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Arbitration Clauses Ruled Enforceable Even when in Conflict with State Law

Wednesday, September, 17, 2014

An appeals court in New Jersey ruled that an arbitration clause that includes “treble damages” language explicitly forbidden by state law is still enforceable in the main, as long as the treble damage language was “severed” from the agreement.  The ruling reverses a lower court ruling that arbitration could not be compelled in the case because the treble damages language clashed with the state’s Consumer Fraud Act, despite the fact that the court agreed the language that prohibited treble damages was “unconscionable, and thus, unenforceable.”


The case involves the Sanford Brown Institute, a higher education company that offers career training programs.  The plaintiffs accused the company of several acts, including breach of contract, and negligent misrepresentation as well as being in violation of the Consumer Fraud Act.  The main complaints centered on programs that were unaccredited, making them useless for career advancement, which the plaintiffs claim was not made clear to them when they registered.


Sanford Brown moved to compel arbitration described in the enrollment agreement signed by all students.  The arbitration agreement is clearly indicated on the contract.  The arbitration language specifically precluded consequential damages, treble damages, and punitive damages.  However, the prohibition of treble damages goes against state law as laid out in the Consumer Fraud Act, which the plaintiffs argued made the entire arbitration agreement unenforceable.


The court’s ruling, however, further strengthened the rising tide of arbitration agreements, as now it seems likely other courts will find that “offending clauses” in arbitration agreements do not necessarily invalidate the clause, as long as the problem language can simply be excised.