The highest court in New Jersey has ruled that a lawsuit filed by former students against for-profit educator Sanford Brown Institute can move forward, even though the school’s enrollment agreement has an arbitration clause that takes away students’ right to file such lawsuits. 

The New Jersey Supreme Court issued a ruling [PDF] this week sending a lawsuit filed by former students in May 2013 accusing the for-profit school of consumer fraud — claiming it used a series of deceptive strategies, and false claims to entice the students to enroll in its ultrasound technician program — back to trial court.

According to the lawsuit, Sanford Brown and administrators used “high-pressure and deceptive business tactics” that resulted in the students funding their education with high-interest loans, resulting in significant financial losses.

Sanford Brown didn’t reply to the case, and instead filed a motion to compel arbitration.

The school claimed that because the students signed an enrollment document that included a mandatory pre-dispute arbitration clause, they were contractually obliged to have their issue resolved outside of the courtroom.

However, the school’s motion did not make it clear they wanted the arbitrator, rather than the court, to decide whether the parties agreed to arbitration.

As a result, the trial court declined to submit the lawsuit to arbitration because the provision did not inform plaintiffs that they were waiving statutory remedies and because the provision conflicted with the remedies available under the New Jersey Consumer Fraud Act.

Sanford Brown appealed that decision and the Appellate Division concluded that the trial court failed to enforce the arbitration agreement’s clause delegating to the arbitrator the issue of whether or not the students agreed to arbitration.

The panel also found that the parties “clearly and unmistakably” agreed that an arbitration would determine issues of arbitrability. However, because Sanford failed to dictate that it wanted an arbitration, ruling that other positions of the clause were unconscionable.

The case then went to the New Jersey Supreme Court which this week reversed the decision, finding [PDF] that the Sanford Brown agreement provision failed to “satisfy the elements necessary for the formation of a contract,” including providing in plain language that a person is waiving their right to a trial.

“Because the term ‘arbitration’ is not self-defining, an arbitration agreement must inform a consumer in some manner that she is waiving her right to seek relief in the judicial system,” the opinion states.

This means the case will go back to trial court, unless the college decides to appeal the New Jersey Supreme Court’s decision to the U.S. Supreme Court.

MarketWatch points out that while the Court’s decision only applies in New Jersey, the reasoning behind the ruling could be applied in other states, essentially making many arbitration clauses difficult to enforce as they are written.

Experts say that many arbitration clauses fail to satisfy the New Jersey Supreme Court’s standards that an agreement must inform a consumer in some manner that they are waiving their right to seek relief through the courts.

“The reasoning of this case would probably strike down a lot of arbitration clauses out there,” Paul Bland, the executive director of Public Justice, tells MarketWatch. “This case, if it’s picked up by other courts, could have a very significant effect on how the law develops.”

[via MarketWatch]

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