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By Perry Cooper
June 16 — State courts are finding ways around a series of pro-arbitration U.S. Supreme Court rulings, illustrated most recently by a New Jersey top court decision against a for-profit college.
The New Jersey court ruled June 14 that the arbitration clause in an enrollment agreement signed by students in Sanford Brown Institute's ultrasound technician program was unenforceable. As a result, the students' fraud and other claims over the college's marketing and registration practices will proceed in court.
The arbitration clause failed because it “does not explain in some broad or general way that arbitration is a substitute for the right to seek relief in our court system,” Justice Barry T. Albin wrote June 14 for the New Jersey Supreme Court ( Morgan v. Sanford Brown Inst., 2016 BL 189084, N.J., No. A-31-14, 6/14/16 ).
Consumer advocate F. Paul Bland Jr. told Bloomberg BNA the New Jersey court's holding that the parties never agreed to arbitrate because the students didn't understand the clause's terms is a solid one.
“The court is right that the word ‘arbitration’ is not self-evident,” said Bland, executive director of Washington-based Public Justice, which often supports consumers in class action cases. “Most people don’t know what it means.”
He pointed to a study cited in the Consumer Financial Protection Bureau's proposed rule to ban mandatory arbitration clauses in disputes over financial products (17 CLASS 506, 5/13/16).
The study found that even when an arbitration clause is pointed out, only 7 percent of people know it means they can't go to court.
Here, New Jersey is saying, “yeah, you can force people into arbitration but you at least have to tell them what arbitration is so they know what they are agreeing to,” he said.
But a defense attorney said that for the New Jersey top court to reach its conclusion, it had to brush aside a significant, preliminary question.
That question is whether an arbitrator, and not a court, should have decided in the first instance if the parties agreed to arbitrate, Liz Kramer, partner at Stinson Leonard Street LLP in Minneapolis, told Bloomberg BNA June 16.
Kramer represents businesses in complex business and construction litigation, and writes about arbitration for her firm's blog Arbitration Nation.
With this ruling, New Jersey now joins Kentucky and West Virginia, whose high courts have also refused to enforce so-called delegation clauses.
These courts are avoiding having their state laws preempted by the Federal Arbitration Act by saying these are issues of contract formation, which is governed by state law, Kramer said.
Enforcing delegation clauses can potentially take the whole substantive arbitration issue out of the courts, Kramer said. Which explains why some states that think consumers have a right to have their claims heard in court try to find a way around them.
The New Jersey Supreme Court had an easy way to avoid the issue altogether—it could have just decided that the plaintiffs waived any challenge to the delegation clause by not properly raising the argument below, she said.
“But that wouldn’t ensure that in their state, delegation clauses aren’t being enforced, which seems to be the goal here,” she said.
Bland disagrees with Kramer's analysis and said the delegation clause issue properly wasn't reached by the top court.
If the Department of Education gets its way, the issue of arbitration clauses in claims against for-profit colleges might eventually be a fight of the past.
Following on the coat tails of the CFPB, the department announced June 16 that it plans to prohibit for-profit colleges from using mandatory pre-dispute arbitration agreements or class-action waivers.
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