Annemarie Morgan v. Sanford Brown Institute(075074)
137 A.3d 1168
| N.J. | 2016Background
- Plaintiffs Morgan and Dever enrolled at Sanford Brown and sued for consumer fraud, breach of contract, breach of warranties, and negligent misrepresentation claiming misrepresentations induced enrollment.
- Their enrollment agreements contained a multi-paragraph arbitration clause that (1) purports to cover virtually any dispute arising from the student–school relationship, (2) states that "any objection to arbitrability" shall be resolved pursuant to that paragraph, and (3) limits certain remedies (e.g., bars treble/punitive damages and attorney’s fees except as provided by law).
- Defendants moved to compel arbitration; in the motion court they sought an order sending claims to arbitration but did not clearly press that an arbitrator (rather than the court) must decide arbitrability or cite Rent-A-Center.
- The trial court denied the motion, finding the clause failed Atalese’s plain-language waiver requirement and conflicted with the New Jersey Consumer Fraud Act (CFA).
- The Appellate Division reversed, concluding the clause contained a clear delegation provision and that plaintiffs had not specifically attacked it, so arbitrability belonged to an arbitrator; it also addressed enforceability of specific terms (striking the treble-damages limitation).
- The New Jersey Supreme Court reviewed de novo and reversed the Appellate Division: it held the arbitration and purported delegation provisions fail First Options and Atalese and are unenforceable; thus the court (not an arbitrator) must decide arbitrability on remand.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Who decides arbitrability (court or arbitrator)? | Plaintiffs: clause is not a clear and unmistakable delegation; court should decide formation and arbitrability. | Sanford Brown: clause delegates arbitrability to arbitrator; plaintiffs failed to specifically attack delegation (Rent-A-Center). | Court: No clearly identifiable delegation clause; state contract principles control; court decides arbitrability. |
| Does the clause satisfy Atalese/plain-language waiver (must inform consumer arbitration replaces judicial forum)? | Plaintiffs: clause does not explain arbitration is a substitute for court/jury; no informed waiver. | Sanford Brown: clause is broad and a reasonable consumer would know they waived court access. | Court: Clause fails Atalese; does not clearly explain arbitration is a substitute for the judicial forum; unenforceable. |
| Did plaintiffs waive challenge to delegation clause under Rent-A-Center? | Plaintiffs: cannot be faulted for not challenging an inadequately defined delegation clause. | Sanford Brown: plaintiffs failed to specifically attack the delegation clause below, so Rent-A-Center requires arbitrator determination. | Court: Rent-A-Center presupposes a clearly identifiable delegation clause; because the clause here is not clear and defendants did not plainly invoke delegation below, plaintiffs did not forfeit challenge. |
| Does the arbitration clause conflict with CFA remedies (treble damages, fees)? | Plaintiffs: clause limits remedies and attorney’s fees, conflicting with CFA; unconscionable. | Sanford Brown: severability permits arbitration while excising offending limits; arbitrator should decide enforceability. | Court: Because the entire arbitration agreement (including delegation) is unenforceable under state-law formation and Atalese, court must address these issues on remand; Appellate Division erred to both delegate and resolve CFA remedy issues. |
Key Cases Cited
- First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (courts decide arbitrability absent clear and unmistakable delegation)
- Atalese v. U.S. Legal Servs. Grp., 219 N.J. 430 (N.J. 2014) (consumer arbitration clauses must plainly notify consumer that arbitration substitutes for judicial forum)
- Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63 (2010) (if delegation clause is clear and unchallenged specifically below, arbitrator decides challenges to agreement’s validity)
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (arbitrability questions about formation go to courts; severability principles)
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (arbitration agreements are severable; contract defenses may invalidate arbitration agreement)