arbitrator,”  those state law principles — such as the requirement of mutual assent and a common understanding of the contract terms — defeat this agreement.  The court held that a waiver of a constitutionally guaranteed right must be clear and unmistakable — and, under New Jersey law, explained “in sufficiently broad terms” in the agreement itself.  The agreement at issue “[did] not explain, in broadly worded language or any other manner, that plaintiffs are waiving their right to seek relief in court for breach of the enrollment agreement or for a statutory violation,” and thus did not satisfy the elements necessary for the formation of a contract.

Several concerns are raised by this decision.  First, it seems to be restricted to consumers who enter into arbitration agreements.  That is, could General Motors rely on Atalese or Sanford Brown to argue that its arbitration agreement with DuPont is unenforceable because the contract did not explain the consequences of arbitration or delegation with respect to waiver of constitutionally guaranteed access to the courts?  Indeed, could any party to any contract contest its validity on the ground that the party did not understand the consequences of its agreement to certain of its provisions?  If General Motors is presumed to understand the meaning of an arbitration agreement, and students enrolled in an ultrasound technician training course are presumed not to understand it and require it to be explained to them, then where do I fall in the continuum?  And where do you?

In addition, there is the issue of futility.  The court itself noted that the arbitration provision in the 4-page enrollment agreement was in 9-point type, single-spaced, and therefore difficult to read.  Would the insertion of a definition of arbitration, waiver, and delegation have cured the defect that the court complained of?  And would certain prospective students reconsider their intention to enroll in Sanford Brown Institute because of an additional inserted phrase in the arbitration clause of the enrollment agreement?

Finally, and perhaps of greatest concern, is the prospect that, in order to be enforceable in New Jersey, arbitration agreements now must feature certain provisions that arbitration agreements in the neighboring states of Pennsylvania, New York and Delaware need not.  The Sanford Brown court saw no difficulty here —  “no greater burden is placed on an arbitration agreement than other agreements waiving constitutional or statutory rights.”  It refers to cases cited in Atalese that require notice when a consumer or employee agrees to waive appeals of the denial of a license and other administrative acts.  This somehow doesn’t hold water.  It is the very nature of agreements to arbitrate that the parties mutually waive access to the courts.  One could argue that there is nothing of substance in an arbitration agreement other than a waiver of access to the courts.

It seems apparent that the driving force behind this opinion is hostility to judicial arbitration, at least in the consumer context.  The court is deeply skeptical that courts should be carved out of claims of consumer fraud by private contracts of adhesion unilaterally promulgated by the stronger party.  So are many of us — but as a matter of policy, not common law, and not because we think judges are any better equipped to decide fraud claims than arbitrators are.  Forcing all these claims to be asserted in New Jersey Superior Court does no favor to the students or to the courts.

I invite readers to articulate the broad legal contract principles that render unenforceable, as to students and consumers, contracts that are perfectly enforceable between businesses, and that render unenforceable in New Jersey arbitration agreements that are enforceable in every other state.



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