Arbitration clauses are often used by companies to prevent customers and consumers from attempting to resolve their grievances in a court of law. Instead, when a person consents to an agreement which includes an arbitration clause he or she agrees to allow a neutral third party to help resolve any grievances that may arise against the company or organization. Arbitration clauses have long been considered to be more favorable to companies than consumers. A recent decision by the New Jersey Supreme Court may cause companies to reexamine their arbitration clauses.
Disgruntled Former Students File Suit
The New Jersey Supreme Court recently ruled that an arbitration clause between Sanford Brown Institute and two former students is invalid. The two plaintiffs, Annemarie Morgan and Tiffany Dever, enrolled in the school’s ultrasound technician program in 2009, but later filed suit against the school claiming that the institution fraudulently misrepresented its accreditation, its programs, and the quality of its instructors.
When the plaintiffs filed suit in May 2013 the defendants, citing the school’s arbitration clause, attempted to have the suit dismissed. But the plaintiffs argued that the arbitration clause was not valid because its terms violated the Consumer Fraud Act. The court agreed with this reasoning.
Defendants Invoke “Delegation Clause” on Appeal
On appeal the defendants asserted that the plaintiffs’ original lawsuit did not attack the validity of the arbitration clause, and went on to say that the arbitration agreement had included a so called “delegation clause” which said that any disputes arising out of the arbitration agreement would also be handled in arbitration. This meant that the very dispute about the arbitration clause should have been handled in arbitration. The appeals court agreed with the defendants reasoning and overturned the plaintiffs’ lower court victory. The plaintiffs appealed the ruling to the New Jersey Supreme Court.
NJ Supreme Court Finds for the Plaintiffs
The New Jersey Supreme Court took up the case in order to help decide on the central question of who should determine whether or not the parties had validly entered into an agreement. After hearing arguments from both sides the court ruled in favor of the plaintiffs, affirming that the arbitration clause within the agreement was unenforceable because the plaintiffs had not given informed consent. The court further found that the delegation clause was unenforceable because it had not clearly and unmistakably given power to the arbitrator.
The court also chided the defendants for not mentioning the delegation clause in the original trial, and for waiting for the appeal to raise the issue.
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