Proposed NJ anti-arbitration legislation for school enrollment contracts: an act of futility

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Proposed legislation now working its way through the New Jersey Senate would eliminate the eligibility of postsecondary students and other individuals for State student assistance, training and employment services, including grants, scholarships and loans, if the school or training provider requires students to sign enrollment contracts that include “forced arbitration and other restrictive clauses, including clauses that require students to waive their right to participate in a class action against the company.”  Senate Bill No. 1851 further provides that “[n]othing in this act shall be construed to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act [FAA]….”  Therein lies the rub.

The FAA almost certainly preempts this proposed New Jersey statute because it interferes with, and discriminates against, the enrollment contracts between students and schools solely on the basis that an arbitration agreement with a class action waiver is involved.  The FAA applies to a written arbitration agreement in a “contract evidencing a transaction involving commerce.”  The term “commerce” is extremely broad, and it is inevitable that an enrollment contract will involve mail, telephone or internet use that will satisfy the interstate commerce requirement.  Reference to the FAA in the arbitration agreement itself would be further evidence that the FAA applies.

Nearly a decade ago, the U.S. Supreme Court in its landmark decision in AT&T Mobility LLC v. Concepcion held that such arbitration agreements are valid and enforceable under the FAA even if state public policy would prohibit them. Concepcion pointedly emphasized that “States [cannot take steps that] … conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms …. Arbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations …. States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”  The Supreme Court reinforced this fundamental preemption principle more recently in Kindred Nursing Centers L.P. v. Clark, holding that “[t]he FAA … preempts any state rule discriminating on its face against arbitration … [and] also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that … have the defining features of arbitration agreements.”  The Court reinforced that the FAA preempts any state law that would “rely on the uniqueness of an agreement to arbitrate as [its] basis.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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