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NJ Supreme Court Strikes Down Provision of Arbitration Agreement in Favor of Consumer Plaintiffs

Enforcing Arbitration Agreements New Jersey Supreme Court

In a 5-1 majority decision, the New Jersey Supreme Court in Dever v. Sanford Brown Institute (075074) (A-31-14)(June 14, Enforcing Arbitration Agreements New Jersey Supreme Court2016) handed consumers a victory by declining to enforce the provision of an arbitration agreement involving the claims of two disgruntled students who had enrolled in Sanford Brown Institute’s ultrasound technician program.

The enrollment agreement contained an arbitration provision delegating authority to an arbitrator to determine issues of arbitrability, but did not mention that the students were surrendering their right to resolve their legal claims in a judicial forum. In other words, the dispute centered around whether a judge or an arbitrator would decide whether the parties agreed to arbitrate the consumer-fraud and other claims raised in plaintiffs’ complaint.

Click to read the relevant provision of the arbitration agreement

Agreement to Arbitrate — Any disputes, claims, or controversies between the parties to this Enrollment Agreement arising out of or relating to (i) this Enrollment Agreement; (ii) the Student’s recruitment, enrollment, attendance, or education; (iii) financial aid or career service assistance by SBI; (iv) any claim, no matter how described, pleaded or styled, relating, in any manner, to any act or omission regarding the Student’s relationship with SBI, its employees, or with externship sites or their employees; or (v) any objection to arbitrability or the existence, scope, validity, construction, or enforceability of this Arbitration Agreement shall be resolved pursuant to this paragraph (the “Arbitration Agreement”). Choice of Arbitration Provider and Arbitration Rules — Unless the parties agree to an alternative, the arbitration shall be administered by the American Arbitration Association (“AAA”) or the National Arbitration Forum (“NAF”). The arbitration shall be before a single arbitrator. . . . Choice of Law — The arbitrator shall apply federal law to the fullest extent possible, and the substantive and procedural provisions of the Federal Arbitration Act (9 U.S.C. §§ 1-16) shall govern this Arbitration Agreement and any and all issues relating to the enforcement of the Arbitration Agreement and the arbitrability of claims between parties. Costs, fees, and expenses of arbitration — Each party shall bear the expense of its own counsel, experts, witnesses, and preparation and presentation of proofs. All fees and expenses of the arbitrator and administrative fees and expenses of the arbitration shall be borne equally by the parties unless otherwise provided by the rules of the AAA or the NAF governing the proceeding, or by specific ruling by the arbitrator, or by agreement of the parties. Relief and Remedies — The arbitrator shall have the authority to award monetary damages and may grant any non-monetary remedy or relief available by applicable law and rules of the arbitration forum governing the proceeding and within the scope of this Enrollment Agreement. The arbitrator will have no authority to alter any grade given to the Student or to require SBI to change any of its policies or procedures. The arbitrator will have no authority to award consequential damages, indirect damages, treble damages or punitive damages, or any monetary damages not measured by the prevailing party’s economic damages. The arbitrator will have no authority to award attorney’s fees except as expressly provided by this Enrollment Agreement or authorized by law or the rules of the arbitration forum. . . . Arbitrator’s Award — At the request of either party, the arbitrator shall render a written award briefly setting forth his or her essential findings and conclusions. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. Severability and right to waive — If any part or parts of this Arbitration Agreement are found to be invalid or unenforceable by a decision of a tribunal of competent jurisdiction, then such specific part or parts shall be of no force and effect and shall be severed, but the remainder of this Arbitration Agreement shall continue in full force and effect. Any or all of the limitations set forth in this Arbitration Agreement may be specifically waived by the party against whom the claim is asserted. Such waiver shall not waive or effect any other portion of this Arbitration Agreement. Survival of provisions of this agreement — This Arbitration Agreement will survive the termination of the Student’s relationship with SBI.

Plaintiffs claimed to be unaware that the arbitration provision denied them their right of access to a judicial forum and to a jury trial. They insisted the arbitration provision was shrouded in ambiguity and did not provide the information necessary for an effective knowing and voluntary waiver of rights.

The trial court denied defendants’ motion to compel arbitration. The arbitration provision did not inform plaintiffs that they were waiving statutory remedies, and the provision conflicted with the remedies available under the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 to -195, the trial court ruled.  The Appellate Division reversed, holding that the “the parties ‘clearly and unmistakably’ agreed an arbitrator would determine issues of arbitrability” and that plaintiffs failed to “specifically attack[] the delegation clause.”  The Appellate Division therefore determined that “arbitrability [was] for the arbitrator to decide.”

The New Jersey Supreme court sided with the trial court, and reversed. Applying state law principles of contract law, the Court opined that the arbitration provision lacks a clearly identifiable delegation clause explaining that an arbitrator would decide whether the parties agreed to arbitrate legal claims, including statutory violations, and did not not inform the plaintiffs that arbitration is a substitute for bringing their claims before a court or jury.

The NJ Supreme Court pointed to the well-settled principle in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), that issues of arbitrability should apply “ordinary state-law principles that govern the formation of contracts,” to utilize the standard enumerated by the Court in Atalese v. U.S. Legal Services Group, 219 N.J. 430 (2014), cert. denied, 135 S. Ct. 2804 (2015). In Atalese, the New Jersey Supreme Court held that, as with any contractual provision in New Jersey waiving a constitutional or statutory right, a waiver of rights provision in an arbitration agreement “must be clearly and unmistakably established.” Accordingly, because the arbitration provision at issue in Dever did not “clearly and unmistakably delegate arbitrability to the arbitrator,” it was unenforceable.

The New Jersey Supreme Court’s decision in Dever accentuates a growing tension between New Jersey state courts and federal courts concerning the proper interpretation and enforceability of arbitration agreements.  This tension is on full display in Justice Patterson’s 24-page dissent in Dever, where she sides with the Appellate Division’s decision to allow the arbitrator to rule on arbitrability.

Admitted to NJ Bar in 1990, NY Bar in 1991. Former Judicial Law Clerk to Honorable Peter Ciolino, Assignment Judge, Superior Court of New Jersey, Bergen County. Member & Barrister: Daniel J. Moore Bankruptcy Inn of Court Member & Barrister: Morris Pashman Inn of Court Member: Bergen County Bar Association NJ Superlawyer - 2008, 2009, 2010, 2011, 2012, 2013 Nominated for inclusion in Best Lawyers of America Member: Litigation Counsel of America, Trial Lawyer Honorary Society
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