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Educational Privileges

April 22, 2017

EDUCATIONAL PRIVILEGES: A PERPSECTIVE ON U.S. DEPARTMENT OF EDUCATION REGULATIONS BANNING PRE-DISPUTE, MANDATORY ARBITRATION IN UNIVERSITIES

By: Kate Kelzenberg, Volume 101 Staff Member

During the Senate confirmation hearing of Supreme Court nominee Neil Gorsuch, Sen. Al Franken (D-Minn.) questioned the nominee on his opinions about arbitration as a form of dispute resolution.[1] Gorsuch conceded that, while he had previously worked to make dispute resolution more efficient, there were some cases when arbitration agreements may be unfair.[2] He concluded that the 1925 Federal Arbitration Act (FAA) “is not being applied as originally intended . . . [and] that lawmakers could ‘revise or eliminate’ the act.”[3] However, it is uncertain how the changes Gorsuch suggests will be enacted under the Trump administration, which some see as pro-arbitration and which has taken actions to reduce the cost and number of agency regulations.[4]

The U.S. Department of Education recently revisited the FAA in October 2017, addressing pre-dispute, mandatory arbitration clauses for college students through new regulations, the Borrower Defense Final Regulations (BDFR).[5] BDFR offers a series of financial rules aimed to protect student consumers.[6] Under one of the regulations, any university or college that receives “direct loan” funding is required to remove any pre-dispute, mandatory arbitration clauses from agreements signed with students.[7] This includes voluntary and mandatory arbitration agreements, though the student and university may still enter an arbitration agreement after the dispute emerges.[8] BDFR becomes effective July 1, 2017.[9]

Forced arbitration has long been controversial, as it reduces the process found in a traditional, judicial trial in favor of a speedy, inexpensive resolution. In this instance, the Department of Education determined the former was necessary to protect student consumers. However, the question must be raised as to why students are protected from arbitration clauses while nonstudents, who are often subject to pre-dispute, mandatory arbitration clauses in other contracts, are not protected.

I. HISTORY OF ARBITRATION AND IT’S USES IN AMERICAN LAW

Arbitration has long been a mechanism for entities to trade extensive litigation processes for a more flexible process.[10] In 1924, Congress passed the Federal Arbitration Act (FAA), creating the judicial mechanism of arbitration to resolve conflicts with “efficiency and expediency.”[11] In a standard arbitration, both sides submit their cases to a third-party arbitrator, or panel of arbitrators, who makes a legally-binding decision on the case.[12] Under arbitration clauses, many of the process rights granted to parties in judicial trials are disregarded. The rules of evidence, discovery, and the right to appeal do not typically apply.[13] Arbitration is also notably different than mediation. In mediation, both sides discuss to come to a mutually agreeable solution, while arbitrations involve the arbitrator making a formal decision on the facts presented to her.[14]

Arbitration clauses are now typically part of standard boilerplate language in a consumer contract.[15] Credit card applications, loans, and contracts for large purchases often include pre-dispute, mandatory arbitration clauses. This dispute mechanism began to be favored by the Supreme Court in the 1970s and 1980s, with the Court holding that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.”[16] Now, arbitration agreements are standard in consumer contracts and, there are questions as to whether the FAA preempts state arbitration laws.[17] Courts have favored federal arbitration, for example from 2010–2013, the Supreme Court expanded substantive arbitration rights by stopping state attempts to limit arbitration powers, by giving arbitration decisions more authority, and by holding that the “prohibitively high cost” of arbitration does not invalidate arbitration clauses that forbid class actions.[18]

And while arbitration clauses are legal and enforceable, a reason they may be questioned is the recent focus on consumer protection. After the financial crisis in 2008, Congress passed the Dodd-Frank Act and formed the Consumer Financial Protection Bureau as mechanisms to protect consumers.[19] This raises the question of whether arbitration clauses, which are generally viewed as anti-consumer, will continue to be enforced as a matter of policy with the increased focus on consumer protection of citizens. With these standard ideas in mind, there are questions of the fairness of pre-dispute, mandatory arbitration clauses in student contracts.

II. ARGUMENTS AGAINST MANDATORY ARBITRATION CLAUSES IN HIGHER EDUCATION

The Department of Education has issued regulations to limit pre-dispute, mandatory arbitration clauses in contracts between students and educational institutions.[20] Arbitration clauses allow parties to resolve issues outside of court, which is generally seen as favorable, though these resolutions typically work in the favor of institution.[21] In the context of a university, arbitration allows the institution to escape the view of the court and the public, for arbitrated decisions do not include a written opinion. As was stated by former U.S. Secretary of Education Ted Mitchell, “these regulations would prevent institutions from using these clauses as a shield to skirt accountability to their students, to the Department and to taxpayers.”[22] Finally, the university will typically control the logistics of the arbitration, including where it takes place and who will be the arbitrator.[23]

Additionally, in arbitration, there is often not an opportunity to appeal the arbitrator’s findings and subsequent rulings.[24] This is especially detrimental for college students who, though adults, typically do not have experience with either legal proceedings or large financial transactions. Which brings us back to the idea that the primary beneficiary of a pre-dispute, mandatory arbitration clause would be the universities, who many would argue already have a superior bargaining position, with greater access to lawyers and other resources. As such, it seems logical that the Department of Education would want to limit such a potentially predatory contract scheme.

III. ARGUMENTS FOR MANDATORY ARBITRATION CLAUSES

While there are many arguments against pre-dispute, mandatory arbitrations, there are arguments favoring this form of dispute resolution. For example, arbitrations may be a more accessible platform of dispute resolution for all parties as they typically do not require lawyers or abide by formalistic court procedures.[25] However, in the university context, the institutions will likely still have an advantage over the students as they would in the court system. Regardless of court procedures, the school likely will have greater experience in arbitration, select the location and arbitrator, and may choose to bring an attorney.[26] However, this is a problem that plagues any dispute where one party has greater legal experience and would likely exist regardless of the forum for resolution.

Another argument for arbitration is that it has significantly lower costs than litigation. Rather than hiring attorneys and paying court fees, the parties pay typically for a single session with an arbitrator and attorneys are optional.[27] Some argue that the higher cost of litigating disputes may make removing arbitration clauses economically disadvantageous. Smaller schools may not be able to afford litigation and pass those costs along to students.[28] After the Department of Education released their rule, the president and CEO of Career Education Colleges and Universities Steve Gunderson stated, “[t]he regulation put forth today by the U.S. Department of Education will cause millions of students to lose access to higher education and leave American taxpayers on the hook for billions of dollars.”[29] The economic impact of this rule will have to be considered by the Department of Education after BDFR’s implementation.

Finally, there is a question of how pervasive pre-dispute, mandatory arbitration clauses are in a university context. A recent study found that avoiding an arbitration clause while registering for college is possible, given that no public institutions and only 7 percent of nonprofit colleges include mandatory arbitration on enrollment contracts.[30] However, these numbers were much higher in federally-funded, for-profit colleges, with 98 percent of universities having mandatory arbitration agreements in their enrollment contracts.[31] Additionally, this study does not include the other contracts that students sign, such as housing contracts, that students typically sign. Thus, though the problem is not particularly common among enrollment contracts, the BDFR will greatly effect for-profit colleges and non-enrollment contracts.

CONCLUSION

In his questioning of nominee Gorsuch, Sen. Franken stated, “[f]orced arbitration clauses, which are buried in the fine print of contracts we sign every day, restrict American’s access to justice by stripping consumers and workers of their legal rights and insulating corporations from accountability.”[32] Through their new restrictions, the Department of Education hopes to reduce the reduce this harm to college students. However, these regulations may also be altered under the pro-business, presidential administration, with one law professor predicting BDFR “will [be] going back to the drawing board” under Trump.[33]

With the slew of new choices facing students during their first years of college, it is easy to understand why this regulation is popular. It protects students from signing away their rights on day one, at a time when they may not know what those rights truly are and before the need for them arises. However, most of the arguments for why mandatory arbitration should be excluded from university contracts are true of any arbitration agreement; there are consumer protection dangers when removing rights to trial. Given the recent efforts to increase consumer protection regulations,[34] it seems likely that the Department of Education’s Borrower Defense Regulations is part of a national policy shift toward increased consumer protection and other arbitration statutes may continue to be questioned nationally. However, with a new Supreme Court justice and president, the future of pre-dispute, mandatory arbitration clauses in higher education remains uncertain.

  1. Nomination of the Honorable Neil M. Gorsuch to be an Associate Justice of the Supreme Court of the United States (Day 2) Before Senate Judiciary Committee, 115th Cong. (2017) [hereinafter Nomination] (statement of Sen. Al Franken). ↑
  2. Id. ↑
  3. Id. (statement of the Honorable Neil M. Gorsuch). ↑
  4. President Trump has used arbitration processes for his business dealings in the past, including a 2012 defamation process against a Miss USA contestant. Lucia Graves, The Miss USA Hopeful Sued by Trump: “There are Ways to Stand Your Ground”, Guardian (Sept. 4, 2016), https://www.theguardian.com/us-news/2016/sep/04/sheena-monnin-donald-trump-miss-usa-lawsuit; see also Reducing Regulation and Controlling Regulatory Costs, Exec. Order No. 13771, 82 FR 9339 (Jan. 30, 2017). ↑
  5. Requirements, Standards, and Payments for Direct Loan Program Schools, 34 C.F.R. § 685 (2016) [hereinafter Requirements]. ↑
  6. Id. ↑
  7. Id. ↑
  8. Id. ↑
  9. Id. ↑
  10. See Christine L. Newhall, Benefits and Opportunities in Mediation and Arbitration, 74 CPA J. 62, 62–63 (2004) (discussing the benefits of mediation and arbitration processes for the interested parties). ↑
  11. See Federal Arbitration Act, 9 U.S.C. §§ 1–16 (2016); Asa Lopatin, What Constitutes Arbitration for Federal Arbitration Act Purposes?, Am. B. Ass’n (June 16, 2014), http://apps.americanbar.org/litigation/committees/adr/articles/spring2014-0614-federal-arbitration-act.html. ↑
  12. See 9 U.S.C. §§ 2–16. ↑
  13. Katherine V.W. Stone & Alexander J.S. Colvin, The Arbitration Epidemic: Mandatory Arbitration Deprives Consumers of Their Rights 5 (Econ. Pol. Inst. 2016). ↑
  14. Understanding Mandatory Binding Arbitration in Consumer Contracts, Ohio St. B. Ass’n (May 26, 2016), https://www.ohiobar.org/ForPublic/Resources/LawYouCanUse/Pages/Understanding-Mandatory-Binding-Arbitration-in-Consumer-Contracts.aspx ↑
  15. Jessica Silver-Greenberg & Robert Gebeloff, Arbitration Everywhere, Stacking the Deck of Justice, N.Y. Times (Oct. 21, 2015), https://www.nytimes.com/2015/11/01/business/dealbook/arbitration-everywhere-stacking-the-deck-of-justice.html?_r=0. ↑
  16. Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 13–14 (1983); Jean R. Sternlight, Creeping Mandatory Arbitration: Is It Just?, 57 Stan. L. Rev. 1631, 1637 (2005). ↑
  17. For examples of state laws that may be preempted by the FAA, see Christopher R. Drahozal, Federal Arbitration Act Preemption, 79 Ind. L.J. 393, 394 fn. 2 (2004) (“[The] lower courts are divided on whether the FAA preempts state laws that apply to arbitration agreements and to some other contract clauses, but not to contracts generally.”). ↑
  18. See American Express Co. et al., v. Italian Colors Restaurant et al., 133 S. Ct. 2304, 2310 (2013) (quoting Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 166–68 (1974); AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 365 (2011); Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 75 (2010); Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 686 (2010). ↑
  19. See Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. §§ 5301 et. seq. (2010); Kevin Drawbaugh & Tim Dobbyn, New U.S. Consumer Financial Bureau Has Wide Powers, Reuters: Factbox (Sept. 14, 2010), http://blogs.reuters.com/financial-regulatory-forum/2010/09/14/factbox-new-us-consumer-financial-bureau-has-wide-powers. ↑
  20. See Requirements, supra note 5. ↑
  21. See American Express Co., 133 S. Ct. at 2310; Sternlight, supra note 16, at 1632. ↑
  22. Megan Leonhardt, New Rules Will Help Students Sue Colleges, Time: Money (June 14, 2016), http://time.com/money/4368137/mandatory-arbitration-colleges-new-rules. ↑
  23. Amer. Arb. Ass’n., AAA Arbitration Roadmap 5 (2007). ↑
  24. Shelia J. Carpenter, Appealing Arbitration Decisions: Practice Tips for Young Lawyers, Amer. B. Ass’n (Sept. 5, 2014), https://apps.americanbar.org/litigation/committees/adr/articles/summer2014-0914-appealing-arbitration-decisions-practice-tips-young-lawyers.html (stating the primary ground for appealing an arbitration award under 9 U.S.C. § 10(a) is misconduct of the arbitrator). ↑
  25. Andrew Pincus, The Advantages of Arbitration, N.Y. Times (May 24, 2012), https://dealbook.nytimes.com/2012/05/24/the-advantages-of-arbitration. ↑
  26. See Carpenter, supra note 24. ↑
  27. See Amer. Arb. Ass’n., supra note 23. ↑
  28. Press Release, Career Education Colleges and Universities, CECU Statement on Release of Defense to Repayment NPRM (June 13, 2016), http://www.career.org/news/cecu-statement-on-release-of-defense-of-repayment-nprm. ↑
  29. Id. ↑
  30. Tariq Habash & Robert Shireman, How College Enrollment Contracts Limit Students’ Rights, Century Found., fig. 1 (Apr. 28, 2016), https://tcf.org/content/report/how-college-enrollment-contracts-limit-students-rights. The report includes an analysis of the different forms contractually limiting clauses, including go-it-alone and gag clauses. Id. ↑
  31. Id. ↑
  32. Nomination, supra note 1. ↑
  33. George H. Friedman, Trump in Charge–What Does it Mean for Arbitration?, Fordham U.: Fordham L. News (Feb. 8, 2017), http://news.law.fordham.edu/blog/2017/02/08/trump-in-charge-what-does-it-mean-for-arbitration. ↑
  34. See 12 U.S.C. §§ 5301 et. seq.; Drawbaugh & Dobbyn, supra note 19. ↑
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