In a decision that appears intentionally controversial, the Supreme Court of New Jersey yesterday refused to enforce the delegation clause in a for-profit college’s enrollment agreement in a 5-1 opinion.  Morgan v. Sanford Brown Institute, 2016 WL 3248016 (N.J. June 14, 2016).  Although the delegation clause had never been specifically challenged by the plaintiffs, as is required by SCOTUS’s Rent-A-Center in order to avoid delegating the issue of arbitrability to the arbitrator, the court found that was immaterial. 

The plaintiffs alleged that Sanford Brown Institute had induced them to enroll via misrepresentations and deception.  In response, the defendants moved to compel arbitration, based on an arbitration agreement in the plaintiffs’ enrollment agreement.  The trial court denied the motion, but the intermediate appellate court reversed, concluding that an arbitrator should decide whether the arbitration agreement was enforceable, due to the presence of a delegation clause.

At the state’s highest court, the issue of whether the delegation clause was enforceable was the sole issue.  The plaintiffs argued they were unaware the arbitration agreement “denied them their right of access to a judicial forum and to a jury trial,” making the arbitration agreement unenforceable under New Jersey’s Atalese decision.  Plaintiffs — and the court– characterized their failure to understand that arbitration is a substitute for court, not an addition to court, as preventing a meeting of the minds, and therefore a challenge to the very existence of the entire agreement.  In response, defendants pounded on Rent-A-Center, arguing that it is binding precedent and must be applied to conclude that since the plaintiff failed to challenge the validity of the delegation clause specifically, an arbitrator must address any challenges to arbitrability (including challenges under Atalese).

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